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

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

For the Fiscal Year Ended May 31, 2004        Commission File No. 0-5920

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

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

    253 Pawnee Street, San Marcos, California                 92078-2437
    (Address of principal executive offices)                  (Zip Code)

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


Check whether the Registrant:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes    X                  No

Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
X

Registrant's revenue for its most recent fiscal year $6,024,009.

The aggregate market value of the voting equity held by non-affiliates of the
Registrant, computed by reference to the price at which the common equity was
last sold on the OTCBB as of July 21, 2004 was approximately $1,407,000.

The number of shares of Registrant's no par value common stock outstanding as
of July 21, 2004, was 2,737,570.

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

Transitional Small Business Disclosure Format:
       Yes              No   X

                                       PART I

Item 1.  DESCRIPTION OF BUSINESS

General Development of Business

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

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

During fiscal 2002, Lancer's facility in Mexico was incorporated as Lancer
Orthodontics de Mexico, ("Lancer de Mexico"), a wholly-owned subsidiary of
the Company.  This subsidiary now administers services previously provided
by an independent manufacturing contractor.  A new lease was negotiated in
the name of Lancer de Mexico, effective April 1, 2001, for the 16,000 square
foot facility already in use for the Mexican operations.  Mexican utilities
and vendor obligations were also converted to the Lancer de Mexico name.
This conversion eliminated the expense of an administrative fee and is
expected to provide better control in meeting future obligations.  The
conversion had no material effect on manufacturing operations. The potential
impact for the use of our own facility, in terms of a corporate entity with
legal standing in Mexico, is that over a fiscal year Lancer would save
approximately $100,000 in service fees over a Mexican contracted corporate
entity. Should Lancer discontinue operations in Mexico, it is responsible
for accumulated employee seniority obligations as prescribed by Mexican law.
At May 31, 2004, this obligation was approximately $397,000. 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, 2004.

Narrative Description of the Business

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

In addition, Lancer markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics, headgear cases,
retainer cases, orthodontic wire, and preformed arches.  Lancer sells its
products directly to orthodontists and dentists through company-paid sales
representatives in the United States.  At the end of its 2004 fiscal year,
Lancer had 3 sales representatives, all in the United States, all of whom
are employees of Lancer. We believe that all Lancer products sold in the US
comply with FDA regulations.

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

For the fiscal years ended May 31, 2004 and 2003, sales by class of product
are:

      Class of Product                           2004            2003
  Manufactured Products                      $4,471,000      $4,403,000
  Resale Products                             1,553,000       1,485,000
      Total                                  $6,024,000      $5,888,000

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, 2004 and 2003:

                                                 2004            2003
Sales to unaffiliated customers:
  United States                              $3,119,000      $3,144,000
  Europe                                      1,768,000       1,732,000
  Central & South America                       317,000         262,000
  Middle East                                   286,000         270,000
  Other Foreign                                 534,000         480,000
     Total                                   $6,024,000      $5,888,000

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

                                                 2004            2003
Long-lived assets:
  United States                                $453,000        $164,000
  Mexico                                        113,000          59,000
     Total                                     $566,000        $223,000

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.  Compliance with and certification to both ISO 9000:2000
and ISO 13488 was implemented in December 2003.

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

Sources and Availability of Raw Materials.  The principal raw materials used
by Lancer in the manufacture of its products include:  stainless steel, which
is available from several commercial sources; nickel titanium, which is
available from three sources; and lucolux translucent ceramic, which is
currently only available from one source, General Electric, and is purchased
on open account.  Ceramic material similar to General Electric's lucolux
translucent ceramic is available from other sources.  Lancer had no
difficulty in obtaining an adequate supply of raw materials during its 2004
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, 2004 and 2003.
Lancer's backlog at May 31, 2004 and 2003, was $124,000 and $35,000,
respectively.  The change in backlog is primarily attributable to problems
related to a new computer system.  Lancer's business has not been subject
to significant seasonal fluctuations.

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

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

Product Development and Improvement.  Lancer is engaged in, and intends to
continue development programs directed toward improving its orthodontic
products and production techniques.  The total costs incurred by Lancer
on product development activities were approximately $116,000 and $107,000
for the fiscal years ended May 31, 2004 and 2003, respectively.

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

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

Insurance. Lancer has insurance coverage for personal property ($472,500),
business income ($1,200,000), general liability ($2,000,000), employee
benefit liability ($1,000,000), products liability ($2,000,000), auto
($1,000,000), commercial fidelity ($100,000), difference in conditions and
Mexico required coverage ($2,500,000). The Company's workman's compensation
policy covers injuries to employees as a result of accidental contamination
of hazardous materials. The Company does not have a separate policy for
contamination of hazardous materials. Lancer also has Directors and Officers
insurance of $2,000,000.

Employees.  As of July 7, 2004, Lancer had 33 employees, 1 part time.  The
decrease of employees from 2003 to 2004 was in the marketing support
department. Additionally, Lancer, through its Mexican subsidiary, employs
approximately 102 people in Mexico.

Risks and Uncertainties

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

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

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

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

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

Item 2.  PROPERTIES

The Company leases its main facility under a non-cancelable operating lease
expiring April 30, 2009, which requires monthly rentals that increase
annually, from $6,688 per month in 2004 to $7,527 per month in 2009. The
lease expense is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash paid
aggregates $20,264 at May 31, 2004, and is included in other current
liabilities in the accompanying consolidated balance sheet. Total rental
expense for this facility for each of the years ended May 31, 2004 and 2003
was approximately $75,000 and $69,000, respectively.

Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a non-
cancelable operating lease for its Mexico facility through March 31, 2009.
The new lease encompasses the approximately 16,000 square feet of the
previous lease, plus additional square footage of approximately 10,000 feet,
for a total of approximately 26,000 square feet.  Lancer Orthodontics de
Mexico will provide sub-contracted manufacturing services to Biomerica,
Inc., using a portion of the additional square footage.  The new lease
requires monthly payments of approximately $9,600 through March 2009.  An
agreement has been negotiated between Lancer Orthodontics de Mexico and
Biomerica for lease reimbursement of approximately $2,000 per month.  The
remainder of approximately $7,600 monthly lease expense will be borne by
Lancer.  Total rental expense for this facility for the years ended May 31,
2004 and 2003 was approximately $103,000 and $76,000, respectively.

The new Lancer Orthodontics de Mexico lease also requires an additional
refundable security deposit of $26,550.  Lancer Orthodontics, Inc. paid half
and Biomerica, Inc. the other half.  This is in addition to the $31,146
refundable security deposit paid in fiscal year 2002.  At May 31, 2004 and
2003, other assets on the consolidated balance sheet includes approximately
$44,000 and $39,000, respectively, of security deposit paid by Lancer on
the Mexico location.

Approximate future aggregate minimum annual cash lease payments are as
follows:

                  Years ending
                     May 31, 2005           $223,000
                     May 31, 2006            225,000
                     May 31, 2007            228,000
                     May 31, 2008            228,000
                     May 31, 2009            191,000
                                          $1,095,000

A sub-lease agreement for approximately 459 square feet of Lancer's main
facility was entered into in April 2003, effective through November 2003, and
extended in December 2003 through November 2004.  The leased space is to be
used for a machine shop and requires monthly payments of $344.  Rental income
for the years ended May 31, 2004 and 2003 was $4,128 and $344, respectively.

Item 3.  LEGAL PROCEEDINGS - Not applicable.

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

No matters were submitted to a vote of Lancer's security holders during the
year ended May 31, 2004.




