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

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

For the Fiscal Year Ended May 31, 2001	Commission File No. 0-5920

		LANCER ORTHODONTICS, INC.
(Name of small business issuer 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)

Issuer'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
	(Title of Class)

Check whether the Issuer:  (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 Issuer 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 Issuer's
knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to
this Form 10-KSB.

Issuer's revenue for its most recent fiscal year $5,927,603.

The aggregate market value of the voting stock held by non-affiliates of
Issuer, based upon the closing
sale price of the common stock as reported on the OTC Bulletin Board, on
August 27, 2001 was
approximately $219,306.

The number of shares of Issuer's no par value common stock outstanding as
of August 27, 2001, was
2,098,620.

Documents Incorporated by Reference:
1. Portions of Issuer's Proxy Statement for the Annual Meeting of
2. Shareholders to be held on
November 12, 2001, are incorporated by reference into Part III.


PART I

Item 1.	DESCRIPTION OF BUSINESS

General Development of Business

Lancer Orthodontics, Inc. ("Lancer") was incorporated in California on August
25, 1967.  Lancer
conducts its operations at one facility which is located at 253 Pawnee Street,
 San Marcos, California
92069-2347.  Since its inception, Lancer has been engaged in the business of
manufacturing and
marketing orthodontic products.

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.  During fiscal 1992 and 1991, Lancer moved
the majority of its
manufacturing operations to Mexico.  Under the terms of the original
agreement, the subcontractor
manufactured Lancer's products charging Lancer an hourly rate per employee
based on the number of
employees in the subcontractor's workforce.  As the number of employees
increased, the hourly rate
decreased.  In December 1992, Lancer renegotiated the agreement changing from
an hourly rate per
employee cost to a pass through of actual costs plus a weekly administrative
fee.  The new agreement
gives Lancer greater control over all costs associated with the manufacturing
operation.  In July 1994,
Lancer again renegotiated the agreement reducing the administrative fee and
extending the agreement
through June 1998.  In March 1996, Lancer agreed to extend the agreement
through October 1998.
Effective April 1, 1996, Lancer leased the Mexicali facility under a separate
agreement.  Effective
November 1, 1998, the subcontractor agreement and lease were extended to
October 31, 2000.
Currently the manufacturing agreement is operated month to month.  Should
Lancer discontinue
operations in Mexico, it is responsible for accumulated employee seniority
obligations as prescribed
by Mexican law.  At May 31, 2001, this obligation was approximately $361,000.
  Such obligation is
contingent in nature and accordingly has not been accrued in Lancer's
financial statements.

The Company is in the process of converting Mexican assets and obligations
to its own division, a
Mexican corporation named Lancer Orthodontics de Mexico (Lancer de Mexico).
  This division will
administer services previously provided by an independent manufacturing
contractor.  A new lease
was negotiated effective April 1, 2001, for the 16,000 square foot facility
used for Lancer's Mexican
operations.  Utility and Mexican vendor obligations have been converted to the
Lancer de Mexico
name.  This conversion will eliminate the expense of an administrative fee and
is expected to provide
better control in meeting obligations.

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, 2001.

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, related
accessories, and dental amalgams.  The foregoing are assembled to the
orthodontists' prescriptions or
the specifications of private label customers.  Lancer's manufactured products
are also sold to
distributors and private label customers.  Lancer also markets products which
are purchased and
resold to orthodontists, including sealants, adhesives, elastomerics, headgear
cases, retainer cases,
orthodontic wire, and preformed arches.

Lancer sells its products directly to orthodontists and dentists through
company-paid sales
representatives in the United States.  At the end of its 2001 fiscal year,
Lancer had seven sales
representatives, all in the United States, all of whom are employees of Lancer.

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.

For the fiscal years ended May 31, 2001 and 2000, sales by class of product are:

	Class of Product		2001			2000
	Manufactured Products	$4,609,000	$4,641,000
	Resale Products	1,319,000	1,010,000
	TOTAL	$5,928,000	$5,651,000

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, 2001 and 2000:
			2001			2000
	Sales to unaffiliated customers:
	United States	$3,018,000	$3,133,000
	Europe	1,852,000	1,379,000
	South America	415,000	489,000
	Other Foreign	   643,000	   650,000
		$5,928,000	$5,651,000

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

	Long-lived assets:
	United States	$  33,000	$  47,000
	Mexico 	  45,000	  70,000
		$  78,000	$117,000


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.

