Edgar Filing: BIOMERICA INC

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

FORM 10-KSB

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

FOR THE FISCAL YEAR ENDED MAY 31, 2007 COMMISSION FILE NUMBER: 0-8765

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

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

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

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

Securities registered under Section 12(b) of the Exchange Act:

(Title of each class) (Name of each exchange on which registered)
--------------------- -------------------------------------------
NONE OTC-BULLETIN BOARD

Securities registered under Section 12(g) of the Exchange Act:

(Title of each class)
---------------------
COMMON STOCK, PAR VALUE $0.08

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

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: $5,748,319.

State the aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer (based upon 4,890,972 shares held by non-affiliates
and the closing price of $.75 per share for Common Stock in the over-the-counter
market as of July 13, 2007): $3,668,229.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 27, 2007: 5,976,214.

DOCUMENTS INCORPORATED BY REFERENCE: none

Transitional Small Business Disclosure Format YES [ ] NO [X]

PART I*

ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS OVERVIEW

THE COMPANY

Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was
incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. We
changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in
November 1987 to Biomerica, Inc. During the first two quarters of fiscal 2006 we
had one operational subsidiary, Lancer Orthodontics, Inc. ("Lancer"), an
international manufacturer of orthodontic products.

Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. Lancer is engaged in the design, manufacture and distribution of
orthodontic products.

Effective December 1, 2005, Lancer's financial statements were no longer
consolidated with those of Biomerica because Biomerica no longer had direct or
indirect control of more than 50% of Lancer's common stock. As of December 1,
2005, Biomerica held less than 20% of Lancer's common stock and therefore
Biomerica's investment is now accounted for under the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities".

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 subsequently were recorded as losses in the consolidated financial
statements. During the fiscal years ended May 31, 2007 and 2006 certain
liabilities were forgiven and thus ReadyScript recorded income for the years
then ended. 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

During fiscal 2007, our existing medical device business was conducted
through one company: (1) Biomerica, Inc., engaged in producing products for the
human diagnostic 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 two
markets: 1) clinical laboratories and 2) point of care (physicians offices and
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 (the point
of care), 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.

Our clinical laboratory diagnostic products include tests for thyroid
conditions, food intolerance, H. pylori, diabetes and others. These diagnostic
test kits utilize enzyme immunoassay 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.

A significant part of Biomerica's manufacturing operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Biomerica maintains its headquarters in Newport Beach,
California where it houses administration, research and development, sales and
marketing, and customer services.

Biomerica 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, 2007.

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.

Effective December 1, 2005 the operations of Lancer Orthodontics were no
longer consolidated with those of Biomerica. The consolidated income statement
for the year ended May 31, 2006 includes the operations of Lancer Orthodontics
for the period of June 1, 2005 through November 30, 2005. The balance sheet as
of May 31, 2007 does not include any assets or liabilities of Lancer
Orthodontics, except for the long-term available-for-sale securities that
Biomerica holds in Lancer Orthodontics. This is included in non-current assets
on the Biomerica balance sheet.

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

Until three years ago Biomerica had suffered substantial recurring losses
from operations. Biomerica has funded its operations through profits as well as
debt and equity financings for the past three years. ReadyScript operations were
discontinued in May 2001. ReadyScript was a contributor to the Company's losses
in prior fiscal years. During the fiscal years ended May 31, 2007 and 2006,
certain ReadyScript liabilities were forgiven and thus income from discontinued
operations for the years then ended was recorded. The subsidiary is being
reported in the financial statements as a discontinued operation because it is
no longer an operating entity.

In the last several years the Company has been focusing on increasing
efficiencies where possible and concentrating on its core business to increase
sales. As a result, sales of medical diagnostic products increased from the
fiscal year ended May 31, 2006 to 2007 by approximately $1,488,000, or 35%.

In February 2007 the Company obtained a $200,000 working capital line of
credit and was approved for a $200,000 equipment loan with Commercial Bank of
California. The credit line and the equipment loan are collateralized by
substantially all of the assets of the Company. As of May 31, 2007 $61,670 was
owed on the equipment loan and there was no outstanding balance due on the
working capital line of credit. Due to the increased sales and profitability, in
particular during the fourth quarter of fiscal 2007, the Company had $516,900 in
cash and equivalents as of May 31, 2007 as compared to $119,914 on May 31, 2006.
Payments on the shareholder's note payable have been made during fiscal 2007
according to the agreement for repayment (payments that were delinquent have
been brought up to date) and, as a result, the balance on the note at May 31,
2007 was $167,870 as compared to $260,942 at May 31, 2006.

For the fiscal years ended May 31, 2003 through 2006 Biomerica's
independent auditors had concluded that there was substantial doubt as to the
Company's ability to continue as a going concern for a reasonable period of time
and thus rendered a "going concern" opinion on the audited financial statements.
Because the Company has had an upturn in sales and profitability and has an
improved working capital condition, among other factors, the audited financial
statements for the fiscal year ended May 31, 2007, do not contain such a "going
concern" opinion. However, there is no assurance that the Company will be able
to sustain such results in future years.

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, the diagnostics division established a manufacturing facility in Mexicali,
Mexico, in a building that we share with Lancer Orthodontics. We have moved a
significant portion of our diagnostic production (primarily packaging and
assembly) 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. We also have an internal
Quality Systems department which insures that our operating procedures are in
compliance with current FDA and ISO 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.

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 as well as
outside contract services.

Consolidated research and development expenses incurred by Biomerica for
the years ended May 31, 2007 and 2006 aggregated $256,101 and $239,004,
respectively. Of the above expenses for fiscal 2006 approximately $42,000 (for
the first half of fiscal 2006), are for Lancer's product development.

MARKETS AND METHODS OF DISTRIBUTION

Biomerica has approximately 450 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 two main markets: (a)
clinical laboratories and (b) point of care testing (physicians' offices and
over-the-counter drug stores). Separate marketing plans are utilized in
targeting each of the two markets.

For the year ended May 31, 2007 the Company had one customer which
accounted for more than 10% of consolidated sales and during fiscal 2006 there
were no customers which accounted for more than 10% of consolidated sales On an
unconsolidated basis, Biomerica had two customers which accounted for more than
10% of sales during fiscal 2006.

BACKLOG

At May 31, 2007 and 2006 Biomerica had a backlog of approximately $267,000
and $234,000 respectively.

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. For the year ended May 31, 2007
three companies accounted for more than 30% of the consolidated purchases of raw
materials. For the year ended May 31, 2006 one company accounted for more than
10% of the purchases of raw materials for Biomerica on an unconsolidated basis.

We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Some sales orders are processed on the day received while
others are processed at a later date depending on the quantity and type of
order.

COMPETITION

Immunodiagnostic products are currently produced by more than 100
companies. 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. We
believe we compete primarily on the basis of the uniqueness of our products, the
quality of our products, the speed of our test results, our patent position, our
favorable pricing 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
marketing and strategic cooperations with larger companies and distributors.

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

Class II - GAP(tm) IgG H. Pylori 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 and OTC), Aware(tm) Breast
Self-Examination, drugs of abuse rapid tests, EZ-HP Professional, GAP(tm) IgA H.
Pylori ELISA kit, C-Peptide ELISA kit, Myoglobin ELISA, Troponin I ELISA, HS-CRP
ELISA, Allerquant (TM), Food Intolerance Kits; Allerquant( tm) Food Additives
Kit.

Class III - GAP(tm) IgM H. Pylori ELISA kit, Isletest(tm) GAD ELISA kit,
Isletest(tm) ICA ELISA kit, Isletest (tm) IAA ELISA kit, EZ-HP OTC, EZ PSA
(Professional and OTC) and IgG Food Additives Kit.

If the FDA finds that the device is not substantially equivalent to a
predicate device, the device may be 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 requirements, 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, 2008. 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:

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
Myoglobin ELISA
Troponin I ELISA
HS-CRP ELISA
EZ-HCG Rapid Pregnancy Test
EZ-LH(tm) Rapid Ovulation Test
EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package)
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
Isletest(tm) GAD ELISA Kit
Isletest(tm) ICA ELISA Kit
Isletest(tm) IAA ELISA Kit
C-Peptide ELISA Kit
Allerquant(tm) IgG Food Intolerance ELISA Kit (90-foods, 14-foods, custom kits)
Allerquant IgG Food Additives 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 and medical 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
March 2006. During the inspection the FDA noted five observations that were
corrected in a timely manner. Management made a commitment to correct all of
these observations within six weeks of the date of inspection, and has notified
the FDA that it has done so. 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 13485:2003. EN ISO 13485:2003
is an internationally recognized standard in which companies establish their
methods of operation and commitment to quality.

Effective December 2003, fifteen major European countries require 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 (TUV Rheinland)
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. The Company is required to pass an annual audit in order to
maintain the license. We are required to comply with new regulations as they are
introduced. Should the Company fail to maintain required licenses, sales could
be adversely affected.

SEASONALITY OF BUSINESS

The businesses of the Company and its subsidiary have not been subject to
significant seasonal fluctuations.

INTERNATIONAL BUSINESS

Most of Biomerica's property and equipment are located within southern
California. The Company currently has a minor amount of property and equipment
located in Mexico. 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, 2007 2006*

U.S. Customers $2,107,000/36.7% $2,752,000/38.3%
Asia 543,000/9.4% 405,000/5.6%
Europe 2,378,000/41.4% 2,678,000/37.3%
Middle East 64,000/1.1% 134,000/1.9%
Oceania 540,000/9.4% 582,000/8.1%
S. America 75,000/1.3% 458,000/6.4%
Other foreign 41,000/0.7% 176,000/2.4%
--------------------------------------------------------------
Total Revenues $5,748,000/100% $7,185,000/100%

*The fiscal 2006 sales figures include six months of sales of Lancer
Orthodontics. On a stand-alone basis, total revenue of Biomerica increased from
$4,259,954 to $5,748,319 or $1,488,365 (34.9%) from 2006 to 2007.

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 at Biomerica are made primarily through a network
of approximately 100 independent distributors in approximately 60 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 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. Biomerica has
co-patent rights to the EZ-Detect Fecal Occult Blood Test (FOBT). In addition,
Biomerica holds the following patents: Immunotherapy Agents for Treatment of IgE
Mediated Allergies and Allergen-thymic Hormone Conjugates for Treatment of IgE
Mediated Allergies, U.S. Patent #5,275,814, issued January 4, 1994 and
Diagnostic Test for Measuring Islet Cell Autoantibodies and Reagents Relating
Thereto, U.S. Patent #5,786,221, issued July 28, 1998. Biomerica has obtained
the rights to manufacture and sell certain products. In some cases royalties are
paid on the sales of these products. Biomerica anticipates that it will license
or purchase the rights to other products or technology in the future.

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. In addition, there can be no assurance that Biomerica is not
violating any third party patents.

EMPLOYEES

As of July 29, 2007, the Company employed 30 employees of whom 2 are
part-time employees in the United States. The following is a breakdown between
departments:

2007 2006
---- ----

Administrative 4 5
Marketing & sales 3 3
Research & development 3 2
Production and operations 20 17
---- ----
Total 30 27

In addition, Biomerica contracts with Lancer for the services of 20 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

The Company is currently leasing its facilities on a month-to-month
agreement while it explores various other facility options. The facilities are
owned and operated by four of the Company's shareholders, one of whom is an
officer and director. Effective May 1, 2006, the monthly rent was set at
$14,000. Management believes there would be no significant difference in the
terms of the property rental if the Company was renting from a third party.
Total gross rent expense for this facility was approximately $168,000 and
$158,000 during the years ended May 31, 2007 and 2006, 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 also shareholders of the Company.