                                     PART II

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

The common stock has been quoted and traded on a limited and sporadic basis
on the OTC Bulletin Board operated by NASD under the trading symbol "LANZ".
The limited and sporadic trading does not constitute, nor should it be
considered, an established public trading market for the common stock.  The
following table sets forth the high and low bid prices for our common stock
for the periods indicated, as reported by MSN Money.  Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commissions, and
may not necessarily represent actual transactions.

    Quarter Ended                High          Low
    August 31, 2002              $.31         $.23
    November 30, 2002            $.30         $.26
    February 28, 2003            $.40         $.32
    May 31, 2003                 $.51         $.38
    August 31, 2003              $.75         $.51
    November 30, 2003            $.85         $.54
    February 28, 2004            $.75         $.54
    May 31, 2004                 $.94         $.57

As of July 21, 2004, there were approximately 312 holders of record of Common
Stock, as shown on the records of the transfer agent and registrar of Common
Stock.  The number of record holders does not bear any relationship to the
number of beneficial owners of the Common Stock.

The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividend on its Common Stock in the
foreseeable future.  The Company's Board of Directors intends, for the
foreseeable future, to retain earnings to finance the continued operation
and expansion of the Company's business.

Equity Compensation Plans

The table below provides information relating to our equity compensation
plans as of May 31, 2004:

                                                          Number of Securities
                       Number of                          Remaining Available
                       Securities                         for Future Issuance
                       to be Issued    Weighted Average   Under Compensation
                       Upon Exercise    Exercise Price    Plans (Excluding
                       of Outstanding  of Outstanding     Securities Reflected
Plan Category          Options             Options        in First Column)

Equity compensation
plans approved by
security holders         647,500            $.60               280,523

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

Total                    647,500                               280,523

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

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

Except for historical information contained herein, the statements in this
Form 10-KSB are forward-looking statements. Forward-looking statements
involve known and unknown risks and uncertainties which may cause Lancer's
actual results in future periods to differ from forecasted results.  These
risks and uncertainties include, among other things, the continued demand
for the Company's products, availability of raw materials and the state
of the economy.  These and other risks are described in the Company's Annual
Report on Form 10-KSB and in the Company's other filings with the Securities
and Exchange Commission.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States.  Note 2 of the Notes to Consolidated Financial Statements
describes the significant accounting policies essential to the consolidated
financial statements.  The preparation of these financial statements requires
estimates and assumptions that affect the reported amounts and disclosures.

We believe the following to be critical accounting policies as they require
more significant judgments and estimates used in the preparation of our
consolidated financial statements.  Although we believe that our judgments
and estimates are appropriate and correct, actual future results may differ
from our estimates.

In general, the critical accounting policies that may require judgments or
estimates relate specifically to the Allowance for Doubtful Accounts,
Inventory Reserves for Obsolescence and Declines in Market Value, Impairment
of Long-Lived Assets, Stock Based Compensation, and Income Tax Accruals.

We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
Sales of manufactured and resale products comprise approximately 74% and
26% of total sales, respectively, for fiscal 2004.

The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments.
The assessment of specific receivable balances and required reserves is
performed by management and discussed with the audit committee.  We have
identified specific customers where collection is not probable and have
established specific reserves, but to the extent collection is made, the
allowance will be released.  Additionally, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.

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

In general, we are in a loss position for tax purposes, and have established
a valuation allowance against deferred tax assets, as we do not believe it is
likely that we will generate sufficient taxable income in future periods to
realize the benefit of our deferred tax assets.  Predicting future taxable
income is difficult, and requires the use of significant judgment.  At
May 31, 2004, all of our deferred tax assets were reserved.  Accruals are
made for specific tax exposures and are generally not material to our
operating results or financial position, nor do we anticipate material
changes to these reserves in the near future.

Result of Operations

For the fiscal year ended May 31, 2004, net sales increased $136,111 (2.3%)
from $5,887,898 in 2003 to $6,024,009 in 2004.  International net sales
increased $161,017 (5.9%) from $2,743,810 in 2003 to $2,904,827 in 2004.
The increase is primarily in South America, Central America, and other new
international markets.  Domestic net sales decreased $24,906 (.8%) from
$3,144,088 in 2003 to $3,119,182 in 2004.  Sales prices were increased for
domestic customers in November, 2003.

Cost of sales, as a percentage of sales, decreased 1.9% from 70.4% in fiscal
2003 to 68.5% in fiscal 2004.  The decrease is primarily attributable to the
selling price increase.

Selling expenses increased $189,199 (15.9%) from $1,190,174 in 2003 to
$1,379,373 in 2004.  The increase is primarily attributable to increases in
selling labor costs and advertising expenses.

General and administrative expenses increased $6,182 (1.4%) from $429,828 in
2003 to $436,010 in 2004.  The increase is primarily attributable to
increases in insurance costs and professional fees.

Product development expenses increased $8,734 (8.1%) from $107,370 in 2003
to $116,104 in 2004.  The increase is primarily attributable to labor costs
associated with development of new products and manufacturing technologies.

Interest expense decreased $1,729 (47.6%) from $3,635 in 2003 to $1,906 in
2004.  The decrease is primarily attributable to a decrease in the interest
rate (8.25% in 2003 and 6.0% in 2004).  Interest income decreased $155 (88.1%)
from $176 in 2003 to $21 in 2004 primarily due to lower interest rates.

Other income increased $7,401 (12.4%) from $59,526 in 2003 to $66,927 in 2004.
This increase is primarily attributable to an increase in rental income and
income from providing shelter services in Mexico.  Other income in 2003 was
primarily attributable to income of $62,655 received as part of an insurance
claim settlement.  No insurance claims were submitted in 2004, and as such
no insurance claim settlements were received during fiscal 2004.

Rental income of $4,128 was realized in fiscal year 2004 resulting from the
sub-lease of approximately 459 square feet of San Marcos warehouse space.

Financial Condition, Liquidity, and Capital Resources

Lancer has a $400,000 line of credit with Cuyamaca Bank, which expires
January 8, 2005.  Borrowings are made at prime plus 2.0%, (6% at May 31, 2004)
and are limited to 80% of accounts receivable less than 90 days old.  The
outstanding balance was $0 and the unused portion available is approximately
$340,000.  The Company requested that Cuyamaca Bank reserve $60,000 of
Lancer's available credit line as a guarantee of credit with a European
supplier.  Lancer is in compliance with its debt covenants at May 31, 2004.

The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment.  The lending
agreement for the line of credit requires, among other things, that Lancer
maintain a balance sheet net worth of $2,700,000 and that a zero outstanding
balance be maintained for 30 consecutive days during the term.

Lancer also had a term loan for $100,000 with Cuyamaca Bank that was paid
off in May 2004.  This loan required monthly payments of approximately
$2,300 (principal and interest) at an interest rate of prime plus 2% (6% in
May 2004).

Lancer instituted a price increase for domestic customers in fiscal 2004.
The 7% increase had no material effect on operations or on demand from
material customers.

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

Working capital increased $9,120 (0.3%) from $2,813,672 in 2003 to
$2,822,792 in 2004.  The increase is primarily attributable to increases
in inventories, accounts receivable, and prepaid expenses, offset by a
decrease in cash.

Cash decreased $207,262 (40.5%) from $511,407 in 2003 to $304,145 in 2004,
primarily due to purchases of new equipment, molds, and technology.

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

Contractual Obligations and Commercial Commitments

The following table summarizes the Company's obligations and commitments as
of May 31, 2004.