Competition.  Lancer encounters intense competition in the sale of
orthodontic products.  Lancer's
management believes that Lancer's seven major competitors are Unitek, a
subsidiary or division of
3M; "A" Company and Ormco, subsidiaries or divisions of Sybron;  RMO, Inc., a
private company;
American Orthodontics, a private company; GAC, a private company; and
Dentaurum, a foreign
company.  Lancer estimates that these seven competitors account for
approximately 80% of the
orthodontic products manufactured and sold in the United States.  Lancer's
management also believes
that each of these seven 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
2001 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, 2001 and 2000.
Lancer's backlog at May 31, 2001 and 2000, was $167,000 and $146,000,
respectively.  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 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
$72,000 and $184,000 for the fiscal years ended May 31, 2001 and 2000,
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.

Employees.  As of August 14, 2001, Lancer had 40 employees, 3 part time.
Additionally, Lancer,
through its Mexican subcontractor, employed approximately 129 people in
Mexico.

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 2004. The lease expense is being recognized on a
straight-line basis over
the term of the lease. The excess of the expense recognized over the cash
paid aggregates $11,032 at
May 31, 2001, 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, 2001 and 2000
was approximately
$69,000.

The Company has entered into a non-cancelable operating lease for its Mexico
facility which expires
in March 2006 and requires average monthly rentals of approximately $6,000.
Total expense for this
facility for the years ended May 31, 2001 and 2000, was approximately $74,000.

Future aggregate minimum annual cash lease payments are as follows:

	Years ending
	May 31, 2002	$133,543
	May 31, 2003	136,397
	May 31, 2004	106,511
	May 31, 2005	62,292
	May 31, 2006	  51,910
		$490,653

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
quarter ended May 31, 2001.

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, as reported
by NASDAQ or
based on a graph provided by MSN, 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, 1999	$1.22	$  .69
	November 30, 1999	$1.06	$  .75
	February 28, 2000	$2.25	$  .72
	May 31, 2000	$1.88	$  .94
	August 31, 2000	$1.43	$  .75
	November 30, 2000	$1.39	$  .39
	February 28, 2001	$1.50	$  .14
	May 31, 2001	$  .54	$  .21
In a letter dated November 10, 2000, NASDAQ had advised the Company that it
was not in
compliance with the minimum bid price required for listing on the Nasdaq
National Market.  The
Company was being afforded a ninety-day grace period, until February 8, 2001,
to remedy this
deficiency.

On February 5, 2001, the Board of Directors approved a reverse stock split
at a rate of 2 shares
converted to 1 share.  Written consents from stockholders holding 1,100,246
shares of Common
Stock (approximately 52% of issued and outstanding stock) were received on
March 1, 2001
approving the split.  On the record date of February 21, 2001, there were
2,098,619 shares issued and
outstanding.  A SEC Schedule 14C Information Statement was mailed on
March 26, 2001 to
stockholders of record.

A hearing before a NASDAQ panel was held on March 23, 2001 in Washington D.C.
regarding the
proposed delisting of the Company's stock.  A letter dated March 30, 2001
stated that the panel
determined to delist the Company's securities from the NASDAQ Stock Market
effective with the
open of business Monday, April 2, 2001.  The Board of Directors voted on
April 2, 2001, to cancel
the reverse stock split since the purpose of the split was to prevent
delisting.

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

The approximate number of beneficial holders of Lancer's common stock at
May 31, 2001, was 479.

	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 that are made pursuant to the safe harbor provisions of
the Private Securities
Litigation Reform Act of 1995.  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, 2001, net sales increased $277,091 (4.9%)
from $5,650,512 in 2000 to
$5,927,603 in 2001.  International net sales increased $391,485 (15.6%) from
$2,517,780 in 2000 to
$2,909,265 in 2001.  This increase is primarily in European sales.  Domestic
net sales decreased $114,394
(3.7%) from $3,132,732 in 2000 to $3,018,338 in 2001.  This decrease is
primarily attributable to
continuing increased discounting due to competition pressures.  Management
believes that if the trend in
increased discounting continues, it could be significant to ongoing
operations.  Lancer continues to search
for new sales representatives, distributors, private label customers,
products, and product ideas, any of
which, if successful, should result in increased sales.

Cost of sales, as a percentage of sales, decreased 1.0% from 68.4% in fiscal
2000 to 67.4% in fiscal
2001.  The decrease is primarily attributable to the sales product mix.

Selling expenses decreased $86,743 (5.3%) from $1,638,804 in 2000 to
$1,552,061 in 2001.  The
decrease is primarily attributable to decreases in labor costs of $56,547
and travel expenses of $71,019,
partially offset by increases in bad debt expense and other expenses.
In fiscal 2001, an additional $24,308
of bad debt expense was incurred as a reserve for international receivables.

