UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
Form 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES
EXCHANGE ACT OF 1934
(No fee required)

For the Fiscal Year Ended May 31, 2003         Commission File No. 0-5920

LANCER ORTHODONTICS, INC.
(Name of small business Registrant in its charter)

           CALIFORNIA                                  95-2497155
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                     Identification No.)

253 Pawnee Street, San Marcos, California              92069-2437
Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code:         (760) 744-5585
Securities Registered Pursuant to Section 12(b) of the Act:       NONE
Securities Registered Pursuant to Section 12(g) of the Act:   Common Stock,
                                                           Without Par Value


Check whether the Registrant:  (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.   X

Registrant's revenue for its most recent fiscal year $5,887,898.

The aggregate market value of the voting equity held by non-affiliates of
the Registrant, computed by reference to the price at which the common
equity was last sold on the OTCBB as of November 30, 2002 was
approximately $465,000.

The number of shares of Registrant's no par value common stock outstanding
as of August 14, 2003, was 2,196,224.

Documents Incorporated by Reference:
1.Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders are incorporated by reference into Part III.

Transitional Small Business Disclosure Format:
Yes            No   X


PART I

Item 1.  DESCRIPTION OF BUSINESS

General Development of Business

Lancer Orthodontics, Inc. ("Lancer") is engaged in the business of
manufacturing and marketing orthodontic products.  The Company was
incorporated in California on August 25, 1967.  Lancer conducts its
operations at two facilities, located at 253 Pawnee Street, San Marcos,
California 92069-2347 and in Mexicali, Mexico.

In May 1990, Lancer entered into a manufacturing subcontractor agreement
whereby the subcontractor agreed to provide manufacturing services to
Lancer through its affiliated entities located in Mexicali, B.C., Mexico.
Effective April 1, 1996, Lancer leased the Mexicali facility under a
separate agreement.  In November 1998, Lancer extended the manufacturing
agreement through October 2000.

During fiscal 2002, the facility in Mexico was incorporated as Lancer
Orthodontics de Mexico, ("Lancer de Mexico"), a wholly-owned subsidiary
of the Company.  This subsidiary now administers services previously
provided by an independent manufacturing contractor.  A new lease was
negotiated in the name of Lancer de Mexico, effective April 1, 2001, for
the 16,000 square foot facility already in use for the Mexican operations.
Mexican utilities and vendor obligations were also converted to the Lancer
de Mexico name.  This conversion eliminated the expense of an administrative
fee and is expected to provide better control in meeting future obligations.
The conversion had no material effect on manufacturing operations. The
potential impact for the use of our own facility, in terms of a corporate
entity with legal standing in Mexico, is that over a fiscal year Lancer
would save approximately $100,000 in service fees over a Mexican contracted
corporate entity. Should Lancer discontinue operations in Mexico, it is
responsible for accumulated employee seniority obligations as prescribed by
Mexican law.  At May 31, 2003, this obligation was approximately $401,000.
Such obligation is contingent in nature and accordingly has not been accrued
in Lancer's financial statements.

Lancer has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any
material amount of its assets during the fiscal year ended May 31, 2003.

Narrative Description of the Business

Principal Products and Industry Segments.  Lancer's manufactured product
line includes preformed bands, direct bonding brackets, buccal tubes, arch
wires, lingual attachments, and related accessories to be used by
orthodontists and dentists in treating their patients.  The foregoing are
assembled for the orthodontists' prescriptions or the specifications of
private label customers.  Lancer's manufactured products are also sold to
distributors worldwide.

In addition, Lancer markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics, headgear cases,
retainer cases, orthodontic wire, and preformed arches.  Lancer sells its
products directly to orthodontists and dentists through company-paid sales
representatives in the United States.  At the end of its 2003 fiscal
year, Lancer had six sales representatives, all in the United States, all
of whom are employees of Lancer. We believe that all Lancer products sold
in the US comply with FDA regulations.

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

For the fiscal years ended May 31, 2003 and 2002, sales by class of product
are:

      Class of Product                            2003             2002
  Manufactured Products                       $4,403,000       $4,143,000
  Resale Products                              1,485,000        1,879,000
      Total                                   $5,888,000       $6,022,000

Lancer has only one industry segment, which is the manufacture and
distribution of orthodontic products.

Financial Information About Foreign and Domestic Operations and Export Sales.
for the fiscal years ended May 31, 2003 and 2002:

                                                  2003             2002
Sales to unaffiliated customers:
  United States                               $3,144,000       $3,031,000
  Europe                                       1,732,000        1,813,000
  Central & South America                        262,000          366,000
  Middle East                                    270,000          334,000
  Other Foreign                                  480,000          478,000
     Total                                    $5,888,000       $6,022,000

No other geographic concentrations exist where net sales exceed 10% of total
net sales.

                                                  2003             2002
Long-lived assets:
  United States                                 $164,000          $21,000
  Mexico                                          59,000           27,000
     Total                                      $223,000          $48,000

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


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

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

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

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

Customers, Backlog, and Seasonality of Business.  Lancer sells its products
directly or indirectly through its sales representatives, to a relatively
large number of customers.  No customer of Lancer's accounted for 10% or
more of Lancer's sales in the fiscal years ended May 31, 2003 and 2002.
Lancer's backlog at May 31, 2003 and 2002, was $35,000 and $84,000,
respectively.  The change in backlog is primarily attributable to improved
planning (better forecasting of demand) and softened summer demand.
Lancer's business has not been subject to significant seasonal fluctuations.





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

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

Product Development and Improvement.  Lancer is engaged in, and intends to
continue development programs directed toward improving its orthodontic
products and production techniques.  The total costs incurred by Lancer on
product development activities were approximately $107,000 and $4,000 for
the fiscal years ended May 31, 2003 and 2002, respectively.

Government Regulations.  Lancer is licensed to design, manufacture, and
sell orthodontic appliances and is subject to the Code of Federal
Regulations, Section 21, Parts 800-1299.  The Food and Drug Administration
(the "FDA") is the governing body that assesses and issues Lancer's license
to assure that it complies with these regulations.  Lancer is currently
licensed, and its last assessment was in November 1997.  Also, Lancer is
registered and licensed with the state of California's Department of Health
Services.

Effect of Environmental Regulations.  Compliance with Federal, State, and
local environmental regulations has not had a material effect on Lancer's
operations to date.

Insurance. Lancer has insurance coverage for personal property ($750,000),
business income ($1,200,000), general liability ($2,000,000), employee
benefit liability ($1,000,000), products liability ($7,000,000), auto
($1,000,000), commercial fidelity ($100,000), excess umbrella ($3,000,000),
difference in conditions and Mexico required coverage ($2,500,000). The
Company's workman's compensation policy covers injuries to employees as a
result of accidental contamination of hazardous materials. The Company does
not have a separate policy for contamination of hazardous materials.

Employees.  As of August 15, 2003, Lancer had 36 employees, 1 part time.
The increase of employees from 2002 to 2003 was in the marketing support
department. Additionally, Lancer, through its Mexican subsidiary, employs
approximately 120 people in Mexico.