                                Payments Due by Period
                                         Less than
Contractual Cash Obligations    Total      1 Year     1-3 Years    4-5 Years

Operating Leases           $1,095,000    $223,000      $453,000     $419,000

Employment Agreement

Pursuant to the terms of the employment agreement between the Company and Dan
Castner, the Vice President of Sales and Marketing of the Company, dated as
of May 20, 2003, the Company agreed to pay Mr. Castner an annual base salary
of $135,000. After June 1, 2004, the contract is automatically extended on a
month-to-month basis requiring fourteen days notice of intention to terminate
by either party.

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

Insurance Claim Receivable

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

Recent Accounting Pronouncements

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

Factors That May Affect Future Results

You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in
materials incorporated by reference in these filings.  The following is
intended to highlight certain factors that may affect the financial condition
and results of operations of Lancer and are not meant to be an exhaustive
discussion of risks that apply to companies such as Lancer.  Like other
businesses, Lancer is susceptible to macroeconomic downturns in the United
States or abroad, as were experienced in fiscal years 2004 and 2003, that may
affect the general economic climate and performance of Lancer or its
customers. Aside from general macroeconomic downturns, the additional
material factors that could affect future financial results include, but are
not limited to: Terrorist attacks and the impact of such events; diminished
access to raw materials that directly enter into our manufacturing process;
shipping; labor disruption or other major degradation of the ability to ship
our products to end users; inability to successfully control our margins
which are affected by many factors including competition and product mix;
protracted shutdown of the US border due to an escalation of terrorist or
counter terrorist activity; the operating and financial covenants contained
in our credit line which could limit our operating flexibility, any changes
in our business relationships with international distributors or the economic
client they operate in; any event that has a material adverse impact on our
foreign manufacturing operations may adversely affect our operations as a
whole, failure to manage the future expansion of our business could have a
material adverse effect on our revenues and profitability; possible costs in
complying with government regulations and the delays in receiving required
regulatory approvals or the enactment of new adverse regulations or
regulatory requirements; numerous competitors, some of which have
substantially greater financial and other resources than we do; potential
claims and litigation brought by patients or dental professionals alleging
harm caused by the use of or exposure to our products; quarterly variations
in operating results caused by a number of factors, including business and
industry conditions and other factors beyond our control. All these factors
make it difficult to predict operating results for any particular period.

Item 7.  FINANCIAL STATEMENTS

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

Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

Effective May 29, 2004, the Company engaged PKF, Certified Public Accountants,
A Professional Corporation (San Diego), to serve as the Company's independent
public accountants and to conduct the audit of the Company's financial
statements for the fiscal year end ending May 31, 2004.  In connection with
the engagement of PKF, Certified Public Accountants, A Professional
Corporation (San Diego), the Company has discontinued its association with
BDO Seidman who had been engaged to audit the Company's financial statements
for the prior fiscal years.  The audit report provided by BDO Seidman for the
fiscal year ended May 31, 2003, did not contain any adverse opinion or a
disclaimer of opinion nor was any report modified as to uncertainty, audit
scope, or accounting principles.  Management of the Company knows of no past
disagreements between the Company and BDO Seidman on any matter of accounting
principles or practices, financial statement disclosure or auditing, scope, or
procedure.

Item 8a.  CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures which
are designed to ensure that information required to be disclosed by the
Company in the reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified under the Securities and Exchange Commission's rules and forms.
Based on an evaluation performed, the Company's certifying officers have
concluded that the disclosure controls and procedures were effective as of
the end of the period covered by this report to provide reasonable assurance
of the achievement of these objectives.

Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company to disclose material information otherwise
required to be set forth in the Company's reports.

We do not believe that there has been any change in the Company's internal
control over financial reporting during the period covered by this report
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.





                                   PART III

Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF LANCER; COMPLIANCE WITH SECTION
         16(a) OF THE EXCHANGE ACT

The Board of Directors voted that effective April 12, 2004, Allen Barbieri
would become Chief Executive Officer on a part time basis.  Mr. Barbieri
receives no cash compensation but received 31,250 shares of restricted
Common Stock effective April 12, 2004. Mr. Barbieri was also appointed to the
Board of Directors and received 17,500 options to purchase Lancer's Common
Stock at $.60 per share, exercisable 50% immediately and 50% at April 12,
2005. The options expire in five years.

Information regarding directors, set forth under the caption "Election of
Directors" in Lancer's annual proxy statement for the annual meeting of
shareholders, which will be filed with the Commission not later than 120 days
after the end of Lancer's fiscal year ended May 31, 2004, is incorporated
herein by reference.  Information regarding executive officers, set forth
under caption "Executive Compensation and Other Information" in the annual
proxy statement for the annual meeting of shareholders which will be filed
with the Commission not later than 120 days after the end of Lancer's fiscal
year ended May 31, 2004, is also incorporated herein by reference.
Information regarding Section 16 compliance, set forth under caption
"Section 16 Compliance" in the annual proxy statement for the annual meeting
of shareholders, which will be filed with the Commission not later than 120
days after the end of Lancer's fiscal year ended May 31, 2004, is
incorporated herein by reference.

Although management and board members actively discuss the ethical conduct of
officers and directors, the Company has not adopted a written Code of Ethics
for its principal executive, financial, and accounting officers.
Historically, the Company has felt that such a policy is unnecessary given
its relatively small size.

Item 10.  EXECUTIVE COMPENSATION

Information regarding executive compensation, set forth under the caption
"Compensation Committee Report on Executive Compensation" in Lancer's annual
proxy statement for the annual meeting of shareholders, which will be filed
with the Commission not later than 120 days after the end of Lancer's fiscal
year ended May 31, 2004, is incorporated herein by reference.

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership, set forth under the caption
"Beneficial Ownership of the Company's Securities" in Lancer's annual proxy
statement for the annual meeting of shareholders, which will be filed with
the Commission not later than 120 days after the end of Lancer's fiscal year
ended May 31, 2004, is incorporated herein by reference.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In fiscal 2003, the Company's parent Biomerica entered into an agreement with
the Company whereby Biomerica agreed to pay an initial shelter fee of $5,000
with additional monthly payments of $2,875 for use of its Lancer de Mexico
facilities to produce and manufacture Biomerica products. The monthly
payments are due as long as Biomerica produces its products at the Lancer de
Mexico facility. At May 31, 2004, Biomerica has paid all applicable shelter
fees and $34,500 is included in other income from this agreement.

Miscellaneous expenses, primarily shipping costs, receivable from Biomerica
were $7,280 at May 31, 2004.  Biomerica cash balances held by Lancer de
Mexico at May 31, 2004 are included in the accompanying consolidated balance
sheet as a payable of $3,026.

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.
         10.1  1993 Stock Option Plan as amended - Incorporated herein by
               reference to Exhibit 4.1 of Lancer's S-8 filed March 8, 1994.
         10.2  2000 Stock Option Plan as amended - Incorporated herein by
               reference to Exhibit 4.1 of Lancer's S-8 filed April 26, 2004.

(b)  Reports on Form 8-K
No reports on Form 8-K were filed in the year ended May 31, 2004. Subsequent
to the year end, a Form 8K was filed June 8, 2004, as amended, for the change
in accountants.

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

For the year ended May 31, 2004, PKF, Certified Public Accountants, A
Professional Corporation (San Diego), audited the Company's consolidated
financial statements.  For the year ended May 31, 2003, BDO Seidman, LLP,
audited the Company's consolidated financial statements.