General and Administrative expenses decreased $57,909 (12.4%) from $465,387
in 2000 to $407,478 in 2001.  The decrease is primarily attributable to an
decrease in labor costs
of $54,340.

Product Development expenses decreased $112,744 (61.2%) from $184,249
in 2000 to $71,505 in 2001.
The decrease is primarily attributable to a halt in the development of a
dental amalgam.

Interest expense increased $369 (1.9%) from $19,562 in 2000 to $19,931
in 2001.  The increase is
primarily attributable to an increase in the interest rate.

Financial Condition, Liquidity, and Capital Resources

During fiscal 2001, management negotiated a renewal of Lancer's line of
credit through September 10, 2001.
The line of credit allows for borrowing up to $300,000 and is
limited to specified percentages of
eligible accounts receivable.  The outstanding balance at May 31, 2001 was
$140,000.  The unused
portion available under the line of credit at May 31, 2001, was approximately
$160,000.  Borrowings
bear interest at prime plus 1.25% per annum (8.25% at May 31, 2001).

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 $2,800,000 and a debt to
tangible net worth ratio of
no more than 1 to 1.  The Company is not required to maintain compensating
balances in connection with
this lending agreement.  The Company was in violation of certain of its debt
covenants at May 31, 2001.
A waiver has been requested but not yet received as of the date of filing.

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 $17,055 (.6%) from $2,714,555 in 2000 to $2,697,500
in 2001.  The decrease
is primarily attributable to a decrease in receivables and an increase in
payables, partially offset by an
increase in inventories and cash.

Lancer's management believes that it will be able to finance Lancer's
operations through cash flow and
available borrowings for the foreseeable future.

Recent Accounting Pronouncements

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial
statements. The Company believes that its current revenue recognition
policies comply with SAB 101.

In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions involving Stock
Compensation." The adoption of this
Interpretation did not have a material impact on the consolidated results of
operations or financial
position of the Company.



In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which
eliminates the pooling
method of accounting for business combinations initiated after June 30, 2001.
  In addition, SFAS 141
addresses the accounting for intangible assets and goodwill acquired in a
business combination. This
portion of SFAS 141 is effective for business combinations completed after
June 30, 2001. The Company
does not expect SFAS 141 will have a material impact on the Company's
financial position or results of
operations.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
 142 ("SFAS 142"),
"Goodwill and Intangible Assets", which revises the accounting for purchased
goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized
and will be tested for impairment annually.  SFAS 142 is effective for fiscal
 years beginning after
December 15, 2001, with earlier adoption permitted. The Company does not
expect SFAS 142 will have
a material impact on the Company's financial position or results of
operations.

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 to be held
November 12, 2001, which will be filed
with the Commission not later than 120 days after the end of Lancer's fiscal
year period ended May 31,
2001, 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 to be held November 12, 2001, which will be filed
with the Commission not later
than 120 days after the end of Lancer's fiscal year ended May 31, 2001, 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 to be held November
12, 2001, which will be filed with the Commission not later than 120 days
after the end of Lancer's fiscal
year ended May 31, 2001, 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 to be held November 12, 2001, which will be filed with the
Commission not later than 120
days after the end of Lancer's fiscal year ended May 31, 2001, 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 to be
held November 12, 2001, which will be filed with the Commission not later
than 120 days after the end of
Lancer's fiscal year ended May 31, 2001, is incorporated herein by reference.

Item 12.	 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable.

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 quarter ended May 31, 2001.




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:  August 29, 2001

LANCER ORTHODONTICS, INC.


By:	/s/ Douglas D. Miller		/s/ Catherine Wyss
	Douglas D. Miller	Catherine Wyss
	President and Chief Operating Officer	Accounting Manager
	(Principal Financial Officer,
	 Principal Accounting Officer)


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		August 29, 2001
	Zackary Irani	CEO, Chairman of the Board
	& Director

/s/ Douglas D. Miller		August 29, 2001
	Douglas D. Miller	President, Chief Operating
		Officer &  Director

/s/ Janet Moore		August 29, 2001
	Janet Moore	Secretary & Director

/s/ Dr. Robert Orlando		August 29, 2001
	Dr. Robert Orlando	Director

/s/ Dr. Francis Cano		August 29, 2001
	Dr. Francis Cano	Director





Lancer Orthodontics, Inc.
Financial Statements
As of May 31, 2001 and
For Each of the Years in the Two-Year Period Then Ended



Report of Independent Certified Public Accountants	FS-2


Financial Statements

Balance Sheet	FS-3

Statements of Operations	FS-4

Statements of Stockholders' Equity	FS-5

Statements of Cash Flows	FS-6


Notes to Financial Statements	FS 7-18






Report of Independent Certified Public Accountants


The Board of Directors
Lancer Orthodontics, Inc.


