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, 1999              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

                                                                          <PAGE>

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. X

Issuer's revenue for its most recent fiscal year $6,159,496.

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 NASDAQ, on
August 3, 1999, was approximately $1,261,902.

The number of shares of Issuer's no par value common stock outstanding as of
August 3, 1999, was 2,082,920.

Documents Incorporated by Reference:
      1.  Portions of Issuer's Proxy Statement for the Annual Meeting of
Shareholders to be held on November 17, 1999, 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.

                                                                          <PAGE>

  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.  Lancer has retained the option to convert the manufacturing operation
  to a wholly owned subsidiary at any time without penalty.  Should Lancer
  discontinue operations in Mexico, it is responsible for accumulated employee
  seniority obligations as prescribed by Mexican law.  At May 31, 1999, this
  obligation was approximately $287,000.  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, 1999.

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,
                                                                          <PAGE>

  lingual attachments, and related accessories.  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 through company-paid
  sales representatives in the United States.  At the end of its 1999 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, 1999 and 1998, sales by class of product
  are:

        Class of Product                           1999               1998
        Manufactured Products                  $5,227,000          $5,155,000
        Resale Products                           932,000           1,039,000
           TOTAL                               $6,159,000          $6,194,000


                                                                          <PAGE>

   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, 1999 and 1998:
                                                   1999              1998
   Sales to unaffiliated customers:
         United States                         $3,413,000          $3,456,000
         Europe                                 1,436,000           1,392,000
         South America                            685,000             747,000
         Other Foreign                            625,000             599,000
                                               $6,159,000          $6,194,000

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

   Sales or transfers between geographic areas       none              none

   Operating profit (loss):
         United States                       $(    91,000)       $     78,000
         Europe                                    79,000             105,000
         South America                             38,000              56,000
         Other Foreign                             34,000              45,000
                                             $     60,000         $   284,000

   Identifiable assets:
         United States                         $2,233,000          $2,076,000
         Mexico                                 1,778,000           1,623,000
                                               $4,011,000          $3,699,000

   Export sales                                $2,746,000          $2,738,000

                                                                          <PAGE>

  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
                                                                          <PAGE>

  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 1999
  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, 1999 and 1998.  Lancer's
  backlog at May 31, 1999 and 1998, was $213,000 and $268,000, 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
                                                                          <PAGE>

  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.  In fiscal 1999, development costs of
  $47,000 and equipment and leasehold costs of $32,000 were incurred in the
  development of paragon_, a dental amalgam, which will be the world's first
  spherical dispersion system that expands when set.  The total costs incurred
  by Lancer on product development activities were approximately $165,000 and
  $188,000 for the fiscal years ended May 31, 1999 and 1998, 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

                                                                          <PAGE>

  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.

  YEAR 2000 ISSUES.  The Year 2000 problem is the result of computer programs
  being written to recognize two digits rather than four to define the
  applicable year, causing computer programs to interpret a date using "00" as
  the year 1900 rather than the year 2000, which could result in computer
  failures or miscalculations.  The effects of this issue will vary from system
  to system and may adversely affect an entity's operations as well as its
  ability to prepare financial statements.  The Company has undertaken certain
  corrective actions in an effort to ensure that its hardware and software
  systems used to manage its business are year 2000 compliant and will continue
  to function properly in the year 2000.  However, there can be no assurance
  that Year 2000 problems will not be encountered or that the costs incurred to
  resolve such problems will not be material.  Additionally, there can be no
  assurance that the Year 2000 problem will not affect the Company by causing
  disruptions in the business operations of persons with whom we do business,
  such as customers or suppliers.  Year 2000 problems could have a material
  adverse effect on the Company.

  EMPLOYEES.  As of August 3, 1999, Lancer had 43 employees, 1 of whom is
  employed on a part-time basis.  Additionally, Lancer, through its Mexican
  subcontractor, employed approximately 134 people in Mexico.