Proposed Merger.  A proposed merger between Lancer and Biomerica was
considered in order to reduce both Companies' administrative expenses.
Market conditions (in particular, the inability of Biomerica to remain on
the Nasdaq SmallCap Market thereby reducing Lancer shareholder liquidity)
made this proposed merger not economically feasible and the proposed merger
has been withdrawn.

Risks and Uncertainties

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

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

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

Risk of Product Liability - Testing, manufacturing and marketing of the
Company's products entail risk of product liability.  The Company currently
has product liability insurance.  There can be no assurance, however, that
the Company will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect the Company against losses due to product
liability.  An inability could prevent or inhibit the commercialization of
the Company'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.

Item 2.  PROPERTIES

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

Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a
non-cancelable operating lease for its Mexico facility through March 31, 2009.
The new lease encompasses the approximately 16,000 square feet of the
previous lease, plus additional square footage of approximately 10,000 feet,
for a total of approximately 26,000 square feet.  Lancer Orthodontics de
Mexico will provide sub-contracted manufacturing services to Biomerica,
Inc., using a portion of the additional square footage.  The new lease
requires four monthly lease payments of approximately $5,300 through March
2003, and seventy-two monthly payments of approximately $9,600 through March
2009.  An agreement has been negotiated between Lancer Orthodontics de
Mexico and Biomerica for lease reimbursement of approximately $2,000 per
month.  The remainder of approximately $7,600 monthly lease expense will be
borne by Lancer.  Total rental expense for this facility for the years ended
May 31, 2003 and 2002 was approximately $76,000 and $69,000, respectively.

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

Future aggregate minimum annual cash lease payments are as follows:

             Years ending
              May 31, 2004                        $173,950
              May 31, 2005                         132,003
              May 31, 2006                         131,148
              May 31, 2007                         129,438
              May 31, 2008                         127,767
              May 31, 2009                         105,776
                                                  $800,082

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

Item 3.  LEGAL PROCEEDINGS - Not applicable.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of Lancer's security holders during the
year ended May 31, 2003.

PART II

Item 5.  MARKET FOR LANCER'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

Approximate high and low sales prices for Lancer's common stock, based on a
graph provided by MSN Money, for the last two years are presented below.
The market for Lancer's stock is limited and sporadic and is traded under
the symbol LANZ.

  Quarter Ended                                    High               Low
   August 31, 2001                                 $.30              $.20
   November 30, 2001                               $.35              $.21
   February 28, 2002                               $.30              $.21
   May 31, 2002                                    $.38              $.34
   August 31, 2002                                 $.31              $.23
   November 30, 2002                               $.30              $.26
   February 28, 2003                               $.40              $.32
   May 31, 2003                                    $.51              $.38

The Company's stock is traded on the OTC Bulletin Board.

As of July 29, 2003, there were approximately 311 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar
of Common Stock.  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 dividend on its Common Stock in the
foreseeable future.  The Company's Board of Directors intends, for the
foreseeable future, to retain earnings to finance the continued operation
and expansion of the Company's business.

Equity Compensation Plans

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

                                                         Number of Securities
                       Number of       Weighted-Average  Remaining Available
                       Securities      Exercise Price    for Future Issuance
                       To be Issued    of Outstanding    Under Compensation
                       Upon Exercise   Options,          Plans (Excluding
                       Of Outstanding  Warrants          Securities Reflected
Plan Category          Options         and Rights        in First Column)

Equity compensation
plans approved by
security holders         430,500          .53               19,500

Equity compensation
plans not approved
by security holders           --           --                   --

Total                    430,500                            19,500

No dividends have been declared or paid on Lancer's common stock since its
inception.

Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

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 Lancer's
actual results in future periods to differ from forecasted results.  These
risks and uncertainties include, among other things, the continued demand
for the Company's products, availability of raw materials and the state
of the economy.  These and other risks are described in the Company's
Annual Report on Form 10-KSB and in the Company's other filings with the
Securities and Exchange Commission.

Result of Operations

For the fiscal year ended May 31, 2003, net sales decreased $134,433 (2.2%)
from $6,022,331 in 2002 to $5,887,898 in 2003.  International net sales
decreased $247,418 (8.3%) from $2,991,228 in 2002 to $2,743,810 in 2003.
This decrease is primarily due to weak economics in South and Central
America.  Domestic net sales increased $112,985 (3.7%) from $3,031,103 in
2002 to $3,144,088 in 2003.

Cost of sales, as a percentage of sales, increased 1.3% from 69.1% in
fiscal 2002 to 70.4% in fiscal 2003.  The increase is primarily attributable
to expansion costs in Mexico.

Selling expenses decreased $139,961 (10.5%) from $1,330,135 in 2002 to
$1,190,174 in 2003.  The decrease is primarily attributable to decreases in
labor costs and travel expenses.

General and Administrative expenses increased $43 (0.1%) from $429,785 in
2002 to $429,828 in 2003.  The increase is primarily attributable to an
increase in insurance costs, offset by a decrease in professional fees.

Product Development expenses increased $103,528 (2700%) from $3,842 in 2002
to $107,370 in 2003.  The increase is primarily attributable to labor costs
and supplies associated with development of new products and manufacturing
technologies.

Interest expense decreased $13,904 (79.3%) from $17,539 in 2002 to $3,635
in 2003.  The decrease is primarily attributable to a decrease in the
average line of credit balance due to an increase in cash, primarily from
insurance proceeds.  Interest income decreased $181 (50.7%) from $357 in
2002 to $176 in 2003 primarily due to lower interest rates.

Other income increased $102,477 from other expense of $43,295 in 2002 to
other income of $59,182 in 2003.  The increase is primarily attributable to
other income of $62,655 from the insurance claim settlement of $144,413 for
the theft of inventory at Lancer's Mexicali facility, less $81,758 of
inventory related thereto.

Rental income of $344 was realized in fiscal year 2003 resulting from the
sub-lease of approximately 459 square feet of San Marcos warehouse space.



Financial Condition, Liquidity, and Capital Resources

During fiscal 2002, management negotiated a new line of credit with GE
Capital Healthcare Financial Services through October 24, 2003.  The line of
credit allows for borrowing up to $400,000 and is limited to 80% of accounts
receivable less than 90 days old with a liquidity factor of 94%.  The
outstanding balance at May 31, 2003 was $426.  The unused portion available
under the line of credit at May 31, 2003, was approximately $365,000.
Borrowings bear interest at prime plus 2.00% per annum (8.25% at May 31,
2003), but never less than 8.0%.

The line of credit is collateralized by substantially all the assets of the
Company, including inventories, receivables, and equipment.  The lending
agreement for the line of credit requires, among other things, that the
Company maintain a tangible net worth of $2,100,000, which was met, and
that receivables payments be sent to a controlled lockbox.  In addition to
interest, a management fee of 0.25% of the average monthly outstanding loan
balance and an unused balance fee of 0.0425% on the average monthly unused
portion available are required.  The Company is not required to maintain
compensating balances in connection with this lending agreement.