We have audited the accompanying balance sheet of Lancer Orthodontics, Inc.
(the "Company") as of May 31, 2001, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended
May 31, 2001. These financial statements are the responsibility of the
Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of
Lancer Orthodontics, Inc. as of May 31, 2001, and the results of its
operations and its cash flows for each of the years in the
two-year period ended May 31, 2001 in conformity with accounting principles
generally accepted in the United States of
America.

The Company is in technical default with their line of credit agreement
(see Note 2).



		BDO SEIDMAN, LLP




Orange County, California
July 26, 2001



May 31,



2001







Assets











Current assets





	Cash


$
131,550

	Accounts receivable, net of allowance for doubtful accounts of $175,000



1,160,951

	Inventories, net of reserve of $239,201



2,139,843

	Prepaid expenses



44,618







Total current assets



3,476,962







Property and equipment, net



78,373

Intangible assets, net



162,152

Other assets



19,149










$
3,736,636







Liabilities and Stockholders' Equity











Current liabilities





	Accounts payable


$
461,352

	Accrued payroll and related benefits



117,725

	Other current liabilities



60,385

	Line of credit



140,000







Total current liabilities



779,462







	Mandatorily redeemable convertible preferred stock Series C, $.06
noncumulative annual dividend, $.75 par value, 250,000 shares authorized;
0 shares issued and outstanding in 2001 ($.75 liquidation preference)



-







Commitments and contingencies











Stockholders' equity





	Redeemable convertible preferred stock, Series D, $.04 noncumulative
annual
dividend; $.50 par value; 500,000 shares authorized; 0 shares issued and
outstanding in 2001 ($.50 liquidation preference per share)



-

	Common stock, no par value; 50,000,000 shares authorized; 2,098,620
shares issued and outstanding



4,815,074

	Accumulated deficit



(1,857,900
)






Total stockholders' equity



2,957,174










$
3,736,636





Years ended May 31,

2001

2000







Net sales
$
5,927,603
$
5,650,512







Cost of sales

3,994,161

3,866,001







Gross profit

1,933,442

1,784,511







Operating expenses:





	Selling

1,552,061

1,638,804

	General and administrative

407,478

465,387

	Product development

71,505

184,249







Total operating expenses

2,031,044

2,288,440







Operating loss

(97,602
)
(503,929
)






Other income (expense):





	Interest expense

(19,931
)
(19,562
)
	Interest income

104

36

	Other income, net

1,370

227,270







Total other (expense) income

(18,457
)
207,744







Loss before income taxes

(116,059
)
(296,185
)






Income taxes

800

800







Net loss
$
(116,859
)   $
(296,985
)






Per share data:











	Basic
$
(.06
)   $
(.15
)






	Diluted
$
(.06
)   $
(.15
)




Series D Preferred Stock

Common Stock
Accumulated




Shares

Amount

Shares

Amount

Deficit

Total














Balances, May 31, 1999
370,483
$
185,242

2,105,965
$
4,697,115
$
(1,444,056
)  $
3,438,301














Common stock issued for
services
-

-

54,725

50,631

-

50,631














Conversion of preferred stock
(370,483
)
(185,242
)
52,926

185,242

-

-














Repurchase of common stock
-

-

(114,998
)
(117,914
)
-

(117,914
)













Net loss
-

-

-

-

(296,985
)
(296,985
)













Balances, May 31, 2000
-

-

2,098,618

4,815,074

(1,741,041
)
3,074,033














Share adjustment
-

-

2

-

-

-














Net loss
-

-

-

-

(116,859
)
(116,859
)













Balances, May 31, 2001
-
$
-

2,098,620
$
4,815,074
$
(1,857,900
)  $
2,957,174




Years Ended May 31,

2001

2000







Cash flows from operating activities:





	Net loss
$
(116,859
)	$
(296,985
)
	Adjustment to reconcile net loss to net cash provided by operating
activities:





		Depreciation and amortization

121,699

151,117

		Provision for losses on accounts receivable

-

(986
)
		Provision for inventory

129,034

-

		Common stock issued for services

-

50,631

		Net change in operating assets and liabilities:





			Accounts receivable

71,819

119,936

			Inventories

(255,632
)
193,909

			Prepaid expenses

2,082

5,145

			Insurance claim receivable

-

110,000

			Accounts payable

111,228

(92,219
)
			Accrued payroll

16,162

8,912

			Other current liabilities

(9,295
)
(104,146
)






Net cash provided by operating activities

70,238

145,314







Cash flows from investing activities:





Purchases of property and equipment

(9,306
)
(10,485
)
Other assets

(12,589
)
-







Net cash used in investing activities

(21,895
)
(10,485
)






Cash flows from financing activities:





Net decrease in line of credit agreement

(20,000
)
(20,000
)
Repurchase of common stock

-

(117,914
)






Net cash used in financing activities

(20,000
)
(137,914
)






Net change in cash

28,343

(3,085
)






Cash, beginning of period

103,207

106,292







Cash, end of period
$
131,550
$
103,207







Supplemental disclosures of cash flow information:





Cash paid during the year for:











Interest
$
19,931
$
19,562







Income taxes
$
800
$
800







Supplemental disclosures of non-cash investing and
financing activities:











Conversion of 370,483 shares of Convertible Preferred Stock
Series D to 52,926 shares of common stock
$
-
$
185,242




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 has a
manufacturing facility in Mexico where a majority of its inventory is
manufactured (Note 8). The Company also
purchases certain orthodontic and dental products for purposes of resale.
Sales of manufactured and resale
products comprise approximately 78% and 22% of total sales, respectively,
for fiscal 2001 and 82% and 18% of
total sales, respectively, for fiscal 2000.



Sales are made directly to orthodontists worldwide through Company
representatives and independent distributors,
with approximately 51% and 55% during fiscal 2001 and 2000, 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



Liquidity

At May 31, 2001, the Company was not in compliance with its required minimum
tangible net worth ratio and is in
technical default under the compliance provisions of the bank line of credit.
  The Company is currently in
discussions with a new lender to replace its existing line of credit.
Management believes it will be successful in such
discussions.  However, there can be no assurance of this success nor that
management would be successful in
finding a replacement lender with acceptable terms.



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, 2001.



Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles 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.






2.
Summary of Significant Accounting Policies (Continued)



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, 2001, reserves for credit
losses totaled $125,000.  Reserves for sales returns totaled $50,000.  At
May 31, 2001, three customers accounted
for approximately 13.8%, 13.6% and 10.2% of gross accounts receivable.  No one
 customer accounted for 10% or
more of revenues for the years ended May 31, 2001 and 2000.



Suppliers - At May 31, 2000, no one company accounted for more than 10% of
accounts payable.  No one
company accounted for more than 10% of purchases for the years ended
May 31, 2001 and 2000.



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.












2.
Summary of Significant Accounting Policies (Continued)



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.



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, 2001.



Stock Based Compensation

The Company accounts for stock based compensation under Statement of
Financial Accounting Standards No. 123
("SFAS 123").  SFAS 123 defines a fair value based method of accounting for
stock based compensation.
However, SFAS 123 allows an entity to continue to measure compensation cost
related to stock and stock options
issued to employees using the intrinsic method of accounting prescribed by
Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."  Entities
electing to remain with the accounting
method of APB 25 must make pro forma disclosures of net income and earnings
per share, as if the fair value
method of accounting defined in SFAS 123 had been applied.  The Company has
 elected to account for its stock
based compensation to employees under APB 25 (Note 9).



Revenue Recognition

Revenues from product sales are recognized at the time the product is shipped.



Research and Development

Research and development expenses are expensed as incurred.  The Company
expensed approximately $72,000
and $184,000 of research and development expenses during the years ended
May 31, 2001 and 2000, 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 replaces 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 2001 and 2000 as their effect was anti-dilutive.



Earnings per share for the years ended May 31, 2001 and 2000 are as follows:

May 31,

2001

2000







Basic loss per share:











Net loss
$
(116,859
)	$
(296,985
)






Net loss applicable to common shareholders
$
(116,859
)	$
(296,985
)






Weighted average number of common shares

2,098,620

2,047,687







Basic loss per share
$
(.06
)	$
(.15
)






Diluted loss per share:











Net loss from primary income per common share
$
(116,859
)	$
(296,985
)






Net loss for diluted earnings per share
$
(116,859
)	$
(296,985
)






Weighted average number of shares used in calculating basic earnings
per common share

2,098,620

2,047,687



















2.
Summary of Significant Accounting Policies (Continued)






Add:





	Stock options

-

-

	Convertible preferred stock

-

-







Weighted average number of shares used in calculating diluted earnings
per share

2,098,620

2,047,687







Diluted loss per share
$
(.06
)	$
(.15
)




Recent Accounting Pronouncements - In December 1999, the Securities and
Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted
accounting principles to revenue recognition in
financial statements. The Company believes that its current revenue
recognition policies comply with SAB 101.