The aggregate fees billed for professional services by PKF and BDO Seidman
were as follows:

Fiscal Year Ended May 31,                       2004              2003

PKF                                          $28,500 (1)           --

BDO Seidman                                  $31,900 (2)       $49,600 (3)

(1)  To be billed in fiscal 2005.
(2)  Includes $9,500 to be billed in fiscal 2005.
(3)  Includes $30,000 billed in fiscal 2004.

It is our Audit Committee's policy and procedure to approve in advance all
audit engagement fees and terms and all permitted non-audit services provided
by our independent auditors.  We believe that all audit engagement fees
and terms provided by our independent auditors as described in the above
table were approved in advance by our Audit Committee.




                                     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 25, 2004

LANCER ORTHODONTICS, INC.

By:  /s/ Allen Barbieri                     /s/ John Dodge
         Allen Barbieri                         John Dodge
         Chief Executive Officer, Director      Director of Financial Planning

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 25, 2004
    Zackary Irani            Chairman of the Board
                             & Director

/s/ Janet Moore                                                August 25, 2004
    Janet Moore              Secretary & Director

/s/ Dr. Robert Orlando                                         August 25, 2004
    Dr. Robert Orlando       Director

/s/ Dr. Francis Cano                                           August 25, 2004
    Dr. Francis Cano         Director

/s/Allen Barbieri                                              August 25, 2004
    Allen Barbieri           CEO & Director


                             CERTIFICATION PURSUANT TO
                           EXCHANGE ACT RULE 15d-14(b) AND
                               18 U.S.C. SECTION 1350

    In connection with the Annual Report of Lancer Orthodontics, Inc. (the
"Company") on Form 10-KSB for the period ending May 31, 2004, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Allen Barbieri, Chief Executive Officer, and I, John Dodge, Director of
Financial Planning, each certify, to the best of my knowledge, pursuant to
Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350,as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002, that:

  i.  The Report fully complies with the requirements of Section 13(a) or
      15(d) of the Securities Exchange Act of 1934; and

 ii.  The information contained in the Report fairly presents, in all
      material respects, the financial condition and results of operations
      of the Company. A signed original of this written statement required
      by Section 906, or other document authenticating, acknowledging, or
      otherwise adopting the signature that appears in typed form within the
      electronic version of this written statement required by Section 906,
      has been provided to Lancer Orthodontics, Inc. and will be retained by
      Lancer Orthodontics, Inc. and furnished to the Securities and Exchange
      Commission or its staff upon request.


                                           /s/  Allen Barbieri

                                                Allen Barbieri
                                                Chief Executive Officer
                                                Lancer Orthodontics, Inc.
                                                August 25, 2004



                                           /s/  John Dodge

                                                John Dodge
                                                Director of Financial Planning
                                                Lancer Orthodontics, Inc.
                                                August 25, 2004



CERTIFICATIONS

I, Allen Barbieri, Chief Executive Officer, certify that:
    1.  I have reviewed this annual report on Form 10-KSB of Lancer
        Orthodontics, Inc.;

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

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

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

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

        b.  Evaluated the effectiveness of the small business issuer's
            disclosure controls and procedures and presented in this report
            our conclusions about the effectiveness of the disclosure controls
            and procedures, as of the end of the period covered by this report
            based on such evaluation; and

        c.  Disclosed in this report any change in the small business issuer's
            internal control over financial reporting that occurred during the
            small business issuer's most recent fiscal quarter (the small
            business issuer's fourth fiscal quarter in the case of an annual
            report) that has materially affected, or is reasonably likely to
            materially affect, the small business issuer's internal control
            over financial reporting; and

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

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

        b.  Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the small business
            issuer's internal control over financial reporting.

Date:    August 25, 2004                   /s/ ALLEN BARBIERI

                                               Allen Barbieri
                                               Chief Executive Officer
                                               Lancer Orthodontics, Inc.





CERTIFICATIONS

I, John Dodge, Director of Financial Planning, certify that:

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

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

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

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

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

        b.  Evaluated the effectiveness of the small business issuer's
            disclosure controls and procedures and presented in this report
            our conclusions about the effectiveness of the disclosure
            controls and procedures, as of the end of the period covered by
            this report based on such evaluation; and

        c.  Disclosed in this report any change in the small business issuer's
            internal control over financial reporting that occurred during the
            small business issuer's most recent fiscal quarter (the small
            business issuer's fourth fiscal quarter in the case of an annual
            report) that has materially affected, or is reasonably likely to
            materially affect, the small business issuer's internal control
            over financial reporting; and

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

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

        b.  Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the small business
            issuer's internal control over financial reporting.

Date:    August 25, 2004                   /s/ JOHN DODGE

                                               John Dodge
                                               Director of Financial Planning
                                               Lancer Orthodontics, Inc.











                           Lancer Orthodontics, Inc.
                       Consolidated Financial Statements
                            As of May 31, 2004 and
                  For Each of the Two Fiscal Years Then Ended



Report of Independent Registered Public Accounting Firm                 FS-2-3


Consolidated Financial Statements

Consolidated Balance Sheet                                                FS-4

Consolidated Statements of Operations                                     FS-5

Consolidated Statements of Stockholders' Equity                           FS-6

Consolidated Statements of Cash Flows                                     FS-7


Notes to Consolidated Financial Statements                        FS-8 - FS-23

































                                     FS-1


Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders
Lancer Orthodontics, Inc
San Marcos, California



We have audited the accompanying consolidated balance sheet of Lancer
Orthodontics, Inc. (a California Corporation) and its wholly-owned subsidiary
as of May 31, 2004 and the related consolidated statements of operations,
stockholder's equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Lancer Orthodontics, Inc. as of May 31, 2004, and the consolidated results
of its operations and cash flows for the year ended May 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.





July 30, 2004                                  PKF
San Diego California                           Certified Public Accountants
                                               A Professional Corporation












                                     FS-2







Report of the Independent Registered Public Accounting Firm


Board of Directors
Lancer Orthodontics, Inc.


We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows of Lancer Orthodontics, Inc. (the
"Company") and its wholly-owned subsidiary for the year ended May 31, 2003.
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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Lancer Orthodontics, Inc. for the year ended May 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America.




BDO SEIDMAN, LLP



Costa Mesa, California
August 11, 2003









                                     FS-3
                          CONSOLIDATED BALANCE SHEET

                                                                 May 31, 2004
Assets
Current assets
Cash                                                               $  304,145
Accounts receivable, net of allowance for doubtful
  accounts of $100,000                                              1,180,474
Inventories, net of reserve of $129,135                             1,847,530
Related party receivables                                               7,280
Prepaid expenses                                                      124,177
Total current assets                                                3,463,606

Property and equipment, net                                           566,367
Intangible assets, net                                                 10,375
Other assets                                                           48,821

                                                                   $4,089,169

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable                                                   $  382,030
Accrued payroll and related benefits                                  126,149
Accrued professional fees                                              53,858
Accrued royalties                                                      30,509
Other current liabilities                                              45,242
Related party payable                                                   3,026
Line of credit                                                              -
Total current liabilities                                             640,814

Commitments and contingencies

Mandatorily Redeemable convertible preferred stock,
  Series C, $0.06 noncumulative annual dividend;
  $0.75 par value; 250,000 shares authorized;
  0 shares issued and outstanding in 2004
($0.75 liquidation preference)                                              -

Stockholders' equity
Redeemable convertible preferred stock,
  Series D, $0.04 noncumulative annual dividend;
  $0.50 par value; 500,000 shares authorized;
  0 shares issued and outstanding in 2004
  ($0.50 liquidation preference per share)                                  -
Common stock, no par value; 50,000,000 shares
  authorized; 2,737,570 shares issued and outstanding,
  and 44,791 shares subscribed                                      5,168,345
Accumulated deficit                                                (1,719,990)

Total stockholders' equity                                          3,448,355

                                                                   $4,089,169


The accompanying notes are an integral part of the financial statements.