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

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

Working capital decreased $26,619 (0.9%) from $2,840,291 in 2002 to
$2,813,672 in 2003.  The decrease is primarily attributable to decreases in
inventories and accounts receivable, offset by an increase in cash.

Cash increased $382,822 (297.7%) from $128,585 in 2002 to $511,407 in 2003.

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

Contractual Obligations and Commercial Commitments

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




                                  Payments Due by Period

Contractual Cash                    Less than                           After
Obligations            Total        1 Year    1-3 Years   4-5 Years   5 Years

Line of Credit              426         426          -           -          -
Operating Leases        800,082     173,950    263,151     257,205    105,776
Employment Agreements   135,000     135,000          -           -          -

                       $935,508    $309,376   $263,151    $257,205   $105,776

Employment Agreement

Pursuant to the terms of the employment agreement between the Company and Dan
Castner, the Vice President of Sales and Marketing of the Company, dated as
of May 20, 2003, the Company agreed to pay Mr. Castner an annual base salary
of $135,000.  In addition, the Company granted Mr. Castner stock options to
purchase an aggregate of 120,000 shares of the Company's common stock at an
exercise price of $0.43 per share.  The stock options have a term of five
years and will vest over four years as follows: (i) 25% vesting on the first
anniversary of the date of the grant; (ii) 25% vesting on the second
anniversary of the date of the grant; (iii) the remaining 50% vesting as to
one-twenty fourth (1/24th) per month each month thereafter for the next two
years.  Should the Company be purchased by an unaffiliated third party, the
options shall vest 100%.

Insurance Claim Receivable

Management of the Company completed an assessment of two occurrences of theft
of inventory located at its wholly-owned and consolidated subsidiary, Lancer
de Mexico, in January and April of 2002.  The carrying value of the inventory
stolen approximated $82,000, valued at standard cost, which has been
reflected in the May 31, 2002 financial statements as a reduction in
inventories and an addition to insurance claim receivable.  During fiscal
year 2003, Lancer received $144,413 from the insurance carrier; the estimated
value of the stolen inventory at net average selling price, less commissions
and royalties.  Lancer recorded other income of $62,655 from the proceeds
received in excess of standard costs.  In order to deter future thefts, a new
security company has been hired and a new security system installed.  In
addition, employees are being closely monitored.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
with the associated asset retirement costs being capitalized as a part of
the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after
June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to
have a material effect on the Company's financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 144, "IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," which addresses accounting and financial reporting for
the impairment or disposal of long-lived assets. This standard was effective
for the Company's financial statements beginning January 1, 2002. The
implementation of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations.







In April 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 145, "Rescission of FASB Statements No. 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," to update, clarify and
simplify existing accounting pronouncements.  FASB Statement No. 4, which
required all gains and losses from debt extinguishment to be aggregated and,
if material, classified as an extraordinary item, net of related tax effect,
was rescinded.  Consequently, FASB Statement No. 64, which amended FASB
Statement No. 4, was rescinded because it was no longer necessary.  We do
not expect the adoption of this statement to have a material effect on our
financial statements.

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

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

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




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

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

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.

We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
Sales of manufactured and resale products comprise approximately 75% and 25%
of total sales, respectively, for fiscal 2003.

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

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

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

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 Lancer and are not meant to be an
exhaustive discussion of risks that apply to companies such as Lancer.
Like other businesses, Lancer 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 Lancer 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
our 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 US border due to an escalation of terrorist or
counter terrorist activity; the operating and financial covenants contained
in our credit line which could limit our operating flexibility, any changes
in our business relationships with international distributors or the
economic client 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 effect on our revenues and
profitability; possible costs in complying with government regulations and
the delays in receiving required regulatory approvals or the enactment of
new adverse regulations or regulatory requirements; numerous competitors,
some of which have substantially greater financial and other resources than
we do; potential claims and litigation brought by patients or dental
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.

Item 7  FINANCIAL STATEMENTS

Reference is made to Exhibit A attached hereto wherein Lancer's financial
statements are contained which are incorporated herein by reference.

Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES - Not Applicable

PART III

Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF LANCER

Information regarding directors, set forth under the caption "Election of
Directors" in Lancer's annual proxy statement for the annual meeting of
shareholders, which will be filed with the Commission not later than 120
days after the end of Lancer's fiscal year period ended May 31, 2003, is
incorporated herein by reference.  Information regarding executive
officers, set forth under caption "Executive Compensation and Other
Information" in the annual proxy statement for the annual meeting of
shareholders which will be filed with the Commission not later than 120
days after the end of Lancer's fiscal year ended May 31, 2003, is also
incorporated herein by reference.  Information regarding Section 16
compliance, set forth under caption "Section 16 Compliance" in the annual
proxy statement for the annual meeting of shareholders, which will be filed
with the Commission not later than 120 days after the end of Lancer's
fiscal year ended May 31, 2003, is incorporated herein by reference.

Item 10.  EXECUTIVE COMPENSATION

Information regarding executive compensation, set forth under the caption
"Compensation Committee Report on Executive Compensation" in Lancer's annual
proxy statement for the annual meeting of shareholders, which will be filed
with the Commission not later than 120 days after the end of Lancer's fiscal
year ended May 31, 2003, is incorporated herein by reference.

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership, set forth under the caption
"Beneficial Ownership of the Company's Securities" in Lancer's annual proxy
statement for the annual meeting of shareholders, which will be filed with
the Commission not later than 120 days after the end of Lancer's fiscal year
ended May 31, 2003, is incorporated herein by reference.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in
Mexicali, Mexico.  The agreement requires reimbursement from Biomerica for
discrete expenses such as payroll, shipping, and customs fees; lease and
security deposits of approximately $2,000 and $1,100 per month,
respectively; and service fees of approximately $2,900 per month.  The
accompanying balance sheet includes a total receivable of approximately
$14,000 due from Biomerica at May 31, 2003; including a one time shelter fee
of $5,000, service fees of approximately $6,000, payroll expenses of $2,600,
and other expenses to be reimbursed of approximately $400.

Item 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Documents filed as a part of the report
     1.  Financial Statements
         See Index to Financial Statements Exhibit A, attached hereto,
         wherein Lancer's financial statements are contained.
     2.  Exhibits Required to be Filed by Item 601 of Regulation S-B
         3(i)  Articles of Incorporation as amended - Incorporated herein by
               reference to Exhibit 4.5 of Lancer's S-8 filed March 8, 1994.
         3(ii) By-laws as amended - Incorporated herein by reference to
               Exhibit 4.6 of Lancer's S-8 filed March 8, 1994.
         10    1993 Stock Option Plan as amended - Incorporated herein by
               reference to Exhibit 4.1 of Lancer's S-8 filed March 8, 1994.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed in the year ended May 31, 2003.




SIGNATURES

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

Dated:  September 15, 2003

LANCER ORTHODONTICS, INC.

By:  /s/ Zackary Irani                      /s/ Catherine Wyss
Zackary Irani                                   Catherine Wyss
Chief Executive Officer,                        Accounting Manager
Chairman of the Board, and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.