In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." The
adoption of this Interpretation did not
have a material impact on the consolidated results of operations or
financial position of the Company.



In July 2001, the Financial Accounting Standards Board ("FASB") issued
 Statement of Financial Accounting
Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates
the pooling method of accounting
for business combinations initiated after June 30, 2001.  In addition,
SFAS 141 addresses the accounting for
intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for
business combinations completed after June 30, 2001. The Company does not
expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.




In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill
and Intangible Assets", which revises the accounting for purchased goodwill
and intangible assets. Under SFAS
142, goodwill and intangible assets with indefinite lives will no longer be
amortized and will be tested for
impairment annually.  SFAS 142 is effective for fiscal years beginning
after December 15, 2001, with earlier
adoption permitted. The Company does not expect SFAS 142 will have a
material impact on the Company's
financial position or results of operations.



Reclassifications - Certain amounts in the 2000 financial statements have
been reclassified to conform to the 2001
presentation.


3.
Other Income



Management of the Company completed an assessment, on April 6, 1999, of a
theft of inventory located at its
facility in Mexicali, Mexico.  The carrying value of the inventory stolen
approximated $110,000, valued at
standard cost, which has been reflected in the accompanying financial
statements as a reduction in inventories and
an addition to insurance claim receivable.  During the year ended
May 31, 2000, the Company settled the claim
with the insurance carrier and received approximately $280,000.  This
amount represents the value of the stolen
inventory at net average selling price, less commissions and royalties.
The $170,000 received in excess of the
$110,000 estimated carrying value was recognized as other income for the
year ended May 31, 2000.



During 1999, the Company was assessed $64,724 in pass through net asset
taxes by their subcontractor under their
Manufacturing Agreement (Note 8). During 2000, legal counsel determined the
Company was not liable for
portions of the assessment.  Accordingly, approximately $50,000 of the prior
year accrual was reversed and
recognized as other income during the year ended May 31, 2000.




4.
Inventories



The components of inventories at May 31, 2001 are as follows:

Raw materials
$
515,818

Work in progress

161,809

Finished products

1,701,417

Inventory reserves

(239,201
)




Total
$
2,139,843

Approximately $1,878,000 of inventory is located at the Company's
manufacturing facility in
Mexico (Note 8).





5.
Property and Equipment



The components of property and equipment at May 31, 2001 are as follows:

Machinery and equipment
$
1,888,562

Dies, tools, and patterns

375,518

Furniture and fixtures

126,063

Leasehold improvements

15,492

Construction in progress

7,400



2,413,035

Less accumulated depreciation and amortization

(2,334,662
)




Total
$
78,373



Approximately $33,000 of property and equipment, net of accumulated
depreciation and amortization, is located at
the Company's manufacturing facility in Mexico (Note 8).



Depreciation expense for the years ended May 31, 2001 and 2000, totaled
$48,103 and $77,521, respectively.


6.
Intangible Assets



The components of intangible assets at May 31, 2001 are as follows:

Marketing and distribution rights
$
442,750

Technology use rights

858,328

Subtotal

1,301,078

Less accumulated amortization

(1,138,926
)




Total
$
162,152



Amortization expense for each of the years ended May 31, 2001 and 2000 was
$73,596.


7.
Line of Credit



At May 31, 2001, the Company had a line of credit with a bank for borrowings
up to $300,000.  The line of credit
bears interest at prime plus 1.25% per annum (8.25% at May 31, 2001).
Allowable borrowings are limited to
specified percentages of eligible accounts receivable.  The outstanding
balance at May 31, 2001 was $140,000.
The unused portion available under the line of credit at May 31, 2001,
was $160,000.  The line of credit expires on
September 10, 2001.


7.
Line of Credit (Continued)




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 $2,800,000 and a debt to tangible
net worth ratio of no more than 1 to
1. The Company is not required to maintain compensating balances in
2. connection with this lending agreement.
The Company was in violation of certain of its debt covenants at
May 31, 2001.  A waiver has been requested but
not yet received as of the date of filing.




The following summarizes information on short-term borrowings for the year
ended May 31, 2001:

May 31,

2001





Average month end balance
$
193,333

Maximum balance outstanding at any month end
$
220,000

Weighted average interest rate (computed by dividing interest expense by
average
monthly balance)

10.31
%




Interest rate at year end

8.25
%

8.