                                     FS-4
                     CONSOLIDATED STATEMENTS OF OPERATIONS



Years ended May 31,                                2004               2003

Net sales                                       $6,024,009         $5,887,898

Cost of sales                                    4,127,590          4,143,999

Gross profit                                     1,896,419          1,743,899

Operating expenses:
    Selling                                      1,379,373          1,190,174
    General and administrative                     436,010            429,828
    Product development                            116,104            107,370

Total operating expenses                         1,931,487          1,727,372

Operating income (expense)                         (35,068)            16,527

Other income (expense):
    Interest expense                                (1,906)            (3,635)
    Interest income                                     21                176
    Other income (expense), net                     66,927             59,526

Total other income (expense)                        65,042             56,067

Income before income taxes                          29,974             72,594

Income taxes                                         1,023              1,419

Net income                                         $28,951            $71,175

Per share data:

    Basic                                            $0.01              $0.03

    Diluted                                          $0.01              $0.03

Weighted average number of common and common equivalent shares:

Basic                                            2,365,955          2,211,479

Diluted                                          2,496,974          2,235,623









The accompanying notes are an integral part of the financial statements.

                                     FS-5
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


               Common Stock          Common Stock       Accumulated
                                      Subscribed         Deficit       Total
               Shares   Amount       Shares   Amount

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

Share adjustment       1         -       -        -             -           -

Common stock
issued for
services
provided in
prior year        62,595     17,021 (62,595) (17,021)           -           -

Common stock
issued for
services          35,000     12,250      -        -             -       12,250

Common stock
subscribed
for services          -          -   69,471   20,250            -       20,250

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

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

Common stock
issued for
services
provided in
prior year        69,471     20,250 (69,471) (20,250)           -           -

Common stock
issued for
services          21,875      8,750      -        -             -        8,750

Private
Placement        450,000    270,000      -        -             -      270,000

Common stock
subscribed
for services          -          -   44,791   25,000            -       25,000

Net income            -          -       -        -         28,951      28,951

Balances,
May 31, 2004   2,737,570 $5,143,345  44,791  $25,000   $(1,719,990) $3,448,355


The accompanying notes are an integral part of the financial statements.

                                     FS-6
                            STATEMENTS OF CASH FLOWS


Years Ended May 31,                                    2004             2003

Cash flows from operating activities:
    Net income                                       $28,951          $71,175
    Adjustment to reconcile net income to net
      cash provided by (used in) operating activities:
    Depreciation and amortization                     76,452           78,318
    Provision for losses on accounts receivable       (5,000)          56,911
    Provision for inventory                           (8,090)          20,335

    Common stock for services                         33,750           32,500

    Net change in operating assets and liabilities:
    Accounts receivable                              (29,694)         (34,416)
    Inventories                                      (90,424)         318,408
    Related party receivables                          6,610          (13,890)
    Prepaid expenses                                 (68,691)          (1,211)
    Insurance claim receivable                            -            81,758
    Other receivables                                (26,809)         (19,530)
    Accounts payable                                 (14,832)         (22,491)
    Accrued payroll and related benefits             (15,002)          46,157
    Other liabilities                                 35,976           42,653

Net cash provided by (used in) operating activities  (76,803)         656,677

Cash flows from investing activities:
   Purchases of property and equipment              (394,612)        (200,757)
   Other assets                                       (5,421)          (7,855)

Net cash used in investing activities               (400,033)        (208,612)

Cash flows from financing activities:
   Net decrease in line of credit agreement             (426)         (65,243)
   Proceeds from sale of stock                       270,000               -

Net cash provided by (used in) financing activities  269,574          (65,243)

Net change in cash                                  (207,262)         382,822

Cash, beginning of period                            511,407          128,585

Cash, end of period                                 $304,145         $511,407

Supplemental disclosures of cash flow information:
   Cash paid during the year for:
   Interest                                           $1,906           $3,635

   Income taxes                                         $223             $619



The accompanying notes are an integral part of the financial statements.

                                     FS-7
1.  Organization

Lancer Orthodontics, Inc. (the "Company") was incorporated on August 25, 1967,
in the state of California, for the purpose of engaging in the design,
manufacture, and distribution of orthodontic products. The Company had a
manufacturing facility in Mexico where a majority of its inventory is
manufactured (Note 7).  During fiscal 2003, the facility in Mexico was
incorporated and became a wholly-owned and consolidated subsidiary of the
Company.  This subsidiary now also administers services previously provided by
an independent manufacturing contractor (Note 7).  The Company also purchases
certain orthodontic and dental products for purposes of resale. Sales of
manufactured and resale products comprise approximately 74% and 26% of total
sales, respectively, for fiscal 2004 and 75% and 25% of total sales,
respectively, for fiscal 2003.

Sales are made directly to orthodontists worldwide through Company
representatives and independent distributors, with approximately 25% and 30%
during fiscal 2004 and 2003, respectively, being domestic in nature. The
Company also sells certain of its products on a private label basis.

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

2.  Summary of Significant Accounting Policies

Principles of Consolidation

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

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 consolidated 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, 2004.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
                                     FS-8
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
made by the Company's management include, but are not limited to, allowances
for doubtful accounts, allowances for sales returns, the valuation of
inventories, and the realizeability of property and equipment through future
operations. Actual results could materially differ from those estimates.

Concentrations of Credit Risk

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

Customers - The Company performs periodic credit evaluations of its customers
and maintains allowances for potential credit losses and returns. The Company
estimates credit losses and returns based on management's evaluation of
historical experience and current industry trends. Although the Company
expects to collect amounts due, actual collections may materially differ from
the estimated amounts. As of May 31, 2004, reserves for credit losses totaled
$60,000.  Reserves for sales returns totaled $40,000. At May 31, 2004, one
customer accounted for approximately 13.7% of gross accounts receivable.  At
May 31, 2003, one customer accounted for approximately 11.1% of gross accounts
receivable.  No one customer accounted for 10% or more of net sales for the
years ended May 31, 2004 and 2003.

Suppliers - At May 31, 2004, one company accounted for 32.5% of accounts
payable.  At May 31, 2003, one company accounted for 27.2% of accounts
payable.  No company accounted for more than 10% of purchases for the years
ended May 31, 2004 and 2003.

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
                                     FS-9
be no assurance that the Company will be able to obtain regulatory clearances
for its current or any future products in the United States or in foreign
markets.

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

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

Inventories

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

Property and Equipment

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

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

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.

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, 2004.
                                     FS-10

Stock Based Compensation

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123 "Accounting for Stock-Based
Compensation" (SFAS 148).  The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. Additionally, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
the annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for financial statements for
fiscal years ending after December 15, 2003. In compliance with SFAS No. 148,
we have elected to continue to follow the intrinsic value method in accounting
for our stock-based employee compensation plan as defined by APB No. 25,
"Accounting for Stock Issued to Employees".