Signature                   Title                          Date

/s/ Zackary Irani                                          September 15, 2003
    Zackary Irani           CEO, Chairman of the Board
                            & Director

/s/ Janet Moore                                            September 15, 2003
    Janet Moore             Secretary & Director

/s/ Dr. Robert Orlando                                     September 15, 2003
    Dr. Robert Orlando      Director

/s/ Dr. Francis Cano                                       September 15, 2003
    Dr. Francis Cano        Director



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

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

/s/ Zackary Irani
    Zackary Irani
    Chief Executive Officer

Date:  September 15, 2003



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

I, Zackary Irani, certify that:

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

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

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

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

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

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

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

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

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

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

Date: September 15, 2003

/s/Zackary Irani
Chief Executive Officer



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

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

/s/ Catherine Wyss
    Catherine Wyss
    Accounting Manager

Date:  September 15, 2003




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

I, Catherine Wyss, certify that:

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

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

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

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

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

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

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

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

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

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

Date:  September 15, 2003


/s/Catherine Wyss
Accounting Manager







Lancer Orthodontics, Inc.
Consolidated Financial Statements
As of May 31, 2003 and
For Each of the Two Fiscal Years Then Ended



Report of Independent Certified Public Accountants            FS-2


Consolidated Financial Statements

Consolidated Balance Sheet                                    FS-3

Consolidated Statements of Operations                         FS-4

Consolidated Statements of Stockholders' Equity               FS-5

Consolidated Statements of Cash Flows                         FS-6


Notes to Consolidated Financial Statements            FS-7 - FS-20








































Report of Independent Certified Public Accountants


The Board of Directors
Lancer Orthodontics, Inc.


We have audited the accompanying consolidated balance sheet of Lancer
Orthodontics, Inc. (the "Company") and its wholly-owned subsidiary as of
May 31, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two fiscal years then
ended.  These consolidated financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the 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 financial position of Lancer
Orthodontics, Inc. as of May 31, 2003, and the results of its operations
and its cash flows for each of the two fiscal years then ended in
conformity with accounting principles generally accepted in the United
States of America.




/s/BDO SEIDMAN, LLP




Orange County, California
August 11, 2003










May 31,                                                                2003

Assets

Current assets
Cash                                                               $511,407
Accounts receivable, net of allowance for doubtful
accounts of $105,000                                              1,099,440
Inventories, net of reserve of $137,225                           1,749,016
Related party receivables                                            13,890
Prepaid expenses                                                     55,486
Other receivables                                                    19,531

Total current assets                                              3,448,770

Property and equipment, net                                         223,307
Intangible assets, net                                               35,275
Other assets                                                         43,400

                                                                 $3,750,752

Liabilities and Stockholders' Equity

Current liabilities
Accounts payable                                                   $396,862
Accrued payroll and related benefits                                141,151
Accrued professional fees                                            40,000
Accrued royalties                                                    49,553
Other current liabilities                                             7,106
Line of credit                                                          426

Total current liabilities                                           635,098

Commitments and contingencies

Stockholders' equity
Preferred stock, various series; 750,000 shares
  authorized; no shares issued and outstanding                            -
Common stock, no par value; 50,000,000 shares
  authorized; 2,196,224 shares issued and
  outstanding, and 69,471 shares subscribed                       4,864,595
Accumulated deficit                                              (1,748,941)

Total stockholders' equity                                        3,115,654

                                                                 $3,750,752










Years ended May 31,                                    2003           2002

Net sales                                         $5,887,898     $6,022,331

Cost of sales                                      4,143,999      4,159,048

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

Operating expenses:
Selling                                            1,190,174      1,330,135
General and administrative                           429,828        429,785
Product development                                  107,370          3,842

Total operating expenses                           1,727,372      1,763,762

Operating income                                      16,527         99,521

Other income (expense):
Interest expense                                      (3,635)       (17,539)
Interest income                                          176            357
Other income (expense), net                           59,526        (43,295)

Total other income (expense)                          56,067        (60,477)

Income before income taxes                            72,594         39,044

Income taxes                                           1,419          1,260

Net income                                           $71,175        $37,784

Per share data:

Basic                                                  $0.03          $0.02

Diluted                                                $0.03          $0.02


Weighted average number of common and common equivalent shares:

Basic                                              2,211,479      2,098,792

Diluted                                            2,235,623      2,098,792















<TABLE>
<CAPTION>
                                          Common Stock
                     Common Stock          Subscribed      Accumulated
                   Shares      Amount    Shares   Amount      Deficit      Total
<S>              <C>        <C>             <C>  <C>       <C>          <C>
Balances,
May 31, 2001     2,098,620  $4,815,074        -  $     -   $(1,857,900) $2,957,174

Share adjustment         8           -        -        -             -           -
Common stock
subscribed for
services and payroll     -           -   62,595   17,021             -      17,021

Net income              -            -        -        -        37,784      37,784

Balances,
May 31, 2002     2,098,628   4,815,074   62,595   17,021    (1,820,116)  3,011,979

Share adjustment         1           -        -        -             -           -
Common stock
issued for services
provided and payroll
in prior year       62,595      17,021  (62,595) (17,021)            -           -

Common stock
issued in lieu
of payroll          35,000      12,250        -        -             -      12,250

Common stock
subscribed in lieu
of payroll               -           -   69,471   20,250             -      20,250

Net income               -           -        -        -        71,175      71,175

Balances,
May 31, 2003     2,196,224  $4,844,345   69,471  $20,250   $(1,748,941) $3,115,654
</TABLE>









Years Ended May 31,                                     2003           2002

Cash flows from operating activities:
  Net income                                         $71,175        $37,784
  Adjustment to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization                     78,318        107,770
    Provision for losses on accounts receivable       56,911          5,000
    Provision for inventory                           20,335         36,870
    Common stock for services                         32,500         17,021
    Net change in operating assets and liabilities:
      Accounts receivable                            (34,416)        34,016
      Inventories                                    318,408         15,214
      Related party receivables                      (13,890)             -
      Prepaid expenses                                (1,211)        (9,657)
      Insurance claim receivable                      81,758        (81,758)
      Other receivables                              (19,530)             -
      Accounts payable                               (22,491)       (41,999)
      Accrued payroll and related benefits            46,157        (22,732)
      Other liabilities                               42,653         (6,379)

Net cash provided by operating activities            656,677         91,150

Cash flows from investing activities:
  Purchases of property and equipment               (200,757)        (3,387)
  Other assets                                        (7,855)       (16,397)

Net cash used in investing activities               (208,612)       (19,784)

Cash flows from financing activities:
  Net decrease in line of credit agreement           (65,243)       (74,331)

Net cash used in financing activities                (65,243)       (74,331)

Net change in cash                                   382,822         (2,965)

Cash, beginning of period                            128,585        131,550

Cash, end of period                                 $511,407       $128,585

Supplemental disclosures of cash flow information:
  Cash paid during the year for:

    Interest                                          $3,635        $17,539

    Income taxes                                        $619         $1,260






1.  Organization

Lancer Orthodontics, Inc. (the "Company") was incorporated on August 25,
1967, in the state of California, for the purpose of engaging in the
design, manufacture, and distribution of orthodontic products. The Company
had a manufacturing facility in Mexico where a majority of its inventory is
manufactured (Note 7).  During fiscal 2002, the facility in Mexico was
incorporated and became a wholly-owned and consolidated subsidiary of the
Company.  This subsidiary now also administers services previously provided
by an independent manufacturing contractor (Note 7).  The Company also
purchases certain orthodontic and dental products for purposes of resale.
Sales of manufactured and resale products comprise approximately 75% and 25%
of total sales, respectively, for fiscal 2003 and 69% and 31% of total
sales, respectively, for fiscal 2002.