ITEM 2.    PROPERTIES

  Lancer conducts its operations in leased facilities located in San Marcos,
  California and Mexicali, Mexico. The San Marcos facility consists of a 9,240
                                                                          <PAGE>

  square foot manufacturing and office building.  The term of the initial lease
  was for five years commencing January 1, 1994 and ending December 31, 1998.
  In 1998, Lancer renegotiated the lease and extended the terms to December 31,
  2003.  The Mexicali facility consists of a 16,000 square foot manufacturing
  and office building.  The term of the lease is for sixty months commencing
  November 1, 1998 and ending October 31, 2003.  Management believes that the
  properties are currently suitable and adequate for Lancer's operations.
  Future aggregate minimum annual cash lease payments are as follows:

                              Years ending
                              May 31, 2000                  $138,362
                              May 31, 2001                  $140,994
                              May 31, 2002                  $143,733
                              May 31, 2003                  $146,587
                              Thereafter                   $  74,884

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, 1999.

                                    PART II

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

  High and low sales prices for Lancer's common stock, after giving effect for
  its one-for-seven reverse stock split, as reported by NASDAQ 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.

                                                                          <PAGE>

        Quarter Ended                                 High           Low
        August 31, 1997                               $1.06          $ .50
        November 30, 1997                             $1.25          $ .88
        February 28, 1998                             $1.06          $ .53
        May 31, 1998                                  $1.14          $ .63
        August 31, 1998                               $1.08          $1.03
        November 30, 1998                             $1.01          $ .97
        February 28, 1999                             $ .93          $ .88
        May 31, 1999                                  $ .82          $ .71



  During fiscal 1999, Lancer's Board of Directors approved the issuance of
  10,625 new shares of common stock to Biomerica, Inc., in lieu of payment of
  $8,500 in accrued administrative support fees.  At May 31, 1999, Biomerica,
  Inc. owned approximately 30% of Lancer's outstanding common stock.

  The approximate number of beneficial holders of Lancer's common stock and
  Series D preferred stock at May 31, 1999, was 508 and one, respectively.

   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
                                                                          <PAGE>

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.

RESULT OF OPERATIONS

For the fiscal year ended May 31, 1999, net sales were $6,159,496, a decrease of
$34,687 (.6%) from the prior year.  The sales decrease experienced from 1998 to
1999 is primarily attributable to increased discounting.  Although net domestic
sales decreased in 1999, the number of units sold increased. While the
unfavorable trend in discounts continues, it has slowed, partially the result of
industry consolidation. Management believes the trend in increased discounting
will be insignificant 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, increased 2.8% from 58.6% in fiscal
1998 to 61.4% in fiscal 1999.  The increase is primarily attributable to
competitive pricing pressures and increased manufacturing costs.  Lancer
continues its program to improve manufacturing by adding new equipment and
improving processes and efficiencies.  Cost of sales for 1999 includes Mexican
tax assessed to Lancer's subcontractor of $65,000.  Management is evaluating
whether this assessment is a pass-through cost.

Selling expenses increased $13,917 (.8%) from $1,710,109 in 1998 to $1,724,026
in 1999.  The increase is primarily attributable to increases in bad debt
expense of $30,807, payroll expenses of $29,467 and outside commissions of
$15,320, partially offset by decreases in other expenses.  The bad debt expense
includes an additional reserve of $50,000 for international receivables.
Management will continue to evaluate the necessity  of these reserves in fiscal
2000.

                                                                          <PAGE>

General and Administrative expenses increased $48,116 (12.6%) from $383,073 in
1998 to $431,189 in 1999.  The increase is primarily attributable to increases
in professional services of $28,767 and board of director costs of $17,268.

Product Development expenses decreased $23,282 (12.4%) from $188,320 in 1998 to
$165,038 in 1999.  The decrease is primarily attributable to a decrease in
payroll costs, partially offset by development costs of new products.

Interest expense decreased $9,753 (38.5%) from $25,360 in 1998 to $15,607 in
1999.  The decrease is primarily attributable to the payoff of debt in 1998.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

During fiscal 1999, management negotiated a renewal of Lancer's line of credit
through November 3, 1999.  The line of credit allows for borrowing up to
$1,000,000 and is limited to specified percentages of eligible accounts
receivable.  The unused portion available under the line of credit at May 31,
1999, was approximately $239,000.  Borrowings bear interest at prime plus .75%
per annum (8.5% at May 31, 1999).