Biomerica subleased a portion of its facility under a non-cancelable
operating lease, which expired May 16, 2003 and was month-to-month until April
1, 2006, at which time the Company returned that space to the landlord. The
Company recorded base rental income of $15,478 during the year ended May 31
2006.

As of May 31, 2007, we believe that our facilities and equipment are in
suitable condition and are adequate to satisfy the current requirements of our
Company. However, management is exploring alternative leasing space, which may
be more beneficial to the needs of the Company and allow for a more efficient
operation at a cost effective rate.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes the Company's obligations and commitments as of
May 31, 2007:

Payments Due by Period

LESS THAN
TOTAL 1 YEAR 1-3 YEARS 5 YEARS
----------- ------------ ----------- -----------
Shareholder debt $167,870 $167,870
Capital Leases $8,574 $4,394 $4,180
----------- ------------ -----------
Total $176,444 $172,264 $4,180

Biomerica has various insignificant leases for office equipment.

ITEM 3. LEGAL PROCEEDINGS

Inapplicable.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

Inapplicable.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since June 20, 2002, the Company's stock has been quoted on the OTC
Bulletin Board under the symbol "BMRA.OB". The following table shows the high
and low bid prices for Biomerica's common stock 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, 2007.................................... $0.80 $0.42
February 28, 2007............................... $0.62 $0.40
November 30, 2006............................... $0.59 $0.45
August 31, 2006................................. $0.59 $0.42
May 31, 2006.................................... $0.50 $0.40
February 28, 2006............................... $0.55 $0.46
November 30, 2005............................... $0.59 $0.42
August 31, 2005................................. $0.75 $0.47

As of July 19, 2007, the number of holders of record of Biomerica's common
stock was approximately 904, 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.

During the past three fiscal years we completed the following private
placement transactions exempt under Regulation D of the Securities Act of 1933,
as amended:

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

insider &
5/06 common 156,000 qualified investors $0.48 $ 74,880

The table below provides information relating to our equity compensation
plans as of May 31, 2007:

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

Equity compensation
Plans approved by 1,449,250 $.48 491,171
Securities holders

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 RESULTS IN
FUTURE PERIODS TO DIFFER FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANYS' PRODUCTS,
AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY AND THE CONTINUED
ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. 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.

RESULTS OF OPERATIONS

During the first six months of fiscal 2006, Biomerica had one active
subsidiary, Lancer Orthodontics, Inc. ("Lancer"), which is engaged in
manufacturing, sales and development of orthodontic products. Effective December
1, 2005, Lancer's financial statements were no longer consolidated with those of
Biomerica because Biomerica no longer had direct or indirect control of more
than 50% of Lancer's common stock. As of December 1, 2005, Biomerica held less
than 20% of Lancer's common stock and therefore Biomerica's investment is
accounted for under the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".

Fiscal 2007 Compared to Fiscal 2006

IN FISCAL 2006, THE LANCER ORTHODONTICS' FINANCIAL STATEMENTS WERE ONLY
CONSOLIDATED WITH THOSE OF BIOMERICA FOR SIX OF THE TWELVE MONTHS. PLEASE REFER
TO FOOTNOTE 10 FOR A BREAKDOWN BY COMPANY OF THE RESULTS OF OPERATIONS FOR
FISCAL 2006.

Our consolidated net sales were $5,748,319 for fiscal 2007 compared to
$7,184,992 for fiscal 2006. This represents a decrease of $1,436,673, or 20.0%
for fiscal 2007. Of the total consolidated net sales for fiscal 2006, $2,925,038
is attributable to Lancer (which was for the first six months of the fiscal
year), and $4,259,954 to Biomerica. Fiscal 2007 represents sales of Biomerica
alone. Biomerica stand-alone sales increased from $4,259,954 in fiscal 2006 to
$5,748,319 in fiscal 2007, an increase of $1,488,365, or 34.9%. The increase was
due to increases of sales to foreign distributors as well as increased sales
domestically to chain drug stores.

Cost of sales in fiscal 2007 as compared to fiscal 2006 decreased by
$1,277,008 or 26.7%. On a stand-alone basis, the cost of sales of Biomerica
increased from $2,604,900 (61.1% of sales) to $3,502,607 (60.9% of sales), or
$897,707 (34.5%). The dollar increase at Biomerica was primarily due to an
increase in sales and an increase in production head count in anticipation of
building larger lot sizes. The percentage of cost of goods relative to sales
decreased by .2%.

Selling, general and administrative costs decreased in fiscal 2007 as
compared to fiscal 2006 by $794,642 or 35.1%. The overall decrease in selling,
general and administrative costs from May 31, 2006 to 2007 was a result of the
deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis,
Biomerica had an increase of $234,417, or 19.0%. The increase at Biomerica was
primarily due to higher wages and related costs, increased bad debt expense,
adoption of SFAS No. 123R on June 1, 2006, which requires employee stock options
to be expensed through the income statement, higher bonuses related to the
improved performance of the company and higher commissions relating to higher
sales. As a percentage of sales, selling, general and administrative expenses
decreased by 3.4% from fiscal 2006 to 2007.

Research and development expense was $256,101 in fiscal 2007 as compared
to $239,004 in fiscal 2006. On a stand-alone basis Biomerica's research and
development expenses increased from $196,534 to $256,101, or $59,567 (30.3%).
This was a result of the expenses for several new products.

Interest expense net of interest income, decreased in fiscal 2007 as
compared to fiscal 2006 by $9,739 or 21.7%. The overall decrease in interest
expense was a result of the deconsolidation of Lancer as of December 1, 2005. On
a stand-along basis Biomerica had increased interest of $4,717, primarily due to
interest being charged beginning in the last quarter on the accrued wages
balance of $264,549.

Other income decreased by $5,535 or 12.1% in fiscal 2007 as compared to
fiscal 2006. The overall decrease in other income was a result of the
deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis
Biomerica had increased other income of $7,064. This increase was primarily a
result of income received in fiscal 2007 for the income received on equipment
purchased and resold.

Consolidated net income was $536,879 for the year ended May 31, 2007.
Prior to recording the expense ($100,000) for employee bonuses according to the
Management Incentive Plan, consolidated net income was $636,879. Stand-alone
income from diagnostic operations before interest in net loss or income of
consolidated subsidiaries and income taxes was $525,779 for fiscal 2007 as
compared to $222,041 for fiscal 2006. This represents an increase of $303,738,
or 136.8%. The increase was primarily due to increased sales.

As of May 31, 2007 Biomerica had federal and state income tax net
operating loss carry forwards of approximately $2,519,000 and $456,000,
respectively, and research and development tax credit carry forwards of
approximately $90,000 and $42,000, respectively. The federal net operating loss
carry forwards begin to expire in 2008. The state net operating loss carry
forwards started to expire in 2006. The federal research and development tax
credit carry forwards begin to expire in 2009 and the California credits carry
forward indefinitely.

Liquidity, Capital Resources and Going Concern

As of May 31, 2007, we had cash and current available for sale securities
of $517,432 (see Note 2 of Notes to Consolidated Financial Statements) and
working capital of $1,198,844. The Company also has $410,137 of long term
available-for-sale securities. During 2006, cash used in operations was $384,369
as compared to cash provided by operations in fiscal 2007 of $463,708. The
increase in cash provided by operations was mainly due to increased income from
continuing operations of $509,010 and partly due to the deconsolidation of
Lancer as of December 1, 2005. During fiscal 2007, cash used in investing
activities was $62,695 as compared to $251,743. Both years the cash used in
investing activities was primarily for the purchase of property and equipment,
however in fiscal 2006, of the $252,428 in equipment purchases, $211,353 related
to Lancer. Cash used in financing activities in fiscal 2007 was $4,027 as
compared to cash provided by financing activities of $538,948 in fiscal 2006.
During fiscal 2006 Lancer conducted a private placement which contributed
$469,800 to Lancer Orthodontics. During fiscal 2007 Biomerica repaid shareholder
debt $93,072 as compared to $40,145 in fiscal 2006, which was offset by funds
received from the equipment line of credit of $61,670, that was used as deposit
for equipment ordered for delivery in fiscal 2008. The change in cash and cash
equivalents at May 31, 2007 compared to May 31, 2006 was an increase of
$396,986.

In February 2007 the Company obtained a $200,000 working capital line of
credit and was approved for a $200,000 equipment loan with Commercial Bank of
California. The credit line and loan are collateralized by substantially all of
the assets of the Company. As of May 31, 2007 $61,670 was owed on the equipment
line of credit and there was no outstanding balance due on the working capital
line of credit. Due to the increased sales and profitability, in particular
during the fourth quarter of fiscal 2007, the Company had $516,900 in cash and
equivalents as of May 31, 2007 as compared to $119,914 on May 31, 2006. Payments
on the shareholder's note payable have been made during fiscal 2007 according to
the agreement for repayment (payments that were delinquent have been brought up
toedate) and, as a result, the balance on the note at May 31, 2007 was $167,870
as compared to $260,942 at May 31, 2006.

SUBSEQUENT EVENTS

During August 2007 the due date on the note payable was extended until
September 1, 2008. The terms of the note payable are the same.

On June 6, 2007, Biomerica received income of $697,034 on the sale of
Hollister-Stier Laboratories securities it held for investment. The
Hollister-Stier securities were held as an option to purchase shares in
Hollister-Stier Laboratories, LLC and were carried on Biomerica's balance sheet
at a zero value as Hollister-Stier is a private company. The acquisition of
Hollister-Stier Laboratories by Jubilant Organosys Ltd. closed on June 1, 2007.

Effective July 16, 2007 the Board of Directors of Biomerica, Inc. voted to
elect John Roehm to serve on the board of directors of the Company. Mr. Roehm
currently serves as President and CEO of Mollen Immunization Clinics of North
America. From 1989 to 2006, Mr. Roehm served in a broad range of leadership
positions with Albertsons/American Stores (Sav-on & Osco), including as its
Director of Pharmacy Marketing since 1999. Mr. Roehm holds a B.S. degree in
Pharmacy from Massachusetts College of Pharmacy.

On June 28, 2007 an employee exercised stock options for 7,500 shares. The
total proceeds to the Company were approximately $2,588. On August 15, 2007
three employees exercised stock options for a total of 24,500 shares. The total
proceeds to the Company were $7,435.

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 if necessary 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.

Historically we were in a loss position for tax purposes, and established
a valuation allowance against deferred tax assets, as we did not believe it was
likely that we would generate sufficient taxable income in future periods to
realize the benefit of our deferred tax assets. Although the Company has
achieved net income in increasing amounts over the last three fiscal years,
predicting future taxable income is difficult, and requires the use of
significant judgment. Due to the fact that many factors can influence
profitability, management determined at May 31, 2007, that all of our deferred
tax assets should remain reserved. Management will re-evaluate this
determination periodically.

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; 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 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
(personal property-$1,824,979), business income insurance ($800,000), employee
benefit errors or omissions 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 ($3,000,000), group health,
disability and life insurance Biomerica's workman's compensation policies covers
injuries to employees as a result of accidental contamination from or by
hazardous materials.

RECENT ACCOUNTING PRONOUNCEMENTS:

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost is measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost is recognized over the
period that an employee provides service in exchange for the award.

In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company has provided SAB No.
107 required disclosures upon adoption of SFAS No. 123R on June 1, 2006.