Sales are made directly to orthodontists worldwide through Company
representatives and independent distributors, with approximately 33% and 42%
during fiscal 2003 and 2002, respectively, being domestic in nature.
The Company also sells certain of its products on a private label basis.

The Company is a partially owned and consolidated subsidiary of Biomerica,
Inc. ("Biomerica"). Biomerica exercises significant financial control over
the Company and its operations.

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the financial
statements of Lancer Orthodontics, Inc. and its wholly-owned subsidiary,
Lancer Orthodontics de Mexico ("Lancer de Mexico").  The consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.  All
significant intercompany accounts and transactions have been eliminated
in consolidation.

Reclassifications

Certain prior year amounts have been reclassified to conform with current
year presentation.

Accounting Methods

The Company uses the accrual method of accounting for financial and income
tax reporting purposes.

Fair Value of Financial Instruments

The Company has financial instruments whereby the fair value of the
financial instruments could be different than that recorded on a
historical basis on the accompanying balance sheet. The Company's financial
instruments consist of cash, accounts receivable, accounts payable, and a
line of credit. The carrying amounts of the Company's financial instruments
generally approximate their fair values at May 31, 2003.



2.  Summary of Significant Accounting Policies (Continued)

Use of Estimates in the Preparation of Financial Statements

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 the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Significant estimates made by the Company's management include, but are
not limited to, allowances for doubtful accounts, allowances for sales
returns, the valuation of inventories, and the realizeability of property
and equipment through future operations. Actual results could materially
differ from those estimates.

Concentrations of Credit Risk

Cash Balances - The Company, at times, maintains cash balances at certain
financial institutions in excess of the federally insured deposits.

Customers - The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and returns.
The Company estimates credit losses and returns based on management's
evaluation of historical experience and current industry trends. Although
the Company expects to collect amounts due, actual collections may
materially differ from the estimated amounts. As of May 31, 2003, reserves
for credit losses totaled $65,000.  Reserves for sales returns totaled
$40,000. At May 31, 2003, one customer accounted for approximately 11.1% of
gross accounts receivable.  At May 31, 2002, one customer accounted for
approximately 12.6% of gross accounts receivable.  No one customer accounted
for 10% or more of revenues for the years ended May 31, 2003 and 2002.

Suppliers - At May 31, 2003, one company accounted for 27.2% of accounts
payable.  At May 31, 2002, one company accounted for 35.4% of accounts
payable.  No company accounted for more than 10% of purchases for the
years ended May 31, 2003 and 2002.

Geographic Concentration - Approximately $1,045,525 of gross inventory and
$59,000 of property and equipment, net of accumulated depreciation and
amortization, is located at the company's wholly owned subsidiary in
Mexico (Note 7).

Risks and Uncertainties

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

2.  Summary of Significant Accounting Policies (Continued)

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

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

Risk of Product Liability - Testing, manufacturing and marketing of the
Company's products entail risk of product liability.  The Company currently
has product liability insurance.  There can be no assurance, however, that
the Company will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect the Company against losses due to product
liability.  An inability could prevent or inhibit the commercialization of
the Company'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.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method. Costs include materials, direct labor,
and an allocable portion of direct and indirect manufacturing overhead
based upon standard rates derived from historical trends and experience
factors. Market is determined by comparison with recent sales prices or net
realizable value.

Property and Equipment

Property and equipment are recorded at cost and are depreciated using
straight-line method over the estimated useful lives, generally five years,
of the related assets.  Leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the term of the lease.

Maintenance and repairs are charged to expense as incurred. Major renewals
and improvements are capitalized.  At the time of retirement or other
disposition of property and equipment the cost and accumulated depreciation
are removed from the accounts and any resulting gains or losses are
reflected in income.

2.  Summary of Significant Accounting Policies (Continued)

Intangible Assets

Assets are being amortized using the straight-line method over 18 years for
the marketing and distribution rights.  Marketing and distribution rights
include repurchased sales territories. Technology use rights include the
1985 purchase of the assets and technology of Titan Research Associates,
Ltd.

Impairment of Long-Lived Assets

The Company assesses the recoverability of long-lived assets by determining
whether the depreciation and 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.  Management has determined that there is no
impairment of long-lived assets as of May 31, 2003.

Stock Based Compensation

In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended FAS No. 123
"Accounting for Stock-Based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Additionally, the statement amends the disclosure requirements of FAS No.
123 to require prominent disclosures in the annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial statements for fiscal years ending
after December 15, 2002. In compliance with FAS No. 148, we have elected
to continue to follow the intrinsic value method in accounting for our
stock-based employee compensation plan as defined by APB No. 25,
"Accounting for Stock Issued to Employees".

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 disclosure, the estimated
fair value of the options is amortized to expense over the options vesting
period. Adjustments are made for options forfeited prior to vesting.  The
effect on compensation expense, net loss, and net loss per common share had
compensation costs for the Company's stock option plans been determined based
on a fair value at the date of grant consistent with the provisions of SFAS
148, for the years ended May 31, 2003 and 2002, are as follows:




2.  Summary of Significant Accounting Policies (Continued)

May 31,                                                 2003          2002

Net income, as reported                               $71,175        $37,784
Add:  Stock-based employee compensation expense             -              -
Less:  Stock-based employee compensation expense
       determined under fair value calculations       (14,989)       (65,322)

Net income (loss) pro forma                           $56,186       $(27,538)

Basic income per share, as reported:                    $0.03          $0.02
Add:  Stock-based employee compensation expense
      recorded                                              -              -
Less: Stock-based employee compensation expense
      determined under fair value calculations              -          (0.03)

Pro forma                                               $0.03         $(0.01)

Diluted income per share, as reported:                  $0.03         $(0.02)
Add:  Stock-based employee compensation expense
      recorded                                              -              -
Less: Stock-based employee compensation expense
      determined under fair value calculations              -          (0.03)

Pro forma                                               $0.03          $0.02

Revenue Recognition

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

Research and Development

Research and development expenses are expensed as incurred.  The Company
expensed approximately $107,000 and $4,000 of research and development
expenses during the years ended May 31, 2003 and 2002, respectively.

Advertising

Advertising costs are expensed as incurred. Advertising expense for the
years ended May 31, 2003 and 2002 was $4,531 and $13,115, respectively.