Pro forma information regarding net income and income per share is required
by SFAS 148, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 148.  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, 2004 and 2003: risk free interest rates between
2% and 4%; dividend yield of 0%; expected life of the option of two to four
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 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
148, for the years ended May 31, 2004 and 2003, are as follows:












                                     FS-11
May 31,                                                    2004          2003

Net income, as reported                                 $28,951       $71,175
Add:  Stock-based employee compensation expense              -             -
Less:  Stock-based employee compensation expense
       determined under fair value calculations         (50,098)      (14,989)

Net (loss) income, pro forma                           $(21,147)      $56,186

Basic income per share, as reported:                      $0.01         $0.03
Add:  Stock-based employee compensation expense recorded     -             -
Less:  Stock-based employee compensation expense
       determined under fair value calculations           (0.02)           -

Pro forma                                                $(0.01)        $0.03

Diluted income per share, as reported:                    $0.01         $0.03
Add:  Stock-based employee compensation expense recorded     -             -
Less:  Stock-based employee compensation expense
       determined under fair value calculations           (0.02)           -

Pro forma                                                $(0.01)        $0.03

Revenue Recognition

We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.

Research and Development

Research and development expenses are expensed as incurred.  The Company
expensed approximately $116,000 and $107,000 of research and development
expenses during the years ended May 31, 2004 and 2003, respectively.

Advertising

Advertising costs are expensed as incurred. Advertising expense for the
years ended May 31, 2004 and 2003 was $24,481 and $4,531, respectively.

Currency

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

Income Taxes

The Company accounts for income taxes using the asset and liability approach
under "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
                                     FS-12
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 "SFAS 128".
SFAS 128 replaced the presentation of primary and fully diluted earnings per
share with the presentation of basic and diluted earnings per share.  Basic
earnings per share excludes dilution and is calculated by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.

Net income per common share is computed based on the weighted average number
of shares of common stock and, if applicable, common stock equivalents
outstanding during the year.  As of May 31, 2004, there was a total of
784,667 potential dilutive shares of common stock.

Earnings per share for the years ended May 31, 2004 and 2003 are as follows:

                                                           2004          2003
Basic income per share:
Net income                                               $28,951       $71,175

Net income applicable to common shareholders             $28,951       $71,175

Weighted average number of common shares               2,365,955     2,211,479

Basic income per share                                     $0.01         $0.03

Diluted income per share:
Net income from primary income per common share          $28,951       $71,175

Net income for diluted earnings per share                $28,951       $71,175

Weighted average number of shares used in
calculating basic earnings per common share            2,365,955     2,211,479
Add:  Stock options                                      131,019        24,144
      Weighted average number of shares used in
      calculating diluted earnings per share           2,496,974     2,235,623

Diluted income per share                                   $0.01         $0.03


Recent Accounting Pronouncements

In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments With
Characteristics of Both Liabilities and Equity" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered into or modified
after May 31, 2003. The adoption of SFAS No. 150 did not have an effect on the
Company's financial position, results of operations, or cash flows.
                                     FS-13
3.  Inventories

The components of inventories at May 31, 2004 are as follows:

    Raw materials                                         $  314,303
    Work in progress                                          24,586
    Finished products                                      1,637,776
    Inventory reserves                                      (129,135)

    Total                                                 $1,847,530

Approximately $1,659,000 of gross inventory is located at the Company's
wholly-owned subsidiary manufacturing facility in Mexico (Note 7).


4.  Property and Equipment

The components of property and equipment at May 31, 2004 are as follows:

    Machinery and equipment                               $2,346,427
    Dies, tools, and patterns                                385,527
    Furniture and fixtures                                   173,680
    Leasehold improvements                                    77,040
    Construction in progress                                  23,117
                                                           3,005,791
    Less accumulated depreciation                         (2,439,424)

    Total                                                 $  566,367

Approximately $113,000 of property and equipment, net of accumulated
depreciation, is located at the Company's wholly-owned subsidiary
manufacturing facility in Mexico (Note 7).

Depreciation expense for the years ended May 31, 2004 and 2003, totaled
$51,552 and $25,037, respectively.

5.  Intangible Assets

The components of intangible assets at May 31, 2004 are as follows:

    Marketing and distribution rights                       $442,750
    Less accumulated amortization                           (432,375)
    Total                                                   $ 10,375

Amortization expense for the years ended May 31, 2004 and 2003 was $24,900
and $53,281, respectively.

6.  Line of Credit

Lancer has a $400,000 line of credit with Cuyamaca Bank, which expires
January 8, 2005.  Borrowings are made at prime plus 2.0%, (6% at May 31, 2004)
and are limited to 80% of accounts receivable less than 90 days old.  The
outstanding balance is $0 and the unused portion available is approximately
$340,000.  The Company requested that Cuyamaca Bank reserve $60,000 of
Lancer's available credit line as a guarantee of credit with a European
supplier.  Lancer is in compliance with its debt covenants at May 31, 2004.
                                     FS-14
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment.  The lending
agreement for the line of credit requires, among other things, that Lancer
maintain a balance sheet net worth of $2,700,000 and that a zero outstanding
balance be maintained for 30 consecutive days during the term.

Lancer also had a term loan for $100,000 with Cuyamaca Bank that was paid off
in May 2004.  This loan required monthly payments of approximately $2,300
(principal and interest) at an interest rate of prime plus 2% (6% in May 2004).

The following summarizes information on short-term borrowings for the year
ended May 31, 2004:

May 31,                                                            2004

Average month end balance                                       $32,348
Maximum balance outstanding at any month end                   $100,000
Weighted average interest rate (computed by
   dividing interest expense by average monthly balance)          5.89%

Interest rate at year end                                         6.00%

7.  Commitments and Contingencies

Leases

The Company leases its main facility under a non-cancelable operating lease
expiring April 30, 2009, which requires monthly rentals that increase
annually, from $6,688 per month in 2004 to $7,527 per month in 2009. The
lease expense is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash paid
aggregates $20,264 at May 31, 2004, and is included in other current
liabilities in the accompanying consolidated balance sheet. Total rental
expense for this facility for each of the years ended May 31, 2004 and 2003
was approximately $75,000 and $69,000, respectively.

Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a non-
cancelable operating lease for its Mexico facility through March 31, 2009.
The new lease encompasses the approximately 16,000 square feet of the previous
lease, plus additional square footage of approximately 10,000 feet, for a
total of approximately 26,000 square feet.  Lancer Orthodontics de Mexico will
provide sub-contracted manufacturing services to Biomerica, Inc., using a
portion of the additional square footage.  The new lease requires monthly
payments of approximately $9,600 through March 2009.  An agreement has been
negotiated between Lancer Orthodontics de Mexico and Biomerica for lease
reimbursement of approximately $2,000 per month.  The remainder of
approximately $7,600 monthly lease expense will be borne by Lancer.  Total
rental expense for this facility for the years ended May 31, 2004 and 2003 was
approximately $103,000 and $76,000, respectively.

The new Lancer Orthodontics de Mexico lease also requires an additional
refundable security deposit of $26,550.  Lancer Orthodontics, Inc. is paying
half and Biomerica, Inc. the other half.  This is in addition to the $31,146
refundable security deposit paid in fiscal year 2003.  At May 31, 2004 other
assets on the balance sheet includes approximately $44,000 of security
deposit paid by Lancer on the Mexico location.
                                     FS-15
The Company entered into a non-cancelable operating lease for a copier in
February 2003 that expires in February 2006, and requires monthly payments of
$214.  Total expense for the copier was approximately $3,000 and $2,600
during the years ended May 31, 2004 and May 31, 2003, respectively.