In April 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for SFAS No. 123R. The Statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company adopted SFAS No. 123R on June 1, 2006.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 improves the financial reporting because its requirements enhance
the consistency of financial reporting between periods. The adoption of this
standard did not have an impact on its results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140
("SFAS, 155"). This statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets. SFAS No. 155: a) permits fair value
remeasurement for any hybrid financial instrument that contains an imbedded
derivative that otherwise would require bifurcation; (b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an imbedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and, (e) eliminates restriction on a qualifying special-purpose
entity's ability to hold passive derivative financial instruments that pertain
to beneficial interests that are or contain a derivative financial instrument.
SFAS No. 155 also requires presentation within the financial statements that
identifies those hybrid financial instruments for which the fair value election
has been applied and information on the income statement impact of the changes
in fair value of those instruments. The Company is required to apply SFAS No.
155 to all financial instruments acquired, issued or subject to a remeasurement
event beginning June 1, 2007. The Company does not expect the adoption of SFAS
No. 155 to have a material impact on the Company's financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140 (Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities).
This Statement requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. This
Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
The Company is required to adopt this statement as of June 1, 2007. The Company
has not yet determined the impact, if any, of adopting SFAS 156 on its
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Defining Fair Value
Measurement. The purpose of SFAS No. 157 is to eliminate the diversity in
practice that exists due to the different definitions of fair value and the
limited guidance for applying those definitions in GAAP that are dispersed among
the many accounting pronouncements that require fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company has not yet determined the impact, if any, of adopting SFAS 157 on its
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers' Accounting For
Defined Benefit Pension and Other Postretirement Plans. Effective in
calendar-year 2006 (with certain exceptions) for public companies and
calendar-year 2007 (with certain exceptions) for private companies, SFAS No. 158
represents the "first phase" of a planned "two-phased" project where the FASB is
working on improving financial reporting related to pension and other
postretirement (OPB) plans, SEC registrants have been required to disclose the
"expected impact" of implementing SFAS No. 158. The adoption of SFAS No. 158 did
not have a material impact on the Company's financial statements.

In July 2006, the FASB issued FIN 48, entitled Accounting for Uncertainty
in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109, entitled
Accounting for Income Taxes. Through the interpretive guidance, the FASB
clarifies the accounting for uncertainty in income taxes, provides recognition
and measurement guidance related to accounting for income taxes, and provides
guidance related to classification and disclosure of income tax-related
financial statement components. The Company has not yet determined the impact,
if any, of adopting FIN 48 on its consolidated financial statements.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

Inapplicable.

ITEM 8A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to our management, including
our Principal Executive Officer and our Principal Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. Our
management, including our Principal Executive Officer and our Principal
Financial Officer, does not expect that our disclosure controls or procedures
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within Biomerica have been detected.

We carried out an evaluation, under the supervision and with the
participation of our management, including our Principal Executive Officer and
our Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the annual
period covered by this report. Based on the foregoing, our Principal Executive
Officer and our Principal Financial Officer concluded that our disclosure
controls and procedures were effective at the reasonable assurance level.

There has been no change in the Company's internal controls over financial
reporting during the Company's most recent fiscal year that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT.

This information is incorporated by reference to the Company's proxy
statement for its 2007 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,
2007.

ITEM 10. EXECUTIVE COMPENSATION

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,
2007, Biomerica has paid all applicable shelter fees.

Other information regarding related transactions is incorporated by
reference to the Company's proxy statement for its 2007 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, 2007.

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

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).

10.3 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 and on
May 30 , 2007).

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).

10.31 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).

10.33 Second Amendment of the Note, Loan and Modification Agreement
(incorporated by reference to the Company's February 28, 2007 Form
10-QSB filed April 16, 2007).

10.34 Commercial Security Agreement (loan #0100000250) with Commercial
Bank of California dated February 20, 2007 (incorporated by
reference to the Company's February 28, 2007 Form 10-QSB filed
April 16, 2007).

10.35 Promissory Note (loan #0100000250) dated February 20, 2007 with
Commercial Bank of California (incorporated by reference to the
Company's February 28, 2007 Form 10-QSB filed April 16, 2007).

10.36 Promissory Note (loan #0100000251) dated February 20, 2007 with
Commercial Bank of California (incorporated by reference to the
Company's February 28, 2007 Form 10-QSB filed April 16, 2007).

10.37 Subordination Agreement (loan #0100000250) dated February 20, 2007
with Commercial Bank of California and Janet Moore, Trustee of the
Janet Moore Trust (incorporated by reference to the Company's
February 28, 2007 Form 10-QSB filed April 16, 2007).

10.38 Business Loan Agreement with Commercial Bank of California
(incorporated by reference to the Company's February 28, 2007 Form
10-QSB filed April 16, 2007).

21.1 Subsidiary of Registrant.

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 Subsidiary Consolidated Financial Statements
For The Years Ended May 31, 2007 and 2006 and Independent
Registered Public Accounting Firm's Report.

(b) Reports on Form 8-K.

The following Forms 8-K are incorporated by reference to the Forms 8-K filed on
the following dates: May 1, 2007, May 3, 2007, June 19, 2007 and July 16, 2007.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The aggregate fees billed for professional services by PKF (San Diego) in 2007
and 2006 were as follows:

2007 2006
---- ----

Audit fees $ 50,000 (1) $ 48,725 (2)
Audit related fees --
Tax fees 5,362 5,219
All other fees 1,732 2,711
-------- --------
Total $ 57,094 $ 56,655

(1) Also includes fees to be billed in fiscal 2008 for fiscal 2007.
(2) Also includes fees to be billed in fiscal 2007 for fiscal 2006.

Audit Fees consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements, the audit of our
subsidiary's financial statements, the reviews of the financial statements
included in our Forms 10-QSB and for any other services that are normally
provided by PKF 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 subsidiary 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 and not otherwise included in Audit Fees, Audit Related fees or
Tax Fees.

Policy on Audit Committee Pre-approval of Audit and Non-Audit Services

The Audit Committee has the responsibility of appointing the independent
audit firm and overseeing their work. The Audit Committee pre-approves all audit
and related services. Should the audit committee pre-approve any services other
than audit and related services, it evaluates whether the services would
compromise the auditor's independence.

Of the services provided in fiscal 2007 and 2006, preparation of the tax
return (9% of the total cost for both fiscal years) was not pre-approved by the
audit committee.

SIGNATURES

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

BIOMERICA, INC.
Registrant

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

Dated: 8/29/07

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

Signature and Capacity

/s/ Zackary S. Irani Date: 8/29/07
------------------------------------
Zackary S. Irani
Director, Chief Executive Officer

/s/ Janet Moore Date: 8/29/07
------------------------------------
Janet Moore,
Secretary, Director,
Chief Financial Officer

/s/ Francis R. Cano, Ph.D. Date: 8/29/07
------------------------------------
Francis R. Cano, Ph.D.
Director

/s/ Allen Barbieri Date: 8/29/07
------------------------------------
Allen Barbieri
Director

/s/ Jane Emerson, M.D., Ph.D. Date: 8/29/07
------------------------------------
Jane Emerson, M.D.,Ph.D.
Director

/s/ John Roehm Date: 8/29/07
------------------------------------
John Roehm
Director

BIOMERICA, INC. AND SUBSIDIARY
TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FS-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet as of May 31, 2007 FS-3

Consolidated Statements of Operations and Comprehensive
Income for the Years Ended May 31, 2007 and 2006 FS-4 - FS-5

Consolidated Statements of Shareholders' Equity for the
Years Ended May 31, 2007 and 2006 FS-6 - FS-9

Consolidated Statements of Cash Flows for the Years Ended
May 31, 2007 and 2006 FS-10 - FS-11

Notes to the Consolidated Financial Statements FS-12 - FS-34

FS-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
(a Delaware Corporation) and its subsidiary as of May 31, 2007 and the related
consolidated statements of operations and comprehensive income, shareholders'
equity, and cash flows for the years ended May 31, 2007 and 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We have conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. as of May 31, 2007, and the results of its consolidated
operations and cash flows for the years ended May 31, 2007 and 2006 in
conformity with accounting principles generally accepted in the United States of
America.

August 20, 2007 /s/ PKF
San Diego California Certified Public Accountants
A Professional Corporation

FS-2

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET

MAY 31,
2007
-------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 516,900
Available-for-sale securities 532
Accounts receivable, less allowance for
doubtful accounts of $58,783 504,767
Inventories, net 1,461,713
Prepaid expenses and other 126,435
-------------

Total current assets 2,610,347
-------------

PROPERTY AND EQUIPMENT, at cost
Equipment 654,546
Furniture, fixtures and leasehold improvements 166,209
-------------
Total property and equipment 820,755
-------------

ACCUMULATED DEPRECIATION (652,718)
-------------
Net property and equipment 168,037

INTANGIBLE ASSETS, net 2,588

AVAILABLE-FOR-SALE SECURITIES 410,137

OTHER ASSETS 33,399
-------------
$ 3,224,508
=============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses $ 666,250
Accrued compensation 567,592
Capital lease - short-term portion 4,394
Notes payable-shareholder 167,870
Loan for equipment purchase 5,397
-------------
Total current liabilities 1,411,503
-------------

Capital lease - long-term portion 4,180

Loan for equipment purchase 56,273

SHAREHOLDERS' EQUITY
Common stock, $.08 par value; 25,000,000
shares authorized; 5,944,214 shares and
issued and outstanding $ 475,535
Additional paid in capital 17,254,714
Accumulated other comprehensive income (loss) (229,717)
Accumulated deficit (15,747,980)
-------------
Total shareholders' equity 1,752,552
-------------
$ 3,224,508
=============

See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.

FS-3

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Note: Due to the deconsolidation of Lancer as of December 1, 2005, consolidated
results from fiscal 2006 include only the first two quarters of the results of
operations of Lancer.

YEARS ENDED MAY 31,
-------------------------------
2007 2006
-------------- --------------
Net Sales $ 5,748,319 $ 7,184,992
Cost of sales 3,502,607 4,779,615
-------------- --------------

GROSS PROFIT 2,245,712 2,405,377
-------------- --------------

OPERATING EXPENSES
Selling, general and administrative 1,468,821 2,263,463
Research and development 256,101 239,004
-------------- --------------

Total operating expenses 1,724,922 2,502,467
-------------- --------------

OPERATING INCOME (LOSS) FROM
CONTINUING OPERATIONS 520,790 (97,090)

OTHER INCOME (EXPENSE)
Interest expense, net of interest income (35,051) (44,790)
Other income, net 40,040 45,575
-------------- --------------

INCOME (LOSS) FROM CONTINUING OPERATIONS,
before minority interest in net loss of
consolidated subsidiary and income taxes 525,779 (96,305)

MINORITY INTEREST IN NET LOSS OF CONSOLIDATED
SUBSIDIARY -- 251,670
-------------- --------------

INCOME FROM CONTINUING OPERATIONS, before
income taxes 525,779 155,365

INCOME TAX EXPENSE 16,769 1,600
-------------- --------------

INCOME FROM CONTINUING OPERATIONS 509,010 153,765

DISCONTINUED OPERATIONS
Income from discontinued operations, net 27,869 76,508
-------------- --------------

NET INCOME 536,879 230,273

See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.

FS-4

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)

YEARS ENDED MAY 31,
-------------------------------
2007 2006
-------------- --------------

OTHER COMPREHENSIVE LOSS, net of tax
Unrealized loss on available-for-sale
securities (2,746) (227,497)
-------------- --------------

COMPREHENSIVE INCOME $ 534,133 $ 2,776
============== ==============

BASIC NET INCOME PER COMMON SHARE:
Income from continuing operations $ .09 $ .03
Income from discontinued operations .00 .01
-------------- --------------

Basic net income per common share $ .09 $ .04
-------------- --------------

DILUTED NET INCOME PER COMMON SHARE:
Income from continuing operations $ .08 $ .02
Income from discontinued operations .00 .01
-------------- --------------

Diluted net income per common share $ .08 $ .03
============== ==============

WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES
Basic 5,929,445 5,759,082
============== ==============

Diluted 6,513,477 6,220,335
============== ==============

See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.