Currency

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

Shipping and Handling Costs

Shipping and handling costs charged to customers is recorded in selling
expenses. For the years ended May 31, 2003 and 2002, the Company recorded
total shipping and handling costs of $18,195 and $38,743, respectively.


2.  Summary of Significant Accounting Policies (Continued)

Income Taxes

The Company accounts for income taxes using the asset and liability
approach under Statement of Financial Accounting Standards No. 109, ("SFAS
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 SFAS 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is provided for certain deferred
tax assets if it is more likely than not that the Company will not realize
tax assets through future operations.

Net Income per Common Share and Dividends

The Company discloses earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS 128").  SFAS 128 replaced the
presentation of primary and fully diluted earnings per share with the
presentation of basic and diluted earnings per share.  Basic earnings per
share excludes dilution and is calculated by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.

Net income per common share is computed based on the weighted average
number of shares of common stock and, if applicable, common stock
equivalents outstanding during the year. Potential common shares, which
relate to shares issuable upon the exercise of common stock purchase
options, were not included in the per share calculations for fiscal 2002
and 2001 as their effect was anti-dilutive.  As of May 31, 2003, there
was a total of 430,500 potential dilutive shares of common stock.

Earnings per share for the years ended May 31, 2003 and 2002 are as follows:

May 31,                                                 2003           2002

Basic income per share:

Net income                                            $71,175        $37,784

Net income applicable to common shareholders          $71,175        $37,784

Weighted average number of common shares            2,211,479      2,098,792

Basic income per share                                  $0.03          $0.02




2.  Summary of Significant Accounting Policies (Continued)

May 31,                                                 2003           2002

Diluted income per share:

Net income from primary income per common share       $71,175        $37,784

Net income for diluted earnings per share             $71,175        $37,784

Weighted average number of shares used in
  calculating basic earnings per common share       2,211,479      2,098,792

Add:
  Stock options                                        24,144              -

Weighted average number of shares used in
  calculating diluted earnings per share            2,235,623      2,098,792

Diluted income (loss) per share                         $0.03          $0.02

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred
with the associated asset retirement costs being capitalized as a part of
the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after
June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to
have a material effect on the Company's financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 144, "IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," which addresses accounting and financial reporting for
the impairment or disposal of long-lived assets. This standard was effective
for the Company's financial statements beginning January 1, 2002. The
implementation of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS." SFAS No. 145 rescinded three previously issued statements and
amended SFAS No. 13, "ACCOUNTING FOR LEASES." The statement provides
reporting standards for debt extinguishments and provides accounting
standards for certain lease modifications that have economic effects similar
to sale-leaseback transactions. The statement is effective for certain
lease transactions occurring after May 15, 2002 and all other provisions of
the statement shall be effective for fiscal years ending after May 15, 2002.
The implementation of SFAS No. 145 will effect the classification of
extraordinary items presented in the Company's statements of operations.
Such gains will no longer be considered extraordinary in nature and will be
reclassified to operations. The implementation of SFAS No. 145 did not have a
material impact on the Company's financial position or results of operations.

2.  Summary of Significant Accounting Policies (Continued)

In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES," which updates accounting and reporting
standards for personnel and operational restructurings. The Company will be
required to adopt SFAS No. 146 for exit, disposal or other restructuring
activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the adoption of SFAS No.
146 to have a material effect on the Company's financial position or results
of operations.

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

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

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

In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and

2.  Summary of Significant Accounting Policies (Continued)

equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS No. 150 is not
expected to have a significant effect on the Company's financial position,
results of operations, or cash flows.

3.  Inventories

The components of inventories at May 31, 2003 are as follows:

Raw materials                                                $  389,607
Work in progress                                                 75,594
Finished products                                             1,421,040
Inventory reserves                                             (137,225)
Total                                                        $1,749,016

Approximately $1,045,525 of gross inventory is located at the Company's
wholly-owned subsidiary manufacturing facility in Mexico (Note 7).

4.  Property and Equipment

The components of property and equipment at May 31, 2003 are as follows:

Machinery and equipment                                      $1,891,949
Dies, tools, and patterns                                       385,527
Furniture and fixtures                                          125,398
Leasehold improvements                                           21,872
Construction in progress                                        186,433
                                                              2,611,179
Less accumulated depreciation and amortization               (2,387,872)
Total                                                          $223,307

Costs in construction in progress consist of three projects, a new product
line, retooling, and a new information system.  Costs capitalized into the
new product line at May 31, 2003 were $116,126 with approximately $204,000
in additional costs estimated to complete the project.  Costs capitalized
into the retooling are $34,418 with approximately $8,000 in additional
costs estimated to complete the project.  Costs capitalized into the new
information system are $35,889 with approximately $35,000 in additional
costs estimated to complete the project.

Costs in construction in progress consist of three projects, a new product
line, retooling, and a new information system.  Costs capitalized into the
new product line at May 31, 2003 were $116,126 with approximately $204,000
in additional costs estimated to complete the project. Costs capitalized
into the retooling are $34,418 with approximately $8,000 in additional costs
estimated to complete the project.  Costs capitalized into the new
information system are $35,889 with approximately $35,000 in additional
costs estimated to complete the project.

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

Depreciation and amortization expense for the years ended May 31, 2003
and 2002, totaled $25,037 and $30,787, respectively.
5.  Intangible Assets

The components of intangible assets at May 31, 2003 are as follows:

Marketing and distribution rights                              $442,750
Technology use rights                                           858,328
Subtotal                                                      1,301,078
Less accumulated amortization                                (1,265,803)
Total                                                           $35,275

Amortization expense for the years ended May 31, 2003 and 2002 was
$53,281 and $73,596, respectively. Future amortization expense for
intangible assets is expected to be $24,900 and $10,375 for fiscal 2004
and 2005, respectively.

6.  Line of Credit

Effective October 24, 2001, the Company obtained a line of credit with a
financing institution for borrowing up to $400,000 and is limited to
specified percentages of eligible accounts receivable.  The outstanding
balance at May 31, 2003 was $426.  The initial drawings were used to pay
off in full the outstanding balance on the previous line of credit.  The
unused portion available under the line of credit at May 31, 2003 was
approximately $365,000.  The line of credit bears interest at prime plus 2%
per annum (8.25% at May 31, 2003) but never less than 8%.  The line of
credit expires on October 24, 2003.

The line of credit is collateralized by substantially all the assets of the
Company, including inventories, receivables, and equipment.  The lending
agreement for the line of credit requires, among other things, that the
Company maintain a tangible net worth of $2,100,000.  In addition to
interest, a management fee of 0.25% of the average monthly outstanding loan
balance and an unused balance fee of 0.0425% on the average monthly unused
portion available are required.  The Company is not required to maintain
compensating balances in connection with this lending agreement.  The
Company was in compliance with its debt covenants at May 31, 2003.

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

May 31,                                                            2003
Average month end balance                                       $13,295
Maximum balance outstanding at any month end                   $130,660
Weighted average interest rate (computed by
  dividing interest expense by average monthly balance)          27.34%

Interest rate at year end                                         8.25%

7.  Commitments and Contingencies

Leases

The Company leases its main facility under a non-cancelable operating lease
expiring December 31, 2003, as extended, which requires monthly rentals that
increase annually, from $2,900 per month in 1994 to $6,317 per month in 2004.