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 increased $133,976 (4.8%) from $2,804,215 in 1998 to $2,938,191
in 1999.  The increase is primarily attributable to an increase in receivables
and inventories, partially offset by a decrease in cash.

In March 1998, Lancer's Board of Directors approved the repurchase of up to 4%
of Lancer's outstanding common stock through February 1999.  The repurchase was
extended on June 1, 1999 for an additional 3% through May 31, 2000.  Such
repurchases are at the discretion of management when management believes
                                                                          <PAGE>

Lancer's common stock is undervalued.  Repurchases will be made out of current
cash flow and all repurchased shares will be retired.  Through July 31, 1999, a
total of 69,272 shares have been repurchased for an aggregate consideration of
$75,860.

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

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 17, 1999, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year period
ended May 31, 1999, 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 17, 1999, which will be filed with the
Commission not later than 120 days after the end of Lancer's fiscal year ended
May 31, 1999, is also incorporated herein by reference.  Information regarding
                                                                          <PAGE>

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 17, 1999, which will be filed with the Commission not later than 120
days after the end of Lancer's fiscal year ended May 31, 1999, 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 17,
1999, which will be filed with the Commission not later than 120 days after the
end of Lancer's fiscal year ended May 31, 1999, 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 17, 1999,
which will be filed with the Commission not later than 120 days after the end of
Lancer's fiscal year ended May 31, 1999, 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

                                                                          <PAGE>

     1.  Financial Statements
       See Table of Contents of Financial Statements, 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, 1999.




                                   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 30, 1999

LANCER ORTHODONTICS, INC.


By:  /s/ Douglas D. Miller                            /s/
        Douglas D. Miller                                Catherine Wyss
        President and Chief Operating Officer            Accounting Manager
                                                                          <PAGE>

        (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 30, 1999
     Zackary Irani                  Chairman of the Board
                                    & Director

/s/ Douglas D. Miller                                       August 30, 1999
     Douglas D. Miller              President, Chief Operating
                                    Officer &  Director

/s/ Janet Moore                                             August 30, 1999
     Janet Moore                    Secretary & Director



     Robert Orlando                 Director







                                                                          <PAGE>



          REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS,
            BDO SEIDMAN, LLP                                             FS-2


          INDEPENDENT AUDITORS' REPORT, CORBIN & WERTZ                   FS-3

          FINANCIAL STATEMENTS

               Balance Sheet                                             FS-4

               Statements of Operations                                  FS-5

               Statements of Stockholders' Equity                        FS-6

               Statements of Cash Flows                              FS-7 - 8


          NOTES TO FINANCIAL STATEMENTS                             FS-9 - 22












                                                                          <PAGE>

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, 1999, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lancer Orthodontics, Inc. as of
May 31, 1999, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.

                                          BDO SEIDMAN, LLP


Orange County, California
                                                                          <PAGE>

July 29, 1999

INDEPENDENT AUDITORS' REPORT


The Board of Directors
Lancer Orthodontics, Inc.


We have audited the accompanying statements of operations, stockholders' equity
and cash flows for the year ended May 31, 1998 of Lancer Orthodontics, Inc. (the
"Company"). 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations and cash flows of Lancer
Orthodontics, Inc. for the year ended May 31, 1998, in conformity with generally
accepted accounting principles.


                                          CORBIN & WERTZ

                                                                          <PAGE>


Irvine, California
July 24, 1998





























                                                                          <PAGE>

 May 31,                                                    1999


ASSETS

CURRENT ASSETS
  Cash                                              $    106,292
  Accounts receivable, net of allowance for
  doubtful accounts of $175,986                        1,351,720
  Inventories                                          2,207,154
  Prepaid expenses                                        51,845
  Insurance claim receivable                             110,000


Total current assets                                   3,827,011

PROPERTY AND EQUIPMENT, net                              184,206
INTANGIBLE ASSETS, net                                   309,344
OTHER ASSETS                                               6,560


                                                    $  4,327,121


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable and accrued liabilities          $    708,820
  Line of credit                                         180,000