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. 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 $11,032 at
May 31, 2001, 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, 2001 and 2000 was approximately $69,000.



The Company has entered into a non-cancelable operating lease for its Mexico
facility which expires in March
2006 and requires average monthly rentals of approximately $6,000.  Total
expense for this facility for the years
ended May 31, 2001 and 2000, was approximately $74,000.



At May 31, 2001, future aggregate minimum lease payments are as follows:

Years Ending May 31,

Amount





2002
$
133,543

2003

136,397

2004

106,511

2005

62,292

2006

51,910





Total
$
490,653










8.	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. The Company moved
the majority of its manufacturing
operations to Mexico during fiscal 1992 and 1991. Under the terms of the
original agreement, the subcontractor
manufactured the Company's products based on an hourly rate per employee
based on the number of employees in
the subcontractor's workforce. As the number of employees increase, the
hourly rate decreases. In December 1992,
the Company renegotiated the Manufacturing Agreement changing from an
hourly rate per employee cost to a pass
through of actual costs, plus a weekly administrative fee. The amended
Manufacturing Agreement gave the
Company greater control over all costs associated with the manufacturing
 operation. In July 1994, the Company
again renegotiated the Manufacturing Agreement reducing the administrative
fee and extending the
Manufacturing Agreement through June 1998.  In March 1996, the Company
agreed to extend the Manufacturing
Agreement through October 1998, to coincide with the building lease.
Effective April 1, 1996, the Company
leased the Mexicali facility under a separate arrangement, as discussed in
the preceding paragraph. During 1999,
the Company extended the Manufacturing Agreement through October 2000.
Currently the manufacturing
agreement is operated month to month.  Should the company discontinue
operations in Mexico, it is responsible
for the accumulated employee seniority obligation as prescribed by Mexican
law.  At May 31, 2001, this obligation
was approximately $361,000.  Such obligation is contingent in nature and
accordingly has not been accrued in the
accompanying balance sheet.



The Company is in the process of converting Mexican assets and obligations
to its own division, a Mexican
corporation named Lancer Orthodontics de Mexico (Lancer de Mexico).  This
division will administer services
previously provided by an independent manufacturing contractor.  A new lease
 was negotiated effective April 1,
2001, for the 16,000 square foot facility used for Lancer's Mexican
operations.  Utility and Mexican vendor
obligations have been converted to the Lancer de Mexico name.  This
conversion will eliminate the expense of an
administrative fee and is expected to provide better control in meeting
obligations.



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 are for various
durations expiring through 2007 and
they require the Company to make payments based on the sales of the
individual licensed products.



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.



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 or
operations or cash flows.










9.
Stockholders' Equity



Manditorily Redeemable Convertible Preferred Stock - Series C

The Company has authorized 250,000 shares of Series C preferred stock.
Each share is entitled to a $.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, can redeem outstanding
shares of the preferred stock for cash at $.75 per share after
December 31, 1994.  At May 31, 2001, there were no
shares issued and outstanding.



Redeemable Convertible Preferred Stock - Series D

The Company has authorized 500,000 shares of Series D preferred stock.
Each share is entitled to a $.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 $.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, 2001, there were no shares
issued and outstanding.



Common Stock

In March 1998, the Company's Board of Directors approved the repurchase of
up to 4% of the Company's
outstanding common stock over the following twelve months.  Such repurchases
 are at the discretion of
management and all repurchased shares will be retired.  During 2000, the
Company repurchased 114,998 shares of
its common stock for aggregate consideration of $117,914.



During 2000, the Company issued 54,725 shares of its common stock valued
at $50,631 for certain management
and consulting services.



Stock Option Agreements

The Company has incentive stock option and non-qualified stock option plans
for directors, officers, and key
employees.  The plans provide for the granting of options for common shares
at exercise prices equal to or
exceeding the fair market value at the date of grant, as determined by the
Board of Directors.  Options may become
exercisable over a period of up to four years from the date of grant and
may be exercised over a period of three to
seven years from the date of the grant, as determined by the Board of
Directors.  The Company's shareholders
have authorized a total of 357,143 shares to be available for grant under
 the Company's stock option plan.
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, 2000, the Company granted 15,000 options to
purchase shares of the Company's
common stock at an exercise price of $0.85 to certain employees of the
Company, which vest ratably over a term of
one year and have a term of five years.



During 2001, the Company granted 20,000 options to purchase shares of the
Company's common stock at an
exercise price of $.25 to a director of the Company, which vest ratably
over one year and have a term of five years.