7.  Commitments and Contingencies (Continued)

The lease expense is being recognized on a straight-line basis over the term
of the lease. The excess of the expense recognized over the cash paid
aggregates $3,093 at May 31, 2003, and is included in accrued liabilities in
the accompanying consolidated balance sheet. Total rental expense for this
facility for the years ended May 31, 2003 and 2002 was approximately $69,000.

The Company entered into a non-cancelable operating lease for its Mexico
subsidiary which expires March 2009. The lease requires four monthly lease
payments of approximately $5,300 through March 2003, and seventy-two
monthly payments of approximately $9,600 through March 2009. An agreement
has been negotiated between the Company and Biomerica for lease reimbursement
of $2,875 per month (Note 13). Total rental expense for this facility
was approximately $76,000 and $69,000 during the years ended May 31, 2003
and 2002, respectively.

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

The Company entered into a non-cancelable operating lease for a copier in
February 2002 which expires February 2006, which requires monthly rentals of
$214.  Total expense for the copier was approximately $2,600 during the
years ended May 31, 2003 and May 31, 2002.

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

Years Ending May 31,                                             Amount

2004                                                           $173,950
2005                                                            132,003
2006                                                            131,148
2007                                                            129,438
Thereafter                                                      233,543

Total                                                          $800,082

Employment Agreement

Pursuant to the terms of the employment agreement between the Company and
Dan Castner, the Vice President of Sales and Marketing of the Company, dated
as of May 20, 2003, the Company agreed to pay Mr. Castner an annual base
salary of $135,000. In addition, the Company granted Mr. Castner stock
options on June 2, 2003 to purchase an aggregate of 120,000 shares of the
Company's common stock at an exercise price of $0.43 per share. The stock
options have a term of five years and will vest over four years as follows:
(i) 25% vesting on the first anniversary of the date of the grant; (ii)25%
vesting on the second anniversary of the date of the grant; (iii) the
remaining 50% vesting as to one-twenty fourth (1/24th) per month each month
thereafter for the next two years. Should the Company be purchased by an
unaffiliated third party, the options shall vest 100%.


7.  Commitments and Contingencies (Continued)

Manufacturing Agreement

In May 1990, the Company entered into a manufacturing subcontractor
agreement (the "Manufacturing Agreement"), whereby the subcontractor agreed
to provide manufacturing services to the Company through its affiliated
entities located in Mexicali, B.C., Mexico. Effective April 1, 1996, the
Company leased the Mexicali facility under a separate arrangement, as
discussed in above under Leases. Since October 2000, the manufacturing
agreement was operated on a month-to-month basis. During fiscal 2002, the
facility in Mexico was incorporated as Lancer Orthodontics de Mexico,
("Lancer de Mexico"), a wholly-owned subsidiary of the Company. This
subsidiary now administers services previously provided by an independent
manufacturing contractor. A new lease was negotiated in the name of Lancer
de Mexico, effective April 1, 2001, for the 16,000 square foot facility
already in use for the Mexican operations. Mexican utilities and vendor
obligations were also converted to the Lancer de Mexico name. This
conversion eliminated the expense of an administrative fee and is expected
to provide better control in meeting future obligations. Should Lancer
discontinue operations in Mexico, it is responsible for accumulated
employee seniority obligations as prescribed by Mexican law. At May 31,
2003, this obligation was approximately $401,000. Such obligation is
contingent in nature and accordingly has not been accrued in Lancer's
financial statements.

Lancer has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any
material amount of its assets during the fiscal years ended May 31, 2003
and May 31, 2002.

License and Royalty Agreements

The Company has entered into various license and/or royalty agreements
pursuant to which it has obtained rights to manufacture and market certain
products. The agreements expire in 2004, 2006, 2007, and 2010. Royalty
expense of approximately $116,100 is included in Cost of Sales for these
agreements. Sales of products manufactured under these agreements comprise
approximately 16% of total sales for the fiscal year ended May 31, 2003.

The Company has entered into license agreements expiring in 2006 whereby,
for cash consideration, the counter party has obtained the rights to
manufacture and market certain products patented by the Company. Royalty
income of approximately $54,700 is netted from Cost of Sales for these
agreements.  Income from these agreements is less than 1% of the total
revenue recognized for the fiscal year ended May 31, 2003.











7.  Commitments and Contingencies (Continued)

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.

8.  Stockholders' Equity

Mandatorily Redeemable Convertible Preferred Stock - Series C

The Company has authorized 250,000 shares of Series C preferred stock. Each
share is entitled to a $0.06 non-cumulative dividend and is convertible at
the option of the holder into common stock at the rate of seven shares of
preferred stock for one and one-half shares of common stock. The Company, at
its option, or by request of a holder, can redeem outstanding shares of the
preferred stock for cash at $0.75 per share after December 31, 1994.
At May 31, 2003, there were no shares issued and outstanding.  There were no
dividends declared or paid in 2003 or 2002.

Redeemable Convertible Preferred Stock - Series D

The Company has authorized 500,000 shares of Series D preferred stock.  Each
share is entitled to a $0.04 non-cumulative dividend and is convertible at
the option of the holder into common stock at the rate of seven shares of
preferred stock for one share of common stock.  The Company, at its option,
can redeem outstanding shares of the preferred stock for cash at $0.50 per
share after December 31, 1994.  In May 2000, all 370,483 issued and
outstanding shares were converted into 52,926 shares of common stock.
At May 31, 2003, there were no shares issued and outstanding.  There were no
dividends declared or paid in 2003 or 2002.

Common Stock

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

During 2003, the Company issued 25,000 shares of its common stock valued at
$8,750 to its Chief Executive Officer in lieu of salary in fiscal 2002.
These shares were classified at May 31, 2002 as common stock subscribed.

During 2003, the Company agreed to issue 104,471 shares of its common stock
lued at $32,500 to its Chief Executive Officer in lieu of salary.




8.  Stockholders' Equity (Continued)

Stock Option Agreements

Under the 2000 Stock Incentive Plan (the "Plan"), the Company is
authorized to grant stock options to key employees, officers, and directors
of the Company (or its parent corporation), non-employee members of the
Board of Directors of the Company (or its parent), and consultants who
provide valuable services to the Company.  Any options outstanding at date of
plan termination will remain in effect.  Under the plan, 450,000 shares have
been authorized for grant or issuance.  Stock options granted under the Plan
shall be granted at an option price not less than 85% of the fair market
value for options granted to employees, or less than 100% of the fair market
value for options granted to non-employees.  The fair market value of the
stock is as of the date the option is granted.  Most options granted under
the Plan to date expire five (5) years from the date of their respective
grant and all were granted at fair market value at the date of grant.
Options granted prior to May 31, 1995, generally vested on the date
of grant and expired through August 1999.

During the year ended May 31, 2002, the Company granted 20,000 options to
purchase shares of the Company's common stock at an exercise price of $0.40
to an employee of the Company for services rendered. The options have a term
of one year. Management assigned a value of $0 to the options.