Total current liabilities                                888,820


COMMITMENTS AND CONTINGENCIES
                                                                          <PAGE>


STOCKHOLDERS' EQUITY
  Redeemable convertible preferred stock, Series C,
  $.06 noncumulative annual dividend; $.75 par
  value; 250,000 shares authorized; 0 shares issued
  and outstanding in 1999 ($.75 liquidation
  preference)                                                  -
  Redeemable convertible preferred stock, Series D,
  $.04 noncumulative annual dividend; $.50 par
  value; 500,000 shares authorized; 370,483 shares
  issued and outstanding ($.50 liquidation
  preference per share: aggregate liquidation
  preference of $185,242)                                185,242
  Common stock, no par value; 50,000,000 shares
  authorized; 2,105,965 shares issued and
  outstanding                                          4,697,115
  Accumulated deficit                                 (1,444,056)


Total stockholders' equity                             3,438,301


                                                    $  4,327,121


                                 See accompanying notes to financial statements.








                                                                          <PAGE>

Years ended May 31,                          1999         1998


NET SALES                             $ 6,159,496  $ 6,194,183

COST OF SALES                           3,779,010    3,628,486


GROSS PROFIT                            2,380,486    2,565,697

OPERATING EXPENSES:
  Selling                               1,724,026    1,710,109
  General and administrative              431,189      383,073
  Product development                     165,038      188,320


TOTAL OPERATING EXPENSES                2,320,253    2,281,502


OPERATING INCOME                           60,233      284,195

OTHER INCOME (EXPENSE):
  Interest expense                        (15,607 )    (25,360 )
  Other income, net                         2,010        1,450


TOTAL OTHER INCOME (EXPENSE)              (13,597 )    (23,910 )


INCOME BEFORE INCOME TAXES                 46,636      260,285

INCOME TAXES                                4,604          800


NET INCOME                            $    42,032  $   259,485

                                                                          <PAGE>


PER SHARE DATA:

  Basic                               $       .02  $       .12


  Diluted                             $       .02  $       .12


                                 See accompanying notes to financial statements.























                                                                          <PAGE>

































                                                                          <PAGE>

<TABLE>
<CAPTION>                           Series D Preferred Stock             Common Stock                 Accumulated
                                       Shares        Amount          Shares           Amount             Deficit           Total
<S>                                    <C>           <C>              <C>             <C>              <C>               <C>
Balance, June 1, 1997                  370,483       $185,242         2,125,712       $4,710,614       $(1,745,573)      $3,150,283

Repurchase of common stock                  --             --           (5,000)          (5,220)                --          (5,220)

Net Income                                  --             --                --               --           259,485          259,485

Balance, May 31, 1998                  370,483        185,242         2,120,712        4,705,394        (1,486,088)       3,404,548

Repurchase of common stock                  --             --          (25,372)         (25,950)                 --        (25,950)

Common stock issued for services            --             --            10,625            8,500                 --           8,500

Compensation expense related
    to options issued for services
    rendered                                --             --                --            9,171                 --           9,171

Net Income                                  --             --                --               --             42,032          42,032

Balance, May 31, 1999                  370,483       $185,242         2,105,965       $4,697,115        $(1,444,056)     $3,438,301


<FN>
                                                                                     See accompanying notes to financial statements.
</TABLE>




                <PAGE>

































                                                                          <PAGE>

































                                                                          <PAGE>

 Years Ended May 31,                              1999        1998


CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                 $  42,032  $  259,485
  Adjustment to reconcile net income to net
cash (used in)
    provided by operating activities:
   Depreciation and amortization               171,589     180,490
   Provision for losses on accounts
receivable                                      55,986      15,000
   Provision for losses on inventory                 -      10,000
   Options issued for services rendered          9,171           -
   Common stock issued for services              8,500           -
   Net change in operating assets and
liabilities:
     Accounts receivable                      (104,856)   (139,014)
     Inventories                              (410,360)     38,860
     Prepaid expenses                           15,912     (29,951)
     Insurance claim receivable               (110,000)          -
     Accounts payable and accrued
liabilities                                    124,598     200,020


Net cash (used in) provided by operating
activities                                    (197,428)    534,890


CASH FLOWS FROM INVESTING ACTIVITIES:
 Property and equipment                        (71,366)    (45,387)
 Deposits                                            -      (2,160)



                                                                          <PAGE>

Net cash used in investing activities          (71,366)    (47,547)