FS-5

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Additional Common Stock
Common Stock Paid-in Subscribed
Shares Amount Capital Shares Amount
------------ ---------- ------------- ------------ ----------

Balances, May 31, 2005 5,752,431 $ 460,193 $ 17,107,474 -- $ --

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

Exercise of Stock Options 14,250 1,140 2,295 -- --

Change in Lancer stock to
unrealized gain on available-for -- -- -- -- --
sale securities

Compensation expense in connection
with options and warrants granted -- -- 2,444 -- --

Expense related to issuance of warrants
for private placement -- -- 9,880 -- --

Private Placement -- -- -- 104,000 49,920

Private Placement - receivable -- -- -- 52,000 24,960

Change in minority interest related
to sale of stock at subsidiary -- -- (57,769) -- --
Net income -- -- -- -- --
------------ ---------- ------------- ------------ ----------
Balances, May 31, 2006 5,766,681 $ 461,333 $ 17,064,324 156,000 $ 74,880
============ ========== ============= ============ ==========

(Continued)

FS-6

Accumulated
Other
Common Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Total
-------------- ------------- ------------- -------------
Balances, May 31, 2005 $ 526 $(16,515,132) $ 1,053,061

Change in unrealized gain (loss) on
available-for-sale securities -- (4,901) -- (4,901)

Exercise of Stock Options -- -- -- 3,435

Change in Lancer stock to
unrealized gain on available-for
sale securities -- (222,596) -- (222,596)

Compensation expense in connection
with options and warrants granted 2,444

Expense related to issuance of warrants
for private placement -- -- 9,880

Private Placement 49,920

Private Placement - receivable (24,960) -- --

Change in minority interest related
to sale of stock at subsidiary -- -- (57,769)

Net Income -- 230,273 230,273
-------------- ------------- ------------- -------------
Balances, May 31, 2006 $ (24,960) $ (226,971) $(16,284,859) $ 1,063,747
============== ============= ============= =============

(Continued)

FS-7

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED

Additional Common Stock
Common Stock Paid-in Subscribed
Shares Amount Capital Shares Amount
------------ ---------- ------------- ------------ ----------

Exercise of stock options 21,533 1,722 4,406 -- --

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

Compensation expense in connection
with options granted -- -- 123,584 -- --

Private Placement 156,000 12,480 62,400 (104,000) (49,920)

Private Placement - receivable -- -- -- (52,000) (24,960)

Net income -- -- -- -- --
------------ ---------- ------------- ------------ ----------
Balances, May 31, 2007 5,944,214 $ 475,535 $ 17,254,714 -- --
============ ========== ============= ============ ==========

FS-8

Accumulated
Other
Common Stock Comprehensive
Subscribed Income Accumulated
Receivable (Loss) Deficit Total
-------------- ------------- ------------- -------------

Exercise of stock options -- -- -- 6,128

Change in unrealized gain (loss)
on available-for-sale securities -- (2,746) -- (2,746)

Compensation expense in connection
with options and warrants granted -- -- -- 123,584

Private placement -- -- -- 24,960

Private placement - receivable 24,960 -- -- --

Net income -- -- 536,879 536,879
-------------- ------------- ------------- -------------
Balances, May 31, 2007 -- $ (229,717) $(15,747,980) $ 1,752,552
============== ============= ============= =============

See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.

FS-9

BIOMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED
MAY 31,
-------------------------------
2007 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 509,010 $ 153,765
Adjustments to reconcile loss from
continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 56,736 122,047
Provision for losses on accounts receivable 51,753 12,372
Provision for losses on inventory -- (3,687)
Gain on sales of available for sale securities -- (685)
Options issued 123,584 12,324
(Gain) loss on sale of equipment (29,512) 1,704
Minority interest in net (loss) of consolidated
subsidiary -- (251,670)
Changes in assets and liabilities
Accounts receivable 4,200 (441,385)
Inventories (333,683) (261,864)
Prepaid expenses and other (69,969) (33,701)
Notes receivable 1,800 --
Other receivables and assets (19,980) --
Accounts payable and other accrued expenses 85,484 243,787
Accrued compensation 84,285 62,624
-------------- --------------

Net cash provided by (used in) operating activities 463,708 (384,369)
-------------- --------------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on sale of equipment 50,000 --
Sales of available-for-sale securities -- 685
Purchases of property and equipment (112,695) (252,428)
-------------- --------------

Net cash used in investing activities (62,695) (251,743)
-------------- --------------

(Continued)

FS-10

BIOMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED
MAY 31,
-------------------------------
2007 2006
-------------- --------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase under line of credit at subsidiary -- 65,000
Payments on capital leases (3,714) (26,352)
Decrease of shareholder debt (93,072) (40,145)
Change in minority interests -- 37,250
Exercise of stock options 6,129 3,435
Sale of common stock, net of offering expenses 24,960 29,960
Increase in loan for equipment purchase 61,670 --
Consolidated subsidiary sale of common stock -- 469,800
-------------- --------------

Net cash (used in) provided by financing activities (4,027) 538,948
-------------- --------------

Net cash provided by (used in) discontinued operations -- (800)
-------------- --------------

Net change in cash and cash equivalents 396,986 (97,964)

Net decrease in cash-reclassification of
Lancer Orthodontics, Inc. to the cost method -- (134,003)

CASH AND CASH EQUIVALENTS, beginning of year 119,914 351,881
-------------- --------------

CASH AND CASH EQUIVALENTS, end of year $ 516,900 $ 119,914
============== ==============

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 34,859 $ 44,790
============== ==============
Income taxes $ 1,600 $ 1,600
============== ==============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding (loss) on
available-for-sale securities $ (2,746) $ (227,497)
============== ==============
Change in minority interest due to subsidiary
sale of stock -- $ (57,769)
============== ==============
Capital lease for purchase of fixed assets -- $ (373,435)
============== ==============
Increase in investment due to de-consolidation
of Lancer -- $ 632,732
============== ==============
Reduction of accrued compensation through
purchase of stock -- $ 19,960
============== ==============
Subscribed stock receivable $ (24,960) $ 24,960
============== ==============

Changes due to de-consolidation of Lancer
Accounts Receivable -- $ 1,590,504
Inventories -- 1,838,698
Prepaid expenses and other current assets -- 90,676
Net fixed assets -- 1,197,310
Other -- 48,821
-------------- --------------
Subtotal assets 4,766,009
-------------- --------------

Accounts payable and other accrued liabilities -- 899,483
Line of credit -- 240,000
Capital lease -- 334,794
Subscribed stock -- 85,850
Common stock -- 5,670,565
Accumulated deficit -- (2,330,680)
-------------- --------------
Subtotal liabilities and equity -- (4,900,012)
-------------- --------------

Net decrease in cash -- $ (134,003)
============== ==============

See report of independent registered public accounting firm and accompanying
notes to consolidated financial statements.

FS-11

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

1. ORGANIZATION AND LIQUIDITY

ORGANIZATION

Biomerica, Inc. and Subsidiary (collectively "the Company") are primarily
engaged in the development, manufacture and marketing medical diagnostic kits
and the design, manufacture and distribution of various orthodontic products. As
of May 31, 2007 the Company had one operational unit. Until November 30, 2005
the Company's financial statements were consolidated with its former subsidiary,
Lancer Orthodontics, Inc. "(Lancer"). Therefore the first six months of
operations of Lancer are included in results for fiscal 2006 only.

LIQUIDITY

Until three years ago Biomerica had suffered substantial recurring losses from
operations. Biomerica has funded its operations through profits as well as debt
and equity financings for the past three years. ReadyScript operations were
discontinued in May 2001. ReadyScript was a contributor to the Company's losses
in prior fiscal years. During the fiscal years ended May 31, 2007 and 2006,
certain ReadyScript liabilities were forgiven and thus income from discontinued
operations for the years then ended was recorded. The subsidiary is being
reported in the financial statements as a discontinued operation because it is
no longer an operating entity.

In February 2007 the Company obtained a $200,000 working capital line of credit
and approval for a $200,000 equipment loan with Commercial Bank of California.
The credit line and loan are collateralized by substantially all of the assets
of the Company. As of May 31, 2007 $61,670 was owed on the equipment loan and
there was no outstanding balance due on the working capital line of credit. Due
to the increased sales and profitability, in particular during the fourth
quarter, the Company had $516,900 in cash and equivalents as of May 31, 2007 as
compared to $119,914 on May 31, 2006. Payments on the shareholder's note payable
have been made during fiscal 2007 according to the agreement for repayment
(payments that were delinquent have been brought up to date) and, as a result,
the balance on the note at May 31, 2007 was $167,870 as compared to $260,942 at
May 31, 2006.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements for the years ended May 31, 2007 and 2006
(see Note 3) include the accounts of Biomerica, Inc. ("Biomerica"), Lancer
Orthodontics, Inc. ("Lancer") (for the first six months of the 2006 fiscal year)
and ReadyScript, Inc. (as discontinued operations). All significant intercompany
accounts and transactions have been eliminated in consolidation. Effective
December 1, 2005 the operations of Lancer Orthodontics were no longer
consolidated with those of Biomerica. The consolidated statement of operations
for the year ended May 31, 2006 includes the results of Lancer Orthodontics for
the period of June 1, 2005 through November 30, 2005. The balance sheet as of
May 31, 2007 does not include any assets or liabilities of Lancer Orthodontics
(other than the available-for-sale securities of Lancer which Biomerica holds as
an investment).

ACCOUNTING ESTIMATES

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

FS-12

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, accounts receivable, available-for-sale securities, capital lease,
shareholder debt, commercial bank line of credit, commercial bank equipment line
of credit and accounts payable. The carrying amounts of the Company's financial
instruments approximate their fair values at May 31, 2007.

Most of the Company's available-for-sale securities include the Company's
investment in Lancer Orthodontics in the amount of $410,137. The Company also
has current available-for-sale securities in the amount of $532. The ability to
sell the Lancer shares on the open market could be affected by market
conditions, Lancer's financial reports, and the trading volume of Lancer's
shares, among other factors.

CONCENTRATION OF CREDIT RISK

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

The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. The Company's sales are not
materially dependent on a single customer or a small group of customers,
however, on an unconsolidated basis Biomerica had one customer who accounted for
greater than 10% of its sales for the fiscal year ended May 31, 2007 and two
customers each of whom accounted for greater than 10% of its sales for the
fiscal year ended May 31, 2006. The Company performs ongoing credit evaluations
of its customers. The Company does not obtain collateral with which to secure
its accounts receivable. The Company maintains reserves for potential credit
losses based upon the Company's historical experience related to credit losses.
At May 31, 2007 three customers each accounted for greater than 10% of gross
accounts receivable for Biomerica. At May 31, 2006 no customer accounted for
more than 10% of gross consolidated accounts receivable.

On a consolidated basis no customer accounted for 10% or more of the
consolidated sales in the fiscal year ended May 31, 2006. No customer accounted
for 10% or more of Lancer Orthodontics' sales for the fiscal year ended May 31
2006.

For the year ended May 31, 2007 three companies accounted for more than 30% of
the purchases for Biomerica on an unconsolidated basis and for the fiscal year
ended May 31, 2006 two companies accounted for more than 20% of the purchases
for Biomerica on an unconsolidated basis.