During the year ended May 31, 2002, the Company granted 113,000 options to
purchase shares of the Company's common stock at an exercise price of $0.30
to its' Chief Executive Officer for services rendered.  The options vest
over three years and have a term of five years.  Management assigned a value
of $0 to the options.

During the year ended May 31, 2003, the Company granted 70,000 options to
purchase shares of the Company's common stock at an exercise price of $0.26
to certain employees of the Company for services rendered. The options vest
over four years and have a term of five years. Management assigned a value
of $0 to the options.

During the year ended May 31, 2003, the Company granted 40,000 options to
purchase shares of the Company's common stock at an exercise price of $0.28
to an employee of the Company for services rendered. The options vest over
four years and have a term of five years. Management assigned a value of
$0 to the options.

During the year ended May 31, 2003, the Company granted 30,000 options to
purchase shares of the Company's common stock at an exercise price of $0.28
to certain employees of the Company for services rendered. The options vest
over four years and have a term of five years. Management assigned a value
of $0 to the options.

On June 2, 2003, the Company granted 120,000 stock options to purchase shares
of the Company's common stock at an exercise price of $0.43 per share as
pursuant to terms of the employment agreement between the Company and Dan
Castner, the Vice President of Sales and Marketing.  The options vest over
four years and have a term of five years.



8.  Stockholders' Equity (Continued)

SFAS 148 Pro Forma Information

The following summary presents the options granted, exercised, expired, and
outstanding as of May 31, 2003:

                                                                   Weighted
                                                                    Average
                                Number of Shares                   Exercise
                            Employee   Non-employee       Total       Price
Outstanding,
May 31, 2001                 349,786        2,000       351,786       $0.93

Granted                      113,000       20,000       133,000        0.32
Exercised                          -            -             -           -
Expired                     (132,786)           -      (132,786)       1.03

Outstanding,
May 31, 2002                 330,000       22,000       352,000        0.66

Granted                      140,000            -       140,000        0.27
Exercised                          -            -             -           -
Expired                      (41,500)     (20,000)      (61,500)       0.71

Outstanding,
May 31, 2003                 428,500        2,000       430,500       $0.53

The following table sets forth the exercise prices, the number of options
outstanding and exercisable, and the remaining contractual lives of the
Company's stock options at May 31, 2003:

                                                        Weighted   Contractual
                                                        Average       Life
                                Number of Options       Exercise    Remaining
Exercise Price              Outstanding   Exercisable    Price        Years
$0.25-0.28                   158,000       56,333        $0.27         4.31
$0.40                        113,000       75,333        $0.30         3.58
$0.85-0.875                   73,500       73,500        $0.87         2.13
$1.00                         86,000       86,000        $1.00         0.25

Total                        430,500      291,166        $0.53

9.  Retirement Savings Plan(Continued)

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.





10.  Income Taxes

The provision for income taxes for the years ended May 31, 2003 and 2002
were $1,419 and $1,260, respectively, consisting primarily of minimum state
taxes.

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 2003 are
presented below:

May 31,                                                              2003
Deferred tax assets:
Accounts receivable, principally due to allowance for
  doubtful accounts and sales returns                             $42,000
Inventories, principally due to additional costs
  inventoried for tax purposes pursuant to the Tax
  Reform Act of 1986 and allowance for inventory obsolescence      86,000
Compensated absences principally due to accrual for
  financial reporting                                              14,000
Net operating loss carryforwards                                  700,000
Business tax credit carryforwards                                  74,000
Less valuation allowance                                         (902,000)

Net deferred tax assets                                            14,000

Deferred tax liabilities:
Unamortized marketing rights                                      (14,000)

Net deferred tax liabilities                                      $     -

Lancer has provided a valuation allowance with respect to substantially all
of its deferred tax assets as of May 31, 2003.  Management provided such
allowance as it is currently more likely than not that tax-planning
strategies will not generate taxable income sufficient to realize such
assets in foreseeable future reporting periods.

Income tax expense for the years ended May 31, 2003 and 2002 differed from
the amounts computed by applying the U.S. Federal income tax rate of 35% to
pre-tax income as a result of:

May 31,                                                 2003         2002
Computed "expected" tax expense                       $24,911      $13,665
Increase (decrease) in income taxes resulting from:
Meals and expenses                                      3,958        5,363
Change in beginning of the year balance of the
  valuation allowance for deferred tax assets
  allocated to income tax expense                     (28,869)     (19,028)
State and local income taxes, net of tax benefit        1,419        1,260
                                                       $1,419       $1,260

As of May 31, 2003, the Company has net tax operating loss carryforwards of
approximately $2,059,000 and business tax credits of approximately $64,000
available to offset future Federal taxable income and tax liabilities,
respectively. The Federal carryforwards expire in varying amounts through
the year 2021.  As of May 31, 2003, the Company has net tax operating loss
carryforwards of approximately $70,000 and business tax credits of approx-
imately $10,000 available to offset future state income tax liabilities.
10.  Income Taxes (Continued)

On September 11, 2002, California passed one of the budget trailer bills
that implemented the state's 2002-2003 Budget Bill (A425). The new law
suspends the net operating loss ("NOL") carryover deduction for tax years
2002 and 2003. To compensate for the deduction suspension, the period of
availability for these NOL deductions has been extended for two years.

11.  Export Sales

The Company has significant export sales. The net sales and operating
activities are as follows:

May 31,                                                 2003          2002
Net Sales
Domestic                                            $3,144,000    $3,031,000
Europe                                               1,732,000     1,813,000
South America                                          262,000       366,000
Middle East                                            270,000       334,000
Other                                                  480,000       478,000

Total                                               $5,888,000    $6,022,000

Long-lived Assets
Domestic                                              $164,000       $21,000
Mexico                                                  59,000        27,000

Total                                                 $223,000       $48,000

12.  Insurance Claim Receivable

Management of the Company completed an assessment of two occurrences of theft
of inventory located at its wholly-owned and consolidated subsidiary, Lancer
De Mexico, in January and April of 2002.  The carrying value of the inventory
stolen approximated $82,000, valued at standard cost, which had been
reflected in the fiscal 2002 financial statements as a reduction in
inventories and an addition to insurance claim receivable.

In fiscal 2003, the Company received approximately $145,000 as payment on the
claim in the prior year and recognized other income of approximately $63,000
in fiscal 2003 for amounts received above the carrying value of inventory
stolen of approximately $82,000.

13.  Related Party Receivables
In fiscal 2003, the Company's parent Biomerica entered into an agreement with
the Company whereby Biomerica agreed to pay an initial shelter fee of $5,000
with additional monthly payments of $2,875 for use of its 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, 2003, Biomerica owes the Company $11,100 from
this agreement which is recorded as a receivable.

Initially, the Company paid approximately $2,600 of the payroll related to
the Biomerica production of products at the Lancer De Mexico facility. The
$2,600 has been recorded as a receivable at May 31, 2003. The approximate
$200 remaining in the related party receivables represents miscellaneous
receivables from normal operations.