CASH FLOWS FROM FINANCING ACTIVITIES:
 Net increase (payments) under line of
 credit agreement                               80,000    (100,000)
 Principal payments on note payable to bank          -    (200,000)
 Principal payments on capital leases                -     (15,848)
 Repurchase of common stock                    (25,950)     (5,220)


Net cash provided by (used in) financing
activities                                      54,050    (321,068)


NET CHANGE IN CASH                            (214,744)    166,275

CASH, beginning of period                      321,036     154,761


CASH, end of period                          $ 106,292  $  321,036



SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
 Cash paid during the year for:

  Interest                                   $  15,607  $   25,360


  Income taxes                               $     800  $    1,230



                                                                          <PAGE>

                                 See accompanying notes to financial statements.































                                                                          <PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE (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 9).  The Company also purchases certain orthodontic and
dental products for purposes of resale.  Sales of manufactured and resale
products comprise approximately 86% and 14% of total sales, respectively, for
fiscal 1999 and 83% and 17% of total sales, respectively, for fiscal 1998.

Sales are made directly to orthodontists worldwide through Company
representatives and independent distributors, with approximately 55% and 56%
during fiscal 1999 and 1998, 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.

NOTE (2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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,

                                                                          <PAGE>

and a line of credit.  The carrying amounts of the Company's financial
instruments generally approximate their fair values at May 31, 1999.

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 differ from those estimates.


CONCENTRATIONS OF CREDIT RISK:

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




NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (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 differ from the estimated
                                                                          <PAGE>

amounts.  As of May 31, 1999, reserves for credit losses totaled $125,986.
Reserves for  sales  returns  totaled $50,000.  At May 31, 1999, one customer
accounted for approximately 17% of accounts receivable.  No one customer
accounted for 10% or more of revenues for the years ended May 31, 1999 and 1998.

Suppliers - At May 31, 1999, one company accounted for approximately 12 % of
accounts payable (Note 7).  No one company accounted for more than 10% of
purchases for the years ended May 31, 1999 and 1998.

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 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.

                                                                          <PAGE>

Listing Requirements - the Company must maintain a minimum bid price and certain
capitalization levels as required by the NASD Marketplace Rule 4310(c).  As of
May 31, 1999, the Company was in compliance with these requirements.  There can
be no assurance that the Company will continue to comply with these requirements
which could impair the Company's ability to be listed on the NASDAQ Stock
Market.

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.




NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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
                                                                          <PAGE>

Company's products.  In addition, a product liability claim or recall could have
a material adverse effect of 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 of the
related assets, generally five years.  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

                                                                          <PAGE>

impairment is determined by management.  Management has determined that there is
no impairment of long-lived assets as of May 31, 1999.

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

NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 10).

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 $165,000 and $188,000 during the years ended May
31, 1999 and 1998, respectively.

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
                                                                          <PAGE>

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 1999 and 1998 as their effect was anti-dilutive.
Potential common shares, which relate to shares issuable upon the conversion of
preferred stock into common stock, were included in the per share calculations
for fiscal 1999 and 1998 as their effect was dilutive.

NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
                                                                          <PAGE>


Earnings per share for the years ended May 31, 1999 and 1998 are as follows:


                                                      1999              1998
BASIC EARNINGS PER SHARE:

Net income                                        $   42,032        $  259,485

Net income applicable to common shareholders      $   42,032        $  259,485

Weighted average number of common shares           2,117,128         2,125,325

Basic earnings per share                          $      .02        $      .12



                                                      1999              1998
DILUTED EARNINGS PER SHARE:

Net income from primary income per common share   $   42,032        $  259.485

Net income for diluted earnings per share         $   42,032        $  259,485

Weighted average number of shares used in
      calculating basic earnings per common share  2,117 128         2,125,325

Add:  Stock options                                       --                --
          Convertible preferred stock                 52,926            52,926

Weighted average number of shares used in
      calculating diluted earnings per share       2,170 054         2,178,251
                                                                          <PAGE>


Diluted earnings per share                        $     .02        $      .12


NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

NEW ACCOUNTING PRONOUNCEMENTS

Segment Reporting - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131").  SFAS 131 requires
public companies to report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders.  It also requires
entity-wide disclosures about the product, services an entity provides, the
material countries in which it holds assets and reports revenues, and its major
customers.  The Company adopted the provisions of this statement for 1999 annual
reporting.  These disclosure requirements had no impact on the Company's
financial position or results of operations, or the Company's existing segment
disclosures.