The Company entered into a non-cancelable operating lease for a postage
machine in July 2003 that expires in September 2008 and requires monthly
payments of $208.  Total expense for the postage machine was approximately
$2,500 in the year ended May 31, 2004.

The Company entered into a lease for a phone system in July 2003 that expires
in June 2008 and requires monthly payments of $887.  Total expense for the
phone system was approximately $9,000 in the year ended May 31, 2004.

Approximate future aggregate minimum annual cash lease payments are as
follows:

          Years ending
            May 31, 2005              $223,000
            May 31, 2006               225,000
            May 31, 2007               228,000
            May 31, 2008               228,000
            May 31, 2009               191,000
                                    $1,095,000

A sub-lease agreement for approximately 459 square feet of Lancer's main
facility was entered into in April 2003, effective through November 2003,
and extended in December 2003 through November 2004.  The leased space is to
be used for a machine shop and requires monthly payments of $344.  Rental
income for the years ended May 31, 2004 and 2003 was $4,128 and $344,
respectively.

Employment Agreement

Pursuant to the terms of the employment agreement between the Company and
Dan Castner, the Vice President of Sales and Marketing of the Company, dated
as of May 20, 2003, the Company agreed to pay Mr. Castner an annual base
salary of $135,000. After June 1, 2004, the contract is automatically
extended on a month-to-month basis requiring fourteen days notice of
intention to terminate by either party.

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

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
                                     FS-16
in Mexicali, B.C., Mexico. Effective April 1, 1996, the Company leased the
Mexicali facility under a separate arrangement, as discussed in above under
Leases. Since October 2000, the manufacturing agreement was operated on a
month-to-month basis. During fiscal 2003, the facility in Mexico was
incorporated as Lancer Orthodontics de Mexico, ("Lancer de Mexico"), a wholly-
owned subsidiary of the Company. This subsidiary now administers services
previously provided by an independent manufacturing contractor. A new lease
was negotiated in the name of Lancer de Mexico, effective April 1, 2001, for
the 16,000 square foot facility already in use for the Mexican operations.
Mexican utilities and vendor obligations were also converted to the Lancer de
Mexico name. This conversion eliminated the expense of an administrative fee
and is expected to provide better control in meeting future obligations.
Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At
May 31, 2004, this obligation was approximately $397,000. Such obligation is
contingent in nature and accordingly has not been accrued in Lancer's
consolidated financial statements.

Lancer has undergone no material change in the mode of conducting its business
other than as described above and it did not dispose of any material amount of
its assets during the fiscal years ended May 31, 2004 and May 31, 2003.

License and Royalty Agreements

The Company has entered into various license and/or royalty agreements
pursuant to which it has obtained rights to manufacture and market certain
products. The agreements expire in 2004, 2006, 2007, and 2010. Royalty expense
of approximately $72,000 and $116,000 is included in Cost of Sales for these
agreements for the years ended May 31, 2004 and 2003, respectively.  Sales of
products manufactured under these agreements comprise approximately 12% and
16% of total sales for the fiscal years ended May 31, 2004 and 2003,
respectively.

The Company has entered into license agreements expiring in 2006 whereby, for
cash consideration, the counter party has obtained the rights to manufacture
and market certain products patented by the Company. Royalty income of
approximately $71,300 and $54,700 is netted from Cost of Sales for these
agreements for the years ended May 31, 2004 and 2003, respectively.  Income
from these agreements is approximately 1% of the total sales recognized for
the fiscal years ended May 31, 2004 and 2003.

Litigation

The Company is, from time to time, involved in legal proceedings, claims and
litigation arising in the ordinary course of business.  While the amounts
claimed may be substantial, the ultimate liability cannot presently be
determined because of considerable uncertainties that exist.  Therefore, it
is possible the outcome of such legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or
cash flows when resolved in a future period.  However, based on facts
currently available, management believes such matters will not have a
material adverse affect on the Company's consolidated financial position,
results of operations or cash flows.



                                     FS-17
8.  Stockholders' Equity

Mandatorily Redeemable Convertible Preferred Stock - Series C

The Company has authorized 250,000 shares of Series C preferred stock. Each
share is entitled to a $0.06 non-cumulative dividend and is convertible at
the option of the holder into common stock at the rate of seven shares of
preferred stock for one and one-half shares of common stock. The Company, at
its option, or by request of a holder, can redeem outstanding shares of the
preferred stock for cash at $0.75 per share after December 31, 1994.
At May 31, 2004, there were no shares issued and outstanding.  There were no
dividends declared or paid in 2004 or 2003.

Redeemable Convertible Preferred Stock - Series D

The Company has authorized 500,000 shares of Series D preferred stock.  Each
share is entitled to a $0.04 non-cumulative dividend and is convertible at
the option of the holder into common stock at the rate of seven shares of
preferred stock for one share of common stock.  The Company, at its option,
can redeem outstanding shares of the preferred stock for cash at $0.50 per
share after December 31, 1994.  In May 2000, all 370,483 issued and
outstanding shares were converted into 52,926 shares of common stock.  At
May 31, 2004, there were no shares issued and outstanding.  There were no
dividends declared or paid in 2004 or 2003.

Common Stock

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

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

During fiscal 2003, the Company issued 35,000 shares of its common stock valued
at $12,250 to its Chief Executive Officer for services rendered in fiscal 2003.

During fiscal 2004, the Company issued 91,346 shares of its common stock
valued at $29,000 to its Chief Executive Officer for services rendered. At
May 31, 2003, 69,471 of these shares were reported as subscribed stock.

During fiscal 2004, the Company agreed to issue 13,541 shares of its common
stock to the Chairman of the Board for services rendered from January 2004
to May 2004 and 31,250 shares of common stock to the Chief Executive Officer
for services rendered per agreement.  At May 31, 2004, these shares are
reported as subscribed stock.

The Lancer Board of Directors approved a private offering of common stock,
effective March 23, 2004, and ending April 12, 2004.  The offering, to
officers, board members, and key employees resulted in the sale of 450,000
new shares at $.60 per share with total proceeds received of $270,000.  In
addition, one warrant exercisable for each share purchased (450,000 warrants)
was issued at $.85 per share.  These warrants shall be exercisable until
April 12 2009.
                                     FS-18
Stock Option Agreements and Warrants

The Company has incentive stock option and non-qualified stock option plans for
directors, officers, and key employees.  The 1993 Stock Option Plan authorized
357,143 shares to be issued. Options granted under the 1993 plan were required
to be granted at an option price not less than 85% of the fair market value for
options granted to employees, or less than 100% of the fair market value for
options granted to non-employees. The fair market value of the stock was the
share price of the Company's common stock at the date the options were granted.
Most options granted under this Plan had an expiration period of five years
from the date of their respective grant and all were granted at fair market
value at the date of grant.  At May 31, 2004 there were 347,000 options
outstanding under this plan.  The 1993 Stock Option Plan expired in March 2004
and no new options could be granted under this Plan, but the outstanding
options remain effective until exercised or forfeited.

The 2000 Stock Incentive Plan authorized 450,000 initial shares to be issued,
increasing by the lower of 1.5% of the total number of common shares
outstanding or 225,000 shares, each year on January 1, beginning in 2001. The
total shares authorized at May 31, 2004 were 581,023.  Incentive stock
options granted under the 2000 Plan are required to be granted at an option
price not less than 100% of the fair market value of the Company's common
stock on the date of grant, with an exercise period not exceeding ten years
from grant date. The option price of non-statutory stock options granted under
the 2000 Plan are required to be granted at an option price not less than 85%
of the fair market value of the Company's common stock on the date of grant.
Options granted to non-executive directors under the 2000 Plan are required to
be granted at an option price not less than 100% of the fair market value
determined by the Board of Directors, with an exercise period not exceeding
ten years from grant date.  The majority of options granted under this plan
vest pro rata over a period of three years.  At May 31, 2004 there were
300,500 options outstanding under this plan.