During the year ended May 31, 2001, the Company granted 157,000 options to
purchase shares of the Company's
common stock at an exercise price of $.875 to certain employees of the
Company, which vest ratably over one year
and have a term of five years.








9.
Stockholders' Equity, (Continued)



SFAS 123 Pro Forma Information

Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as
if the Company had accounted for its employee stock options under the fair
value method of SFAS 123. The fair
value for these options was estimated at the date of grant using the Black
Scholes option pricing model with the
following weighted average assumptions for the years ended May 31, 2001 and
2000: risk free interest rates
between 4.5% and 6.2%; dividend yield of 0%; expected life of the option of
three years; and volatility factor of the
expected market price of the Company's common stock of between 40% and 100%.



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 123,
for the years ended May 31, 2001 and 2000, are as follows:

May 31,

2001

2000







Net loss, as reported
$
(116,059
)	$
(296,985
)
Adjustment to compensation expense under SFAS 123

(57,126
)
(6,505
)






Net loss, pro forma
$
(173,185
)	$
(303,490
)






Net loss, per common and common equivalent share, as reported
$
(.06
)	$
(.15
)






Net loss per common and common equivalent share, pro forma
$
(.08
)	$
(.15
)



The following summary presents the options granted, exercised, expired, and
outstanding as of May 31, 2001:


Number of Shares



Weighted Average

Employee
Non-employee

Total

Exercise Price
Outstanding,
  May 31, 1999
149,786

29,000

178,786
$
1.06
	Granted
15,000

-

15,000

0.85
	Exercised
-

-

-

-
	Expired
-

-

-

-








Outstanding,
  May 31, 2000
164,786

29,000

193,786

1.04
	Granted
177,000

-

177,000

 .80
	Exercised
-

-

-

-
	Expired
(19,000
)
-

(19,000
)
 .93








Outstanding,
  May 31, 2001
322,786

29,000

351,786
$
 .93

9.
Stockholders' Equity, (Continued)



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, 2001:

Number of Options

Weighted
Average

Contractual
Life
Exercise Price
Outstanding
Exercisable

Exercise
Price

Remaining
Years








$  0.25
20,000

10,000

$0.25

5.00
$  0.85-0.875
161,000

80,500

$0.87

4.20
$1.00
156,500

156,500

$1.00

2.25
$1.75
14,286

14,286

$1.75

 .42

Total
351,786

261,286

$0.93



10.
Retirement Savings Plan



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


11.
Income Taxes



The provision for income taxes for the years ended May 31, 2001 and 2000
consists solely of minimum state taxes
of $800 for each year as a result of the Company's losses.



The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities
at May 31, 2001 are presented below:

May 31,



2001

Deferred tax assets:





	Accounts receivable, principally due to allowance for doubtful accounts
and sales returns


$
79,000

	Inventories, principally due to additional costs inventoried for tax
purposes
pursuant to the Tax Reform Act of 1986 and allowance for inventory
obsolescence



129,000

	Compensated absences principally due to accrual for financial reporting



21,000

	Net operating loss carryforwards



736,000

	Business tax credit carryforwards



121,000

	Less valuation allowance



(1,052,000
)






Net deferred tax assets



34,000







Deferred tax liabilities:





	Unamortized marketing rights



(34,000
)






Net deferred tax liabilities


$
-








11.
Income Taxes (Continued)



Lancer has provided a valuation allowance with respect to substantially all
of its deferred tax assets as of May 31,
2001. Management provided such allowance as it is currently more likely
2002. 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, 2001 and 2000 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,

2001

2000









Computed "expected" tax  expense
$
(40,621
)
(103,665
)

Increase (decrease) in income taxes resulting from:






	Meals and expenses

4,662

13,048


	Change in beginning of the year balance of the valuation allowance
for deferred tax assets allocated to income tax expense

35,959

90,617


	State and local income taxes, net of tax benefit

800

800



$
800
$
800





As of May 31, 2001, the Company has net tax operating loss carryforwards of
approximately $2,049,000 and
business tax credits of approximately $98,000 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, 2001,
the Company has net tax operating loss carryforwards of approximately
$205,000 and business tax credits of
approximately $23,000 available to offset future state income tax
liabilities.  The state carryforwards expire
through the year 2011.


12.
Export Sales



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

May 31,

2001

2000

Net Sales





	Domestic
$
3,018,000
$
3,133,000

	Europe

1,852,000

1,379,000

	South America

415,000

489,000

	Other

643,000

650,000







Total
$
5,928,000
$
5,651,000







Long-lived assets





	Domestic
$
33,000
$
47,000

	Mexico

45,000

70,000







Total
$
78,000
$
117,000