Reporting Comprehensive Income - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income".  This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements.  Comprehensive income
includes net income as well as certain items that are reported directly within a
separate component of stockholders' equity and bypass net income.  The Company
adopted the provisions of this statement in 1999.  These disclosure requirements
                                                                          <PAGE>

had no impact on the Company's results of operations.  The Company has no
elements of other comprehensive income, as defined by SFAS No. 130, for the
periods presented.

NOTE (3)  INSURANCE CLAIM RECEIVABLE

Management of the Company completed an assessment of a theft of inventory
located at its facility in Mexicali Mexico on April 6, 1999.  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.  Subsequent to year
end, 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.

NOTE (4)  INVENTORIES

The components of inventories at May 31, 1999 are as follows:

      Raw materials                                     $  376,611
      Work in progress                                      88,256
      Finished products                                  1,742,287

         Total                                          $2,207,154



NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (5)  PROPERTY AND EQUIPMENT

The components of property and equipment at May 31, 1999, are as follows:
                                                                          <PAGE>


      Machinery and equipment                           $1,885,477
      Tooling, jigs, and fixtures                          375,518
      Furniture and fixtures                               132,249
                                                         2,393,244
      Less accumulated depreciation and amortization    (2,209,038)
         Total                                          $  184,206

Approximately $120,000 of property and equipment, net of accumulated
depreciation and amortization, is located at the Company's manufacturing
facility in Mexico (Note 9).

Depreciation expense for the years ended May 31, 1999 and 1998, totaled $97,993
and $106,894, respectively.

NOTE (6)  INTANGIBLE ASSETS

The components of intangible assets at May 31, 1999, are as follows:

      Marketing and distribution rights                $   442,750
      Technology use rights                                858,328
                                                         1,301,078
      Less accumulated amortization                    (   991,734)
`                                                      $   309,344

Amortization expense for each of the years ended May 31, 1999 and 1998 totaled
$73,596.

NOTE (7)  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

The components of accounts payable and accrued liabilities at May 31, 1999, are
as follows:
                                                                          <PAGE>


`                 Trade accounts payable                  $442,343
                  Accrued payroll and related benefits      92,648
                  Accrued net asset tax (Mexicali)          64,724
                  Other accrued liabilities                109,105
                     Total                                $708,820

During 1999, the Company was assessed $64,724 in pass through net asset taxes by
their subcontractor under their Manufacturing Agreement (Note 9).  The Company
is currently exploring the accuracy of such pass through tax.



NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (8)  LINE OF CREDIT

At May 31, 1999, the Company had a line of credit with a bank for borrowings up
to $1,000,000.  The line of credit bears interest at prime plus .75% per annum
(8.5% at May 31, 1999).  Allowable borrowings are limited to specified
percentages of eligible accounts receivable.  The unused portion available under
the line of credit at May 31, 1999, was $239,213.  The line of credit expires on
November 3, 1999.

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 $2,500,000, 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
compliance with its bank covenants as of May 31, 1999.

                                                                          <PAGE>

The following summarizes information on short-term borrowings for the year ended
May 31, 1999:

Average month end balance                                          $173,333
Maximum balance outstanding at any month end                       $200,000
Weighted average interest rate (computed by dividing interest
   expense by average monthly balance)                                 9.0%
Interest rate at year end                                              8.5%

NOTE (9) 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
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 $7,197 at May 31, 1999, and is included in accrued liabilities in the
accompanying balance sheet.  Total rental expense for this facility for the
years ended May 31, 1999 and 1998, was approximately $56,000 and $46,000,
respectively.

Effective April 1, 1996, the Company entered into a non-cancelable operating
lease for its Mexico facility expiring October 31, 1998, which required average
monthly rentals of approximately $5,200.  The lease has been extended to October
2003, which requires monthly rentals of approximately $6,040.  The rentals are
subject to annual increases based on the United States Consumer Price Index.
Prior to April 1, 1996, such was included in amounts paid under the terms of the
Manufacturing Agreement, discussed in the following paragraph.  Total expense
for this facility for the years ended May 31, 1999 and 1998, was $55,537 and
$62,962 respectively.