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

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

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

On June 2, 2003, the Company granted 120,000 stock options to purchase shares
of the Company's common stock at an exercise price of $0.43 per share as
pursuant to terms of the employment agreement between the Company and Dan
Castner, the Vice President of Sales and Marketing.  The options vest over
four years and have a term of five years. Management assigned a value of $0
                                     FS-19
to the options.

On June 2, 2003, the Company granted its Chief Executive Officer 75,000 stock
options to purchase shares of the Company's common stock at an exercise price
of $.43. The options vest over 3 years and have a term of five years.
Management assigned a value of $0 to the options.

On June 2, 2003, the Company granted directors 52,500 stock options to
purchase shares of the Company's common stock at an exercise price of $.43.
The options vest over 2 years and have a term of five years. Management
assigned a value of $0 to the options.

On June 30, 2003, the Company granted 8,000 stock options to purchase shares
of the Company's common stock at an exercise price of $.50 to an employee of
the Company for services rendered.  The options vest over 3 years beginning
June 30, 2004 and have a term of five years. Management assigned a value of
$0 to the options.

On March 30, 2004, the Company granted 40,000 stock options to purchase
shares of the Company's common stock at an exercise price of $.57 to an
employee of the Company for services rendered.  The options vest over four
years and have a term of five years. Management assigned a value of $0 to
the options.

On April 12, 2004, the Company granted 17,500 stock options to purchase shares
of the Company's common stock at an exercise price of $.60 to a new member of
its Board of Directors for services to be rendered. The options vest over 2
years and have a term of five years. Management assigned a value of $0 to the
options.

On April 12, 2004, the Company issued 450,000 warrants to officers, directors,
and key employees who purchased 450,000 shares of the Company's common stock
in a private placement. The warrants have an exercise price of $.85 and have
a term of five years.

The following summary presents the options and warrants granted, exercised,
expired, and outstanding as of May 31,
2004:
                                                                  Weighted
                               Number of Shares                    Average
                              Employee      Non-                  Exercise
                            & Directors   employee       Total       Price

Outstanding, May 31, 2002      330,000     22,000       352,000      $0.66
Granted                        140,000         -        140,000       0.27
Exercised                           -          -             -           -
Expired                        (41,500)   (20,000)      (61,500)       .71
Outstanding, May 31, 2003      428,500      2,000       430,500      $0.53
Granted                        763,000         -        763,000       0.69
Exercised                           -          -             -           -
Expired                        (94,000)    (2,000)      (96,000)      0.95
Outstanding, May 31, 2004    1,097,500          0     1,097,500      $0.60




                                     FS-20
The following table sets forth the exercise prices, the number of options and
warrants outstanding and exercisable, and the remaining contractual lives of
the Company's stock options and warrants at May 31, 2004:

                                                            Contractual
                                                                Life
  Exercise               Number of Options and Warrants      Remaining
   Price                  Outstanding      Exercisable         Years
   $0.60                    17,500              8,750           4.87
   $0.85                   450,000            450,000           4.87
   $0.57                    40,000                 0            4.83
   $0.50                     8,000                 0            4.08
   $0.43                   247,500             51,250           4.01
   $0.28                    40,000             26,667           3.84
   $0.26                    63,000             31,500           3.51
   $0.28                    30,000             15,000           3.26
   $0.30                   113,000            113,000           2.50
   $0.25                    20,000             20,000           1.92
   $0.875                   53,500             53,500           1.21
   $0.85                    15,000             15,000            .21

   Total                 1,097,500            784,667

9.  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.

10.  Income Taxes

The provision for income taxes for the years ended May 31, 2004 and 2003 were
$1,023 and $1,419, respectively, consisting primarily of minimum state taxes.



















                                     FS-21
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 2004 are
presented below:

    May 31,                                                              2004
    Deferred tax assets:
    Accounts receivable, principally due to allowance for
      doubtful accounts and sales returns                             $41,000
    Inventories, principally due to additional costs
      inventoried for tax purposes pursuant to the Tax Reform
      Act of 1986 and allowance for inventory obsolescence             84,000
    Compensated absences and bonuses principally due to
      accrual for financial reporting                                  27,000
    Net operating loss carryforwards                                  701,000
    Business tax credit carryforwards                                  75,000
    Less valuation allowance                                         (924,000)

Net deferred tax assets                                                 4,000
Deferred tax liabilities:  Unamortized marketing rights                (4,000)

Net deferred tax liabilities                                           $   --

Lancer has provided a valuation allowance with respect to substantially all
of its deferred tax assets as of May 31, 2004.  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.  The valuation allowance increased
by $22,000 from May 31, 2003.

Income tax expense for the years ended May 31, 2004 and 2003 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,                                                 2004            2003
Computed "expected" tax expense                       $10,133         $24,911
Increase (decrease) in income taxes resulting from:
    Meals and expenses                                  3,966           3,958
Change in beginning of the year balance of the
  valuation allowance for deferred tax assets
  allocated to income tax expense                     (14,099)        (28,869)
State and local income taxes, net of tax benefit        1,023           1,419

                                                       $1,023          $1,419

As of May 31, 2004, the Company has net tax operating loss carryforwards of
approximately $1,997,000 and business tax credits of approximately $63,000
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, 2004, the Company has net tax operating loss
carryforwards of approximately $70,000 and business tax credits of
approximately $10,000 available to offset future state income tax liabilities.

On September 11, 2002, California passed one of the budget trailer bills that
implemented the state's 2002-2003 Budget Bill (A425). The law suspended the
net operating loss ("NOL") carryover deduction for tax years 2002 and 2003.
To compensate for the deduction suspension, the period of availability for
                                     FS-22
these NOL deductions has been extended for two years.

11.  Export Sales

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

                                                2004                 2003
Sales to unaffiliated customers:
  United States                            $3,119,000           $3,144,000
  Europe                                    1,768,000            1,732,000
  Central & South America                     317,000              262,000
  Middle East                                 286,000              270,000
  Other Foreign                               534,000              480,000
     Total                                 $6,024,000           $5,888,000

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

                                                2004                 2003
Long-lived assets:
  United States                              $453,000             $164,000
  Mexico                                      113,000               59,000
     Total                                   $566,000             $223,000

12.  Insurance Claim Receivable

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

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

13.  Related Party Receivables

In fiscal 2003, the Company's parent Biomerica entered into an agreement with
the Company whereby Biomerica agreed to pay an initial shelter fee of $5,000
with additional monthly payments of $2,875 for use of its Lancer de Mexico
facilities to produce and manufacture Biomerica products. The monthly payments
are due as long as Biomerica produces its products at the Lancer de Mexico
facility. At May 31, 2004, Biomerica has paid all applicable shelter fees and
$34,500 is included in other income from this agreement.

Miscellaneous expenses, primarily shipping costs, receivable from Biomerica
were $7,280 at May 31, 2004.  Biomerica cash balances held by Lancer de Mexico
at May 31, 2004 are included in the accompanying consolidated balance sheet as
a payable of $3,026.



                                      FS-23
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