GEOGRAPHIC CONCENTRATION

Approximately $280,000 of Biomerica's gross inventory and $28,000 of Biomerica's
property and equipment, net of accumulated depreciation and amortization, is
located at Lancer's wholly owned subsidiary in Mexico.

CASH EQUIVALENTS

Cash and cash equivalents consist of demand deposits and money market accounts.

AVAILABLE-FOR-SALE SECURITIES

The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES." This statement addresses the accounting and
reporting for investments in equity securities which have readily determinable
fair values and all investments in debt securities. The Company's marketable
equity securities are classified as available-for-sale under SFAS 115 and
reported at fair value, with changes in the unrealized holding gain or loss
included in shareholders' equity. Available-for-sale securities consist of
common stock of publicly-traded companies and are stated at market value in
accordance with SFAS 115. Cost for purposes of computing realized gains and
losses is computed on a specific identification basis. The proceeds from the
sale of available-for-sale securities during fiscal 2007 was $0 and during
fiscal 2006 it was $685. The change in the net unrealized holding gain (loss) on
available-for-sale securities that has been included as a separate component of
shareholders' equity totaled $(2,746) and $(227,496) for the years ended May 31,
2007 and 2006, respectively. The decrease in fiscal 2006 was primarily a result
of a write down of $222,596 to market value of the Lancer securities that the
Company previously classified as an investment under the equity method of
accounting. See Principles of Consolidation above.

FS-13

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

The Company has a total of $410,669 in available-for-sale securities of which
$410,137 is its long-term investment in Lancer Orthodontics common stock. As
described earlier, effective December 1, 2005, the financial results of the
former subsidiary, Lancer Orthodontics, were no longer consolidated with those
of Biomerica. At that time the investment amount carried on the Biomerica
balance sheet for Biomerica's ownership in Lancer was $632,733, or approximately
$.93 per share. Due to the change in status from subsidiary to
available-for-sale security, the Company adopted the accounting provisions of
SFAS 115 for this investment. This resulted in a write-down to quoted market
value with losses recognized in other comprehensive income. On May 31, 2007 the
closing price for Lancer common stock was $.60 per share which is equal to a
total investment of $410,137. Management evaluated various factors with respect
to its investment in Lancer, including advances and changes within the industry,
strategic relationships with other manufacturers, and the Company's ability and
intent to hold this investment for a reasonable period of time sufficient for a
forecasted recovery of fair value. Based on the above, the Company does not
consider this investment decline to be other-than-temporary as of May 31, 2007.

INVENTORIES

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

Inventories approximate the following:

MAY 31,
2007
--------------
Raw materials $ 630,096
Work in progress 469,524
Finished products 362,093
--------------
Total $ 1,461,713
==============

Approximately $280,000 of Biomerica's gross inventory is located at its
manufacturing facility in Mexico as of May 31, 2007.

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

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Expenditures for additions and major
improvements are capitalized. Repairs and maintenance costs are charged to
operations as incurred. When property and equipment are retired or otherwise
disposed of, the related cost and accumulated depreciation or amortization are
removed from the accounts, and gains or losses from retirements and dispositions
are credited or charged to income.

Depreciation and amortization are provided over the estimated useful lives of
the related assets, ranging from 3 to 10 years, using the straight-line method.
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Depreciation and amortization
expense amounted to $56,736 and $122,047 for the years ended May 31, 2007 and
2006, respectively. At May 31, 2007, approximately $28,000 of Biomerica's
property and equipment, net of accumulated depreciation and amortization, is
located at Lancer's manufacturing facility in Mexico.

Management of the Company assesses the recoverability of property and equipment
by determining whether the depreciation and amortization of such assets over
their remaining lives can be recovered through projected undiscounted cash
flows. The amount of impairment, if any, is measured based on fair value
(projected discounted cash flows) and is charged to operations in the period in
which such impairment is determined by management. Management has determined
that there is no impairment of property and equipment at May 31, 2007.

FS-14

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

INTANGIBLE ASSETS

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

Intangible assets are being amortized using the straight-line method over the
useful life, not to exceed 18 years for marketing and distribution rights and
purchased technology use rights, and 17 years for patents. Amortization amounted
to $5,175 for each of the years ended May 31, 2007 and 2006 (see Note 4).

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

RISKS AND UNCERTAINTIES

Biomerica has entered into a royalty agreement which continues pursuant to which
it has obtained rights to manufacture and market certain products for the life
of the products. Royalty expense of approximately $120,600 and $101,600 is
included in cost of sales for this agreement for the years ended May 31, 2007
and 2006, respectively. Sales of products manufactured under this agreement
comprise approximately 8% and 5% of total sales for the fiscal years ended May
31, 2007 and 2006, respectively. Biomerica may license other products or
technology in the future as the Company deems necessary for conducting business.

Distribution - Biomerica has entered into various exclusive and non-exclusive
distribution agreements (the "Agreements") which generally specify territories
of distribution. The Agreements range in term from one to five years. Biomerica
may be dependent upon such distributors for the marketing and selling of its
products worldwide during the terms of these agreements. Such distributors are
generally not obligated to sell any specified minimum quantities of the
Company's product. There can be no assurance of the volume of product sales that
may be achieved by such distributors.

Government Regulation - Biomerica's immunodiagnostic products are regulated in
the United States as medical devices primarily by the FDA and as such, require
regulatory clearance or approval prior to commercialization in the United
States. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates, among other things, the clinical
testing, manufacture, labeling, promotion, distribution, sale and use of medical
devices in the United States. Failure of Biomerica to comply with applicable
regulatory requirements can result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, the government's refusal to grant premarket
clearance or premarket approval of devices, withdrawal of marketing approvals,
and criminal prosecution.

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

European Community - Biomerica is required to obtain certification in the
European community to sell products in those countries. The certification
requires Biomerica to maintain certain quality standards. Biomerica has been
granted certification and undergoes annual audits to assure that the Company
remains in compliance with regulations. There is no assurance that Biomerica
will be able to retain its certification in the future.

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

FS-15

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

Hazardous Materials - Biomerica's manufacturing and research and development
involves the controlled use of hazardous materials and chemicals. Although
Biomerica believes that safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and Federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company. The Company may incur substantial costs to comply with
environmental regulations.

STOCK-BASED COMPENSATION

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

Pro forma information regarding loss per share is required by SFAS 123 for the
years ended prior to June 1, 2007, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant using
the Black Scholes option pricing model with the following assumptions for the
years ended May 31, 2007 and 2006; risk free interest rates ranging from 4.55%
to 5.04%; dividend yield of 0%; expected life of the options ranging from two
and a half years to five years; and volatility factors of the expected market
price of the Company's common stock ranging from 95% to 119%.

The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option vesting period. Adjustments are made for
options forfeited prior to vesting. The effect on compensation expense, net
loss, and net loss per share (basic and diluted) had compensation costs for the
Company's stock option plans been determined based on fair value on the date of
grant consistent with the provisions of SFAS 123 are as follows:

MAY 31,
2006
--------------

Income from continuing operations, as reported $ 153,765
Plus: Stock-based employee compensation expense included
in reported loss from continuing operations 2,444
Less: Stock-based employee compensation expense
determined using fair value based method (129,414)
--------------

Income from continuing operations, pro forma $ 26,795
==============

Pro forma Income from continuing operations per share - basic $ 0.00
==============
Pro forma from continuing operations per share - diluted $ 0.00
==============

Income from discontinued operations, as reported $ 76,508
Plus: Stock-based employee compensation expense
included in reported income from discontinued operations --
Less: Stock-based employee compensation expense
determined using fair value based method --
--------------

Income from discontinued operations, pro forma $ 76,508
==============

Pro forma income from discontinued operations per
share - basic $ 0.01
==============

Pro forma income from discontinued operations per
share - diluted $ 0.01
==============

FS-16

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statement (with limited exceptions). The amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
Effective June 1, 2006, Biomerica implemented the provisions of this Statement.

In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. The Company has provided the
required disclosures of SAB No. 107 upon adoption of SFAS No. 123R on June 1,
2006.

In April 2005, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for SFAS No. 123R. The Statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company adopted SFAS No. 123R on June 1, 2006 and recognized
stock based compensation which vested during fiscal 2007 in the financial
statements.

As of May 31, 2007 total compensation cost related to nonvested stock option
awards not yet recognized totaled $128,388. The weighted-average period over
which this amount is expected to be recognized is 1.29 years.

MINORITY INTEREST

Minority interest represents the minority shareholders' proportionate share of
the equity of Lancer. At May 31, 2007, Biomerica owned 88.9% of ReadyScript (see
Notes 3 and 11). ReadyScript's results of operations are reported under
discontinued operations.

REVENUE RECOGNITION

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

SHIPPING AND HANDLING FEES AND COSTS

The consolidated financial statements reflect, for all periods presented, the
adoption of the classification or disclosure requirements pursuant to Emerging
Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and
Costs." The Company has historically classified income from freight charges to
customers as sales, which has been offset by shipping and handling costs. The
income from freight for the fiscal years 2007 and 2006, respectively, was
$124,784 and $106,501. The financial statements presented herein show the income
from shipping and handling as a component of sales for both periods and the
costs of shipping and handling as a component of cost of goods sold.

RESEARCH AND DEVELOPMENT

Research and development expenses are expensed as incurred. The Company expensed
$256,101 and $239,004 of research and development expenses during the years
ended May 31, 2007 and 2006, respectively. Included in these expenses in fiscal
2006 was $42,470 incurred by Lancer for the six month period ended November 30,
2005.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement No. 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.

FS-17

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

ADVERTISING COSTS

The Company reports the cost of all advertising as expense in the period in
which those costs are incurred. Advertising costs were approximately $90,460 and
$71,700 for the years ended May 31, 2007 and 2006, respectively. The fiscal 2006
costs include the first six months of the fiscal year for Lancer. Stand-alone
advertising costs for Biomerica were $46,052 for the fiscal year 2006.

CURRENCY

The functional currency for the Lancer De Mexico subsidiary (from which
Biomerica contracts its labor and facilities in Mexicali) is dollars.
Accordingly, all transactions are recorded using dollars and no adjustments,
gains and losses on intercompany currency transactions are recorded.

INCOME (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "EARNINGS PER
SHARE" ("EPS"). SFAS 128 requires dual presentation of basic EPS and diluted EPS
on the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net
income/(loss) divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
other convertible securities.

The following table illustrates the required disclosure of the reconciliation of
the numerators and denominators of the basic and diluted EPS computations.

FOR THE YEARS ENDED
MAY 31,
-------------------------------
2007 2006
-------------- --------------

Numerator:
Income from continuing operations $ 509,010 $ 153,765
Income from discontinued operations 27,869 76,508
-------------- --------------

Numerator for basic and diluted net
income per common share $ 536,879 $ 230,273
============== ==============

Denominator for basic net income
per common share 5,929,445 5,759,082
Effect of dilutive securities:
Options and warrants 584,032 461,253
-------------- --------------

Denominator for diluted net income per common share 6,513,477 6,220,335
============== ==============

Basic net income per common share:
Income from continuing operations $ 0.09 $ 0.03
Income from discontinued operations 0.00 0.01
-------------- --------------

Basic net income per common share $ 0.09 $ 0.04
============== ==============

Diluted net income per common share:
Income from continuing operations $ 0.08 $ 0.02
Net income from discontinued operations 0.00 0.01
-------------- --------------

Diluted net income per common share $ 0.08 $ 0.03
============== ==============

SEGMENT REPORTING

The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION". SFAS 131 requires public companies to report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the product, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company's business segments are disclosed in Note 8.