NOTES TO FINANCIAL STATEMENTS - CONTINUED
                                                                          <PAGE>


NOTE (9)  COMMITMENTS AND CONTINGENCIES - CONTINUED

At May 31, 1999, future aggregate minimum lease payments are as follows:

               Years Ending May 31,
                 2000                                                $138,362
                 2001                                                 140,994
                 2002                                                 143,733
                 2003                                                 146,587
                 2004                                                  74,884
                     Total                                           $644,560

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
increased, the hourly rate decreased.  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 gives 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
                                                                          <PAGE>

Agreement through December 2003.  The Company has retained the option to convert
the manufacturing operation to a wholly owned subsidiary at any time without
penalty.  Should the Company discontinue operations in Mexico, it is responsible
for the accumulated employee seniority obligation as prescribed by Mexican law.
At May 31, 1999, this obligation was approximately $287,000.  Such obligation is
contingent in nature and accordingly has not been accrued in the accompanying
balance sheet.

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.

NOTE (10)  STOCKHOLDERS' EQUITY

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, 1999 and 1998, there were no shares issued and outstanding.
There were no dividends declared or paid in 1999 or 1998.
NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (10)  STOCKHOLDERS' EQUITY - CONTINUED

                                                                          <PAGE>

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.  There were
370,483 shares issued and outstanding at May 31, 1999.  There were no dividends
declared or paid in 1999.

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 next
twelve months.  Such repurchases are at the discretion of management and all
repurchased shares will be retired.  During 1999, the Company repurchased 25,372
shares of its common stock for aggregate consideration of $25,950.  During 1998,
the Company repurchased 5,000 shares of its common stock for aggregate
consideration of $5,220.

During 1999, the Company issued 10,625 shares of its common stock valued at
$8,500 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
in April 1998 or expire in August 1999.

                                                                          <PAGE>

During the year ended May 31, 1998, no options were granted.  During 1999, the
Company granted options 138,500 options to purchase shares of the Company's
common stock at an exercise price of $1.00 to certain employees of the Company

During 1999, the Company granted 29,000 options to purchase shares of the
Company's common stock at an exercise price of $1.00 to certain non-employees of
the Company.  The Company recorded $9,171 of compensation expense based on the
fair value of these non-employee options.


NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (10)  STOCKHOLDERS' EQUITY - CONTINUED

SFAS 123 PRO FORMA INFORMATION - Pro forma information regarding net income and
earnings 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 year ended May 31, 1999, (no options were issued
during the year ended May 31, 1998): risk free interest rate of 4.5%; dividend
yield of 0%; expected life of the option of 5 years; and volatility factor of
the expected market price of the Company's common stock of 40%.

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
                                                                          <PAGE>

measure of the fair value of its employee stock options.  For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period.  Adjustments are made for options
forfeited prior to vesting.  The effect on compensation expense, net income, and
net income 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, 1999 and
1998, are as follows:

May 31,                                                1999          1998

   Net income, as reported                           $  42,032      $259,485
   Adjustment to compensation expense under SFAS 123    42,837         3,961
   Net (loss) income, pro forma                      $(   805)      $255,524
   Net income per common and common equivalent share,
      as reported                                    $     .02      $    .12
   Net (loss) income per common and common equivalent
      share, pro forma                              $(    .00)      $    .12

The following summary presents the options granted, exercised, expired, and
outstanding as of May 31, 1999:
                                                                      Weighted
                                           Number of Shares            average
                                  Employee   Nonemployee    Total     exercise
                                                                         price
Outstanding, June 1, 1997          184,286      21,429     205,715       $1.51
   Granted                              --          --          --          --
   Exercised                            --          --          --          --
   Expired                        (170,000)    (21,429)   (191,429)       1.49
Outstanding, May 31, 1998           14,286          --      14,286        1.75
   Granted                         138,500      29,000     167,500        1.00
   Exercised                            --          --          --          --
                                                                          <PAGE>

   Expired                      (    3,000)         --   (   3,000)       6.00
Outstanding, May 31, 1999          149,786      29,000     178,786        1.67


NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (10)  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, 1998:

                                        Number of options          Contractual
            Exercise price          Outstanding  Exercisable      life remaining
                 1.00                 164,500       164,500             5.0
                 1.75                  14,286         7,142             3.4

                        Total         178,786       171,642

WARRANTS - In 1994, the Company issued warrants to purchase 200,596 shares of
Common Stock at $1.75 per share to two major shareholders and a member of the
Board of Directors.  These warrants expired in 1998.