FS-18

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

REPORTING COMPREHENSIVE INCOME

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

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related implementation guidance. SFAS No.
123R will require compensation costs related to share-based payment transactions
to be recognized in the financial statement (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. Compensation cost is recognized
over the period that an employee provides service in exchange for the award.

In April 2005, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for SFAS No. 123R. The Statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Company adopted SFAS No. 123R on June 1, 2006.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140 ("SFAS No.
155"). This statement resolves issues addressed in SFAS No. 133 Implementation
Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. SFAS No. 155: (a) permits fair value remeasurement for any
hybrid financial instrument that contains an imbedded derivative that otherwise
would require bifurcation; (b) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133; (c)
establishes a requirement to evaluate beneficial interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation; (d) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and, (e) eliminates restrictions on
a qualifying special-purpose entity's ability to hold passive derivative
financial instruments that pertain to beneficial interests that are or contain a
derivative financial instrument. SFAS No. 155 also requires presentation within
the financial statements that identifies those hybrid financial instruments for
which the fair value election has been applied and information on the income
statement impact of the changes in fair value of those instruments. The Company
is required to apply SFAS No. 155 to all financial instruments acquired, issued
or subject to a remeasurement event beginning June 1, 2007. The Company does not
expect the adoption of SFAS No. 155 to have a material impact on the Company's
financial statements.

FS-19

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

In July 2006, the FASB issued FIN 48, entitled Accounting for Uncertainty in
Income Taxes. FIN 48 interprets the guidance in SFAS No. 109, entitled
Accounting for Income Taxes. Through the interpretive guidance, the FASB
clarifies the accounting for uncertainty in income taxes, provides recognition
and measurement guidance related to accounting for income taxes, and provides
guidance related to classification and disclosure of income tax-related
financial statement components. The Company has not yet determined the impact,
if any, of adopting FIN 48 on its consolidated financial statements.

3. CONSOLIDATED SUBSIDIARY

Lancer is engaged in the design, manufacture and distribution of orthodontic
products. Biomerica's direct ownership percentage of Lancer was 23.41% at May
31, 2005 and its direct and indirect (via agreements with certain
shareholders/directors) voting control over Lancer was greater than 50% as of
May 31, 2005. As a result of Biomerica's control and ownership, the Company's
financial statements were consolidated with those of Lancer. During the fiscal
year ending May 31, 2005, Biomerica was a party to certain informal agreements
with certain of Lancer's officers and directors, pursuant to which they agreed
to vote in the same manner as Biomerica (and its directors holding shares of
Lancer's common stock) on matters requiring the approval of Lancer's
stockholders. Biomerica's percentage of direct ownership in Lancer has continued
to decrease due to Lancer's issuance of additional shares of its common stock.
As of December 1, 2005, the above-mentioned board members reserved their right
no longer to vote their shares of Lancer in the same manner as the Biomerica
board votes Biomerica's shares of Lancer. Therefore, effective as of December 1,
2005, Lancer's financial statements were no longer consolidated with those of
Biomerica because Biomerica no longer has direct or indirect control of more
than 50% of Lancer's common stock. As of December 1, 2005, Biomerica held less
than 20% of Lancer's common stock and therefore Biomerica's investment is
accounted for under the provision of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".

The ReadyScript subsidiary was a development-stage enterprise and required the
raising of a significant amount of capital to fund its short-term working
capital needs. The ReadyScript operations were discontinued in May 2001 (see
Note 11). The net assets and operating results of ReadyScript are included in
the accompanying consolidated financial statements as discontinued operations.

FS-20

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

Operating results for Lancer (for the six month period ended November 30, 2005)
and ReadyScript (as discussed) in the aggregate for the years ended May 31, 2007
and 2006, which are included in the consolidated operating results of the
Company, are as follows:

FOR THE YEARS ENDED
MAY 31,
-------------------------------
2007 2006
-------------- --------------

Net sales -- $ 2,925,038

Cost of sales -- 2,190,495
-------------- --------------
Gross profit 734,543
-------------- --------------

Operating expenses:
Selling, general and administrative -- 1,029,059
Research and development -- 42,470
-------------- --------------
Total operating expenses -- 1,071,529
-------------- --------------

Other income (expense):
Interest expense, net -- (14,456)

Other income, net -- 33,096
-------------- --------------
Total other income (expense) 18,640
(Loss) from continuing operations before income taxes -- (318,346)
Income tax expense -- 800
-------------- --------------

(Loss) from continuing operations -- (319,146)
Discontinued operations of ReadyScript:
Income from discontinued operations, net 27,869 76,508
-------------- --------------

Net income (loss) $ 27,869 $ (242,638)
============== ==============

FS-21

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

4. INTANGIBLE ASSETS

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

MAY 31,
2007
--------------

Patents and other intangible $ 36,465
--------------

Less accumulated amortization 33,877
--------------
$ 2,588
==============

5. RELATED PARTY TRANSACTIONS

NOTES PAYABLE -SHAREHOLDER

Biomerica, Inc. entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to the
Company, as needed, up to $500,000 for working capital needs. The line of credit
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. The note payable
was secured by all the Company's assets except for the Lancer common stock owned
by Biomerica. The note was due September 1, 2004. On November 19, 2004, the
Company entered into an agreement entitled "Amendment of the Note, Loan and
Modification Agreement" and "Amended and Restated Promissory Note" which were
included as exhibits to the Form 10QSB filed April 14, 2004. The Amendment of
the Note, Loan and Modification Agreement was filed as an exhibit to a Form 8K
filed November 24, 2004. The agreement extended the maturity date of the note
until August 31, 2005 and allowed for minimum payments of $4,000 per month and
additional contingent payments of up to $3,500 per month based on the Company's
quarterly performance. On March 9, 2007 the Company entered into an additional
agreement entitled "Second Amendment of the Note, Loan and Modification
Agreement" which was filed as an exhibit to a Form 10-QSB on April 16, 2007. The
agreement called for payment of overdue principal by August 31, 2007, agreement
by Janet Moore to enter into a Commercial Subordination Agreement, pledge of
additional collateral to Janet Moore (all of which is subordinate to the
Commercial Bank of California) and the reduction by Moore of additional payments
of $3,500 per month, depending on certain quarterly results of the Company, to
$2,000 per month. There was $167,870 of outstanding principal and $0 of interest
payable under this note payable at May 31, 2007. As of May 31, 2007 all overdue
principal had been paid.

During 2007 and 2006, the Company incurred $19,898 and $22,355, respectively, in
interest expense related to the shareholder note payable.

During 2005 and 2004, a shareholder/director advanced the Company $0 and $4,000,
respectively. At May 31, 2007 and 2006 $1,659, was owed in interest payable on
this loan and a previous loan of $10,000. During fiscal 2006, $320 of interest
due on the $4,000 was forgiven by the shareholder/director.

During fiscal 2007 a shareholder/director advanced the Company $15,000, $50,000
and $35,000 in short term loans. The loans were repaid in two days, twenty-five
days and fourteen days, respectively. Interest of $388 was paid on the loans.

RENT EXPENSE

Biomerica, Inc. currently leases facilities from four individuals, all of whom
are shareholders of the Company. Gross rent expense of approximately $168,000
and $158,000 was incurred during 2007 and 2006, respectively, for this lease. A
further expense of $8,013 has been included in accounts payable representing
late fees, insurance, property taxes and interest payable on outstanding rent.
Rent payable at May 31, 2007 was $86,147. The total of rent, late fees,
insurance and interest payable of $94,160 is included in accounts payable in the
consolidated balance sheet.

FS-22

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

ACCRUED COMPENSATION

During fiscal 2002-2005, two officers, who are also shareholders of the Company,
agreed to defer payment of a portion of their salaries. At May 31, 2007,
$264,548 of deferred officer's salary is included in accrued compensation in the
accompanying consolidated financial statements. During fiscal 2006 one of the
officers agreed to participate in the Company's private placement in part by
reducing his accrued compensation by approximately $20,000 in exchange for
restricted common stock (Note 6). No interest was accrued on the deferred wages
until March 2007. As of March 1 the Company has been accruing interest at the
rate of 8% per year. For the year ended May 31, 2007 $5,334 in interest expense
was incurred.

Included in accrued compensation as of May 31, 2007 is vacation accrual of
$169,044. Of this, approximately $121,000 is due to the former chief executive
officer's estate. The Company is disputing the validity of this claim.

LANCER ORTHODONTICS, INC.

In fiscal 2003, Biomerica entered into an agreement with Lancer (the Company's
former subsidiary) 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, 2007, Biomerica has paid all applicable shelter
fees.

Biomerica also contracts the services of certain Lancer employees each month at
the manufacturing facility. The costs include wages and other related employment
costs, which are billed to Biomerica on a monthly basis. These costs for the
fiscal years ended May 31, 2007 and 2006 were approximately $236,000 and
$154,000, respectively.

6. SHAREHOLDERS' EQUITY

1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS

In December 1991, the Company adopted a stock option and restricted stock plan
(the "1991 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 350,000 of the Company's
unissued common stock may be granted to officers, employees or consultants of
the Company. Options granted under the 1991 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock, vest at not
less than 20% per year and expire not more than 10 years after the date of
grant.

In January 1996, the Company adopted a stock option and restricted stock plan
(the "1995 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 500,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. Options granted under the 1995 Plan may be granted at prices not
less than 85% of the then fair market value of the common stock and expire not
more than 10 years after the date of grant.

In August 1999, the Company adopted a stock option and restricted stock plan
(the "1999 Plan") which provides that non-qualified options and incentive stock
options and restricted stock covering an aggregate of 1,000,000 of the Company's
unissued common stock may be granted to affiliates, employees or consultants of
the Company. As of January 1, of each calendar year, commencing January 1, 2000,
this amount is subject to automatic annual increases equal to the lesser of 1.5%
of the total number of outstanding common shares, assuming conversion of
convertible securities, or 500,000. Options granted under the 1999 Plan may be
granted at prices not less than 85% of the then fair market value of the common
stock and expire not more than 10 years after the date of grant.

The Company has 603,999 warrants outstanding at May 31, 2007, which are included
in the table below. The warrants were issued in transactions related to
financing, primarily as a component of private placements. The warrants are for
restricted stock and have expiration dates ranging from five to ten years.
Purchase prices range from $.25 to $3.00. As of May 31, 2007 no warrants had
been exercised.

FS-23

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

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

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

Options and warrants outstanding at May 31, 2005 1,602,637 $0.20 - $3.00 $0.90
Options or warrants granted 691,500 $0.47 - $0.65 $0.44
Options exercised (14,250) $0.20 - $0.33 $0.24
Options and warrants canceled or expired (378,937) $0.20 - $3.00 $1.39

Options and warrants outstanding at May 31, 2006 1,900,950 $0.20 - $3.00 $0.64
Options granted 419,500 $0.50 - $0.80 $0.74
Options exercised (21,533) $0.20 - $0.33 $0.28
Options and warrants canceled or expired (245,668) $0.20 - $1.90 $0.67

Options and warrants outstanding at May 31, 2007 2,053,249 $0.20 - $3.00 $0.48

The weighted average fair value of options and warrants granted during 2007 and
2006 was $0.74 and $0.44 respectively.

The following summarizes information about all of the Company's stock options
and warrants outstanding at May 31, 2007. These options and warrants comprise of
those granted under the 1991, 1995 and 1999 plan and those granted outside of
these plans.

WEIGHTED
AVERAGE
REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING LIFE IN EXERCISE AT MAY 31, EXERCISE
PRICES MAY 31, 2007 YEARS PRICE 2007 PRICE
---------------- ------------ ------------ ---------- ----------- -----------

$ .20 - $ .33 706,250 1.21 $ .27 673,812 $ .27
$ 0.40 - $ 0.87 1,196,999 4.07 $ .54 842,874 $ .52
$3.00 150,000 2.03 $ 3.00 150,000 $ 3.00

STOCK ACTIVITY

In February 2006 the Company granted 20,000 stock options to purchase shares of
common stock at an exercise price of $.48 to two employees. The options vest
over four years, and have a term of five years. Management assigned a value of
$5,520 to these options.

In May 2006 the Company granted 498,500 stock options to purchase shares of
common stock at an exercise price of $.40 to various employees, consultants,
officers and directors. The options vest over three years, and have a term of
five years. Management assigned a value of $118,643 to these options.

In May 2006 the Company granted warrants to purchase 52,000 shares of restricted
common stock at an exercise price of $.65 as part of the private placement
conducted at that time. The options vest immediately and have a term of five
years. Management assigned a value of $9,880 to these warrants.

During fiscal 2006 an employee of the Company exercised a stock option for 750
shares at the purchase price of $.20 per share and 750 shares at the purchase
price of $.33 per share. The total proceeds to the Company was $398.

FS-24

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

During fiscal 2006 a former employee (then a consultant) of the Company
exercised a stock option for 3,000 shares at the purchase price of $.20 per
share. The total proceeds to the Company was $600.

During fiscal 2006 a former employee (then a consultant) of the Company
exercised a stock option for 6,000 shares at the purchase price of $.20 per
share and 3,750 shares at $.33 per share. The total proceeds to the Company was
$2,438.

During fiscal 2006 the board of directors approved a private placement of the
Company's restricted common stock. There was a total of 156,000 shares sold at
the purchase price of $.48 per share. One warrant at the exercise price of $.65
was granted for every three shares of restricted common purchased. Total
proceeds to the Company was $74,880, of which $54,920 was to be paid in cash and
the balance was a reduction of accrued wages. Three investors participated, one
of whom was an officer and director. Of the $74,880, $24,960 was recorded as a
receivable at year-end. This amount was paid after year-end in June 2006.

In July 2006 the Company granted 10,000 stock options to purchase shares of
common stock at an exercise price of $.50 to one employee. The options vest over
four years and have a term of five years. Management assigned a value of $3,636
to these options.

In February 2007 the Company granted 50,000 stock options to purchase shares of
common stock at an exercise price of $0.57 to two directors. The options vest
over three years and have a term of five years. Management assigned a value of
$18,112 to these options.

In April 2007 the Company granted 163,500 stock options to purchase shares of
common stock at an exercise price of $.73 to various employees and consultants.
The options vest over three years and have a term of five years. Management
assigned a value of $72,489 to these options.

In April 2007 the Company granted 25,000 stock options to purchase shares of
common stock at an exercise price of $.76 to a new director. The options vest
over three years and have a term of five years. Management assigned a value of
$11,632 to these options.

In May 2007 the Company granted 171,000 stock options to purchase shares of
common stock at an exercise price of $.80 to various employees and officers of
the Company. The options vest over three years and have a term of five years.
Management assigned a value of $78,895 to these options.

In September 2006 an employee exercised a stock option to purchase 1,875 shares
at the purchase price of $.42 per share. The total proceeds to the Company were
$787.50.

In October 2006 employees exercised stock options to purchase 6,408 shares at
the purchase price of $.42 per share and 2,250 shares at the purchase price of
$.20 per share. The total proceeds to the Company were $2,692 and $450,
respectively.

In November 2006 an employee exercised stock options to purchase 6,000 shares at
the exercise price of $.20 per share. The total proceeds to the Company were
$1,200.

In May 2007 an employee exercised stock options to purchase 5,000 shares at the
exercise price of $.20 per share. The total proceeds to the Company were $1,000.

Options or warrants granted are assigned values according to current market
value, using the Black-Scholes model for option valuation. The term used in the
calculation of the options or warrants is the expected life of the option,
taking into consideration cancellations, exercises and expirations. A discount
rate equivalent to the expected life (in fiscal 2007, expected life of the
options was 2.5 years) of the option is calculated using Treasury constant
maturity interest rates. The historical volatility of the stock is calculated
using weekly historical closing prices for the length of the vesting period as
reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the
Black-Scholes Model is also used for calculating employee options and warrants
valuations.

When shares are issued for services or other non-cash consideration, fair value
is measured using the current market value on the day of the board approval of
such issuance.

FS-25

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

FORMER SUBSIDIARY SALE OF STOCK

During the years ended May 31, 2006 the Company recognized a reduction in its
additional paid capital in the amount of $57,769 resulting from a decrease in
its ownership percentage of Lancer as a result of Lancer's sale of common stock.
The Company treated this reduction in its equity of the subsidiary as an equity
transaction in the accompanying consolidated statement of shareholder's equity.

FORMER SUBSIDIARY OPTIONS, WARRANTS AND STOCK ACTIVITY

In fiscal 2006 Lancer conducted a private placement, the purpose of which was to
raise funds to proceed with the terms of the Lingualcare agreement. Lancer sold
722,769 shares of restricted common stock at the price of $.65 per share. Total
gross proceeds to Lancer were $469,800. This private placement further reduced
Biomerica's control and ownership percentage in Lancer.

7. INCOME TAXES

Income tax expense from continuing operations for the years ended May 31, 2007
and 2006 consists of the following current provisions:

MAY 31,
-------------------------------
2007 2006
-------------- --------------

U.S. Federal $ 11,384 $ --
State and local 5,385 1,600
-------------- --------------
$ 16,769 $ 1,600
============== ==============

Income tax expense from continuing operations differs from the amounts computed
by applying the U.S. Federal income tax rate of 35 percent to pretax loss as a
result of the following:

MAY 31,
-------------------------------
2007 2006
-------------- --------------

Computed "expected" tax expense (benefit) $ 187,908 $ 81,366
Increase (reduction) in income taxes resulting from:
Lancer loss -- 27,494
Tax credits (1,990) (13,711)
Change in valuation allowance (206,000) (94,000)
State income taxes, net of federal benefit 30,849 13,358
Other 6,002 (12,907)
-------------- --------------

$ 16,769 $ 1,600
============== ==============

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

MAY 31,
2007
--------------

Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts and sales returns $ 23,952
Inventories, due to additional costs inventoried
for tax purposes and allowance for obsolescence --
Compensated absences and deferred payroll 171,036
Net operating loss carryforwards 907,932
Tax credit carryforwards 131,560
Accumulated depreciation of property and equipment 15,408
Other 46,514

Less valuation allowance (1,296,402)
--------------
Net deferred tax asset (liability) $ --
==============

FS-26

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

The Company has provided a valuation allowance for all of its deferred tax
assets as of May 31, 2007. Although the Company has achieved net income in
increasing amounts over the last three fiscal years, predicting future taxable
income is difficult and influenced by many factors. Therefore, Management
provided such allowance as it is currently more likely than not that the Company
will not generate taxable income sufficient to realize such assets in
foreseeable future reporting periods. Management will re-evaluate this
determination periodically. During fiscal 2007 the valuation allowance related
to Biomerica on a stand alone basis decreased by approximately $206,000.

At May 31, 2007, the Company has federal and state income tax net operating loss
carry forwards of approximately $2,519,000 and $456,000 respectively. The
federal net operating loss carry forwards begin to expire in 2008. The state net
operating loss carry forwards expire beginning in 2006.

At May 31, 2007 the Company has federal and California research and development
tax credit carryforwards of approximately $90,000 and $42,000 respectively. The
federal credits begin to expire in 2009 and the California credits carryforward
indefinitely.

Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss ("NOL") and credit carryforwards will be limited by
statute because of a cumulative change in ownership of more than 50%. The
Company has had numerous equity transactions that may have resulted in several
changes in ownership of us as defined by Section 382 of the Internal Revenue
Code of 1986, as amended, or the Code. Pursuant to Sections 382 and 383 of the
Code, the annual use of the Company's NOLs would be limited if there is a
cumulative change of ownership (as that term is defined in Section 382(g) of the
Code) of greater than 50% in the past three years. Should Section 382 ownership
change have occurred, there would be a substantial limitation on the Company's
ability to utilize its NOLs to offset future taxable income.

8. BUSINESS SEGMENTS

Reportable business segments are identified by product line and for the years
ended May 31, 2007 and 2006 are as follows (the amounts for Lancer's orthodontic
sales for fiscal 2006 include results for only the six months ended November 30,
2005):

2007 2006
-------------- --------------

Domestic sales:
Orthodontic products $ -- $ 1,584,000
============== ==============
Medical diagnostic products $ 2,107,000 $ 1,168,000
============== ==============

Foreign sales:
Orthodontic products $ -- $ 1,341,000
============== ==============
Medical diagnostic products $ 3,641,000 $ 3,092,000
============== ==============

Net sales:
Orthodontic products $ -- $ 2,925,000
Medical diagnostic products 5,748,000 4,260,000
-------------- --------------
Total $ 5,748,000 $ 7,185,000
============== ==============

Operating profit (loss):
Orthodontic products -- $ (337,000)
Medical diagnostic products 521,000 224,000
-------------- --------------
Total $ 521,000 $ (113,000)*
============== ==============

*THE INCOME STATEMENT REPORTED A LOSS OF $97,000 FOR FISCAL 2006. THE
DIFFERENCE OF $16,000 FOR FISCAL 2006 IS ATTRIBUTABLE TO INTERCOMPANY
ELIMINATION ENTRIES UPON CONSOLIDATION.

FS-27

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

Operating income from discontinued segment:
ReadyScript $ 27,869 $ 76,508
-------------- --------------
Total $ 27,869 $ 76,508
============== ==============

Domestic long-lived assets:
Medical diagnostic products $ 140,000 $ 115,000
-------------- --------------
Total $ 140,000 $ 115,000
============== ==============

Foreign long-lived assets:
Medical diagnostic products $ 28,000 $ 12,000
-------------- --------------
Total $ 28,000 $ 12,000
============== ==============

Total assets:
Medical diagnostic products $ 3,225,000 2,428,000
-------------- --------------
Total $ 3,225,000 $ 2,428,000
============== ==============

Depreciation and amortization expense:
Orthodontic products $ -- $ 63,000
Medical diagnostic products 57,000 59,000
-------------- --------------
Total $ 57,000 $ 122,000
============== ==============

Capital expenditures:
Orthodontic products $ -- $ 575,000
Medical diagnostic products 113,000 51,000
-------------- --------------
Total $ 113,000 $ 626,000
============== ==============

The net sales as reflected above consist of sales to unaffiliated customers only
as there were no significant intersegment sales during fiscal years 2007 and
2006. On a consolidated basis one customer accounted for 10% or more of the
consolidated sales in the fiscal year ended May 31, 2007 and no customer
accounted for 10% or more of the consolidated sales during 2006. On an
unconsolidated basis Biomerica has two customers each of which account for
greater than 10% of its sales for the year ended May 31, 2007 and 2006.

Geographic information regarding net sales is as follows (fiscal 2006 includes
$2,925,000 sales of Lancer for the six month period ended November 2005):

2007 2006
-------------- --------------

Net sales:
United States $ 2,107,000 $ 2,752,000
Europe 2,378,000 2,678,000
South America 75,000 458,000
Middle East 64,000 134,000
Asia 543,000 405,000
Oceania 540,000 582,000
Other foreign 41,000 176,000
-------------- --------------
Total net sales $ 5,748,000 $ 7,185,000
============== ==============

Identifiable assets by business segment are those assets that are used in the
Company's operations in each industry. Identifiable assets are held primarily in
the United States.

9. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company is currently leasing its facilities on a month-to-month basis while
management explores various other facility options. The facilities are owned and
operated by four of the Company's shareholders, one of whom is an officer and
director. Effective May 1, 2006 the monthly rent was set at $14,000. Management
believes there would be no significant difference in the terms of the property
rental if the Company leased from a third party. Total rent expense for this
facility was approximately $168,000 and $158,000 during the years ended May 31,
2007 and 2006, respectively.

FS-28

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

Biomerica subleased a portion of its facility under a non-cancelable operating
lease, which expired May 16, 2003 and was month-to-month until April 1, 2006, at
which time the Company returned this space to the landlord. The Company recorded
base rental income of $15,478 during the year ended May 31, 2006.

Biomerica has various insignificant leases for office equipment.

RETIREMENT SAVINGS PLAN

Effective September 1, 1986, the Company established a 401(k) plan for the
benefit of its employees. The plan permits eligible employees to contribute to
the plan up to the maximum percentage of total annual compensation allowable
under the limits of Internal Revenue Code Sections 415, 401(k) and 404. The
Company, at the discretion of its Board of Directors, may make contributions to
the plan in amounts determined by the Board each year. No contributions by the
Company have been made since the plan's inception.

LITIGATION

The Company is, from time to time, involved in legal proceedings, claims and
litigation arising in the ordinary course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows. There were
no legal proceedings pending as of May 31, 2007.

CONTRACT

During the first quarter of fiscal 2006 the Company entered into an agreement
with another company for the purpose of developing certain technology for
Biomerica. The total amount of the contract was for $55,000, with a 40% down
payment required and milestone payments for the balance of the contract. The
balance due at May 31, 2007 was $16,500. On June 5, 2006, a milestone payment of
$16,500 was made which was included in payables as of May 31, 2006. The
remaining $16,500 has not been recorded as a liability at May 31, 2007 due to
the fact that payment of it is contingent upon performance of certain functions
by the contractor. The Company does not expect to make payment in the future on
this contract because complete performance of the contract has not been
achieved.

On March 14, 2007, the Company entered into a contract to purchase manufacturing
equipment in the amount of $181,200. The Company borrowed the required
down-payment of $61,670 on the equipment loan with Commercial Bank of
California. Another 50% is due upon acceptance of the equipment at the
manufacturer's factory and 15% is due twenty days post delivery. The Company
intends to draw further on the equipment loan as payments are due on the
equipment.

COMMERCIAL LINE OF CREDIT

In February 2007 the Company entered into a Commercial Security Agreement, two
Promissory Notes (loan #0100000250 and loan #0100000251), a Subordination
Agreement and a Business Loan Agreement. These agreements pertain to a $200,000
working capital line of credit and a $200,000 equipment loan with Commercial
Bank of California and are collateralized by substantially all of the assets of
the Company. Copies of these agreements in their entirety were filed on April
16, 2007, with Biomerica's Form 10-QSB for the period ended February 28, 2007.

Any outstanding balance on the Promissory Note for Loan #0100000250 (up to
$200,000) is due at the maturity date on September 1, 2008. Accrued unpaid
interest on the outstanding balance is due on a monthly basis. The initial
interest rate was 9.75% and is subject to change based on changes in the Wall
Street Journal Prime Rate. The interest rate is set at 1.500 percentage points
over the Index. As of May 31, 2007 no balance was due on this note.

With respect to the balance due on Promissory Note for Loan #0100000251, nine
monthly consecutive interest payments, beginning April 1, 2007, with interest
calculated on the unpaid principal balances at an interest rate based on the
Wall Street Journal Prime Rate, plus a margin of 1.250 percentage points are
due. In addition, 47 monthly consecutive principal and interest payments in the
initial amount of $5,038.21 each (assuming a balance of $200,000), beginning
January 1, 2008, with interest calculated on the unpaid principal balances at an
interest rate of 9.500%, and one principal and interest payment of $5,038.46 on
December 1, 2011, with interest calculated on the unpaid principal balances at
an interest rate of 9.500% are due. As of May 31, 2007 the balance due on this
loan was $61,670.

FS-29

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

10. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

The following are condensed, unconsolidated pro forma statements of operations
and condensed unconsolidated statements of cash flows for the years ended May
31, 2007 and 2006 for Biomerica Inc and subsidiary. No cash dividends were paid
by the consolidated subsidiary (see Note 3) during the years ended May 31, 2007
and 2006.

CONDENSED UNCONSOLIDATED STATEMENT OF OPERATIONS

MAY 31,
-------------------------------
2007 2006
-------------- --------------

Net Sales $ 5,748,319 $ 4,259,954
Cost Of Sales 3,502,607 2,604,900
-------------- --------------
Gross Profit 2,245,712 1,655,054
-------------- --------------

Operating Expenses:
Selling, General And Administrative 1,468,821 1,234,404
Research And Development 256,101 196,534
-------------- --------------
Total Operating Expenses 1,724,922 1,430,938
-------------- --------------

Operating Income (Loss) 520,790 224,116
Other Income (Expense) 4,989 (2,075)
-------------- --------------

Income From Operations Before Interest
In Net Loss (Income) Of Consolidated
Subsidiary And Income Taxes 525,779 222,041
Interest In Net Loss Of Consolidated Subsidiary -- 67,476
Interest In Net Income Of Consolidated Subsidiary -
Discontinued Operations (27,869) (76,508)

Income From Operations Before Income Taxes 553,648 231,073
Income Tax Expense 16,769 800
-------------- --------------

Net Income $ 536,879 $ 230,273
============== ==============

FS-30

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

PRO FORMA STATEMENT OF OPERATIONS BY COMPANY

Year Ended
May 31, 2006

Lancer
Intercompany Pro-forma Biomerica
Actual Eliminations adjustments Stand-alone
--------------- -------------- ------------- -------------

Net sales $ 7,184,992 $ (2,925,038) $ 4,259,954
Cost of sales 4,779,615 $ 15,780(1) (2,190,495) 2,604,900
--------------- -------------- ------------- -------------

Gross profit 2,405,377 $ (15,780) (734,543) 1,655,054
--------------- -------------- ------------- -------------

Operating expenses:
Selling, general and admin 2,263,463 (1,029,059) 1,234,404
Research and development 239,004 (42,470) 196,534
--------------- -------------- ------------- -------------

Total operating expenses 2,502,467 (1,071,529) 1,430,938
--------------- -------------- ------------- -------------

Operating income (loss) (97,090) (15,780) 336,986 224,116

Other (income)expense
Interest expense 44,790 (14,456) 30,334
Other expense (income) (45,575) (15,780)(2) 33,096 (28,259)
--------------- -------------- ------------- -------------
(785) (15,780)(2) 18,640 2,075

Income (loss) from operations
before interest in net
income (loss) of consolidated
subsidiary and income taxes (96,305) 318,346 222,041

Minority interest in net loss
(income) of Lancer 251,670 (319,146)(3) -- --
67,476 (4)
--------------- -------------- ------------- -------------

Income (loss) from operations
before income taxes 155,365 (251,670) 318,346 222,041

Income tax expense 1,600 (800) 800
--------------- -------------- ------------- -------------

Discontinued operation (76,508) (76,508)
--------------- -------------- ------------- -------------

Net income (loss) $ 230,273 $ (251,670) $ 319,146 $ 297,749
=============== ============== ============= =============

(1) To record the charge for rent by Lancer at the manufacturing facility in
Mexico, which was eliminated in consolidation.
(2) To record the income from Biomerica received by Lancer for rent at the
Mexico facility, which was eliminated in consolidation.
(3) To de-consolidate Lancer's loss.
(4) Elimination of Biomerica's portion of Lancer's operations as if the
termination of the voting agreement occurred May 31, 2005.

FS-31

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED MAY 31,
-------------------------------
2007 2006
-------------- --------------

Cash Flows From Operating Activities:
Net Income (loss) From Continuing Operations $ 509,010 $ 153,765
Adjustments To Reconcile Net Income (Loss) To Net
Cash Provided (Used) in Operating Activities:
Depreciation and Amortization 56,736 62,278
Provision For Losses On Accounts Receivable 51,753 (3,361)
Realized Gain On Sale Of Available-For-Sale Securities -- (685)
Loss Of Subsidiary -- 67,476
Options issued 123,584 12,324
Gain on sale of equipment (29,512) 1,704
Net Change In Other Current Assets And Current Liabilities (247,863) (203,234)
-------------- --------------

Net Cash Provided By (Used In) Operating Activities 463,708 90,267
-------------- --------------

Cash Flows From Investing Activities: 50,000 --
Proceeds on the sale of equipment
Sales Of Available-For-Sale Securities -- 685
Purchase Of Property And Equipment (112,695) (41,075)
-------------- --------------

Net Cash (Used In) Provided By Investing Activities (62,695) (40,390)
-------------- --------------

Cash Flows From Financing Activities:
Decrease of shareholder debt (93,072) (40,145)
Exercise Of Stock Options 6,129 3,435
Sale Of Common Stock, Net Of Offering Expenses 24,960 29,960
Payments on capital lease (3,714) (553)
Borrowing on equipment line of credit 61,670 --
Decrease (increase) In Notes Receivable -- 3,419
-------------- --------------

Net Cash (Used In) Provided By Financing Activities (4,027) (3,884)
-------------- --------------

Net cash provided by (used in) discontinued operations -- (800)
-------------- --------------

Net Change In Cash And Cash Equivalents 396,986 45,193

Cash And Cash Equivalents At Beginning Of Year 119,914 74,721
-------------- --------------

Cash And Cash Equivalents At End Of Year $ 516,900 $ 119,914
============== ==============

Supplemental Disclosure Of Cash Flow Information -
Cash Paid During The Year For:
Interest $ 34,859 $ 29,379
Income Taxes 1,600 $ 800

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Change in unrealized holding gain (loss) on available-for-sale
securities (2,746) $ (227,497)
============== ==============
Change in minority interest due to subsidiary sale of stock $ -- $ (57,769)
============== ==============
Capital lease for purchase of fixed assets $ -- $ 12,841
============== ==============
Increase in investment due to de-consolidation of Lancer $ -- $ 632,732
============== ==============
Reduction of accrued compensation through purchase of stock $ -- $ 19,960
============== ==============
Subscribed stock receivable $ (24,960) $ 24,960
============== ==============

FS-32

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

11. DISCONTINUED OPERATIONS

The following summarizes the net liabilities of the discontinued operations,
ReadyScript, as of May 31, 2007 and the results of its operations for each of
the years in the two-year period ended May 31, 2007.

Balance sheet items:

MAY 31,
2007
--------------
Assets:
Miscellaneous receivable $ 5,304

Less liabilities:
Accrued expenses 4,709

Net liabilities 595

Results of its operations items:

YEARS ENDED MAY 31,
-------------------------------
2007 2006
-------------- --------------

Legal settlements and debt forgiveness $ 27,869 $ 77,308

Cost and expenses:

General and administrative (reduction of previous expenses) -- 800
-------------- --------------

Total costs and expenses -- 800
-------------- --------------

Income from operations $ 27,869 $ 76,508
============== ==============

FS-33

BIOMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2007 AND 2006

12. SUBSEQUENT EVENTS

During August 2007 the due date on the note payable with a related party was
extended until September 1, 2008. The terms of the note payable are the same.

FS-34