NOTE (11)  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.
                                                                          <PAGE>


NOTE (12)  INCOME TAXES

The provision for income taxes for the years ended May 31, 1999 and 1998,
consists of the following:


May 31,                                               1999              1998
Current
      U.S. Federal                                 $      --         $      --
      State and Local                              $   4,604         $     800
                                                   $   4,604         $     800


Deferred
      U.S. Federal                                 $      --         $      --
      State and Local                              $      --         $      --
                                                   $      --         $      --

NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (12)  INCOME TAXES - CONTINUED

The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at May 31, 1999 are presented below:

                                                                        1999
Deferred tax assets:
   Accounts receivable, principally due to allowance for
      doubtful accounts and sales returns                           $   70,395
   Inventories, principally due to additional costs inventoried
      for tax purposes pursuant to the Tax Reform Act of 1986
                                                                          <PAGE>

      and allowance for inventory obsolescence                          80,133
   Compensated absences principally due to accrual for financial
      reporting                                                         18,886
   Net operating loss carryforwards                                    628,938
   Business tax credit carryforwards                                   173,174
   Less valuation allowance                                         (  917,576)
      Net deferred tax assets                                           53,950
Deferred tax liabilities:
   Unamortized marketing rights                                     (   53,950)
                                                                    $       --

Lancer has provided a valuation allowance with respect to substantially all of
its deferred tax assets as of May 31, 1999 and 1998.  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, 1999 and 1998, differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 % to pre-tax
income as a result of:

                                                          1999            1998
Computed "expected" tax expense                       $  15,856        $  88,497

Income (reduction) in income taxes resulting from:
   Meals and entertainment                                9,944            4,864
   Change in beginning of the year balance of the valuation
     allowance for deferred tax assets allocated to income
     tax expense                                      (  25,800)        (93,089)
   State and local income taxes, net of tax benefit       4,604              528
                                                      $   4,604        $     528

                                                                          <PAGE>

NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE (12)  INCOME TAXES - CONTINUED

As of May 31, 1999, the Company has net tax operating loss carryforwards of
approximately $1,850,000 and business tax credits of approximately $150,000
available to offset future Federal taxable income and tax liabilities,
respectively.  The Federal carryforwards expire in varying amounts from 1999 to
2012.  As of May 31, 1999, the Company has business tax credits of approximately
$23,000 available to offset future state income tax liabilities.  The Company's
state net operating loss carryforward totaling $254,886 expired during the year
ended May 31, 1998.

NOTE (13)  EXPORT SALES

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

May 31,                                          1999              1998

Net Sales
   Domestic                                    $3,413,000        $3,456,000
   Europe                                       1,436,000         1,392,000
   South America                                  685,000           747,000
   Other                                          625,000           599,000
      Total                                    $6,159,000        $6,194,000

Operating (Loss) Profit
   Domestic                                    $(  91,000)       $   78,000
   Europe                                          79,000           105,000
   South America                                   38,000            56,000
   Other                                           34,000            45,000
                                                                          <PAGE>

      Total                                    $  60,000        $  284,000

Identifiable Assets
   Domestic                                    $2,233,000        $2,076,000
   Mexico                                       1,778,000         1,623,000
      Total                                    $4,011,000        $3,699,000

NOTE (14) SUBSEQUENT EVENTS

Subsequent to May 31, 1999, through the date of this report, the Company
repurchased and retired 50,340 shares of its common stock for cash of $1.00 or
$1.31 per share for an aggregate cost to the Company of $51,977.  Additionally,
the Company issued 27,295 shares of its common stock valued at $23,170 for
directors fees previously outstanding and included in accrued liabilities as of
May 31, 1999.

















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