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

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

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

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

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

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

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

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

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

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

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

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

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


PART I

Item 1.  DESCRIPTION OF BUSINESS

General Development of Business

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

In May 1990, Lancer entered into a manufacturing subcontractor
agreement whereby the subcontractor agreed to provide
manufacturing services to Lancer through its affiliated
entities located in Mexicali, B.C., Mexico.  During fiscal 1992
and 1991, Lancer moved the majority of its manufacturing
operations to Mexico.  Under the terms of the original
agreement, the subcontractor manufactured Lancer's products
charging Lancer an hourly rate per employee based on the number
of employees in the subcontractor's workforce.  As the number
of employees increased, the hourly rate decreased.  In
December 1992, Lancer renegotiated the agreement changing from
an hourly rate per employee cost to a pass through of actual
costs plus a weekly administrative fee.  The new agreement
gives Lancer greater control over all costs associated with the
manufacturing operation.  In July 1994, Lancer again
renegotiated the agreement reducing the administrative fee and
extending the agreement through June 1998.  In March 1996,
Lancer agreed to extend the agreement through October 1998.
Effective April 1, 1996, Lancer leased the Mexicali facility
under a separate agreement.  Effective November 1, 1998, the
subcontractor agreement and lease were extended to October 31,
2000.  Currently the manufacturing agreement is operated month
to month.  Should Lancer discontinue operations in Mexico, it
is responsible for accumulated employee seniority obligations
as prescribed by Mexican law.  At May 31, 2001, this obligation
was approximately $361,000.  Such obligation is contingent in
nature and accordingly has not been accrued in Lancer's
financial statements.

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

Lancer has undergone no material change in the mode of
conducting its business other than as described above and it did
not dispose of any material amount of its assets during the
fiscal year ended May 31, 2001.

Narrative Description of the Business

Principal Products and Industry Segments.  Lancer's manufactured
product line includes preformed bands, direct bonding brackets,
buccal tubes, arch wires, lingual attachments, related
accessories, and dental amalgams.  The foregoing are assembled
to the orthodontists' prescriptions or the specifications of
private label customers.  Lancer's manufactured products are
also sold to distributors and private label customers.  Lancer
also markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics,
headgear cases, retainer cases, orthodontic wire, and preformed
arches.

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

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

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

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

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

Financial Information About Foreign and Domestic Operations and
Export Sales.  For the fiscal years ended May 31, 2001 and 2000:
                                       2001           2000
     Sales to unaffiliated customers:
     United States                 $3,018,000     $3,133,000
     Europe                         1,852,000      1,379,000
     South America                    415,000        489,000
     Other Foreign                    643,000        650,000
                                   $5,928,000     $5,651,000

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

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


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

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

With ISO 9002, EN 46002, and the Product Technical Files, Lancer
applied for and was granted certification under ISO 9002,
EN 46002, and CE.  With the CE certification, Lancer is now
permitted to sell its products within the European Community.

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

Sources and Availability of Raw Materials.  The principal raw
materials used by Lancer in the manufacture of its products
include:  stainless steel, which is available from several
commercial sources; nickel titanium, which is available from
three sources; and lucolux translucent ceramic, which is
currently only available from one source, General Electric, and
is purchased on open account.  Ceramic material similar to
General Electric's lucolux translucent ceramic is available
from other sources.  Lancer had no difficulty in obtaining an
adequate supply of raw materials during its 2001 fiscal year,
and does not anticipate that there will be any interruption
or cessation of supply in the future.

Customers, Backlog, and Seasonality of Business.  Lancer sells
its products directly or indirectly through its sales
representatives, to a relatively large number of customers.  No
customer of Lancer's accounted for 10% or more of Lancer's
sales in the fiscal years ended May 31, 2001 and 2000.  Lancer's
backlog at May 31, 2001 and 2000, was $167,000 and $146,000,
respectively.  Lancer's business has not been subject to
significant seasonal fluctuations.

Patents and Trademarks, Licenses, Franchises, and Concessions
Held.
On April 4, 1989, Lancer was granted a patent on its Counter
Force design of a nickel titanium orthodontic archwire.  On
August 1, 1989, Lancer was granted a patent on its bracket
design used in the manufacturing of Sinterline and Intrigue
orthodontic brackets.  On September 17, 1996, Lancer was
granted a patent on its method of laser annealing marking of
orthodontic appliances.  On March 4, 1997, Lancer was granted
a patent on an orthodontic bracket and method of mounting.  All
of the patents are for a duration of seventeen years.  Lancer
has entered into license agreements expiring in 2006 whereby,
for cash consideration, the counter party has obtained the
rights to manufacture and market certain products patented by
Lancer.  Lancer has also entered into a number of license
and/or royalty agreements pursuant to which it has obtained
rights to certain of the products which it manufactures and/or
markets.  The patents and agreements have had a favorable effect
on Lancer's image in the orthodontic marketplace and Lancer's
sales.

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

Product Development and Improvement.  Lancer is engaged in, and
intends to continue development programs directed toward improving
its orthodontic products and production techniques.  The total
costs incurred by Lancer on product development activities were
approximately $72,000 and $184,000 for the fiscal years ended
May 31, 2001 and 2000, respectively.

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

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

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

Item 2.  PROPERTIES

The Company leases its main facility under a non-cancelable
operating lease expiring December 31, 2003, as extended, which
requires monthly rentals that increase annually, from $2,900
per month in 1994 to $6,317 per month in 2004. The lease
expense is being recognized on a straight-line basis over
the term of the lease. The excess of the expense recognized
over the cash paid aggregates $11,032 at May 31, 2001, and is
included in accrued liabilities in the accompanying balance
sheet. Total rental expense for this facility for each of the
years ended May 31, 2001 and 2000 was approximately $69,000.

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

Future aggregate minimum annual cash lease payments are as
follows:

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

Item 3.  LEGAL PROCEEDINGS - Not applicable.

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

No matters were submitted to a vote of Lancer's security
holders during the quarter ended May 31, 2001.


PART II

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

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

                  Quarter Ended           High         Low
                  August 31, 1999        $1.22       $ .69
                  November 30, 1999      $1.06       $ .75
                  February 28, 2000      $2.25       $ .72
                  May 31, 2000           $1.88       $ .94
                  August 31, 2000        $1.43       $ .75
                  November 30, 2000      $1.39       $ .39
                  February 28, 2001      $1.50       $ .14
                  May 31, 2001           $ .54       $ .21

In a letter dated November 10, 2000, NASDAQ had advised the
Company that it was not in compliance with the minimum bid price
required for listing on the Nasdaq National Market.  The
Company was being afforded a ninety-day grace period, until
February 8, 2001, to remedy this deficiency.

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

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

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

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

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

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

Except for historical information contained herein, the
statements in this Form 10-KSB are forward-looking statements
that are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.  Forward-
looking statements involve known and unknown risks and
uncertainties which may cause Lancer's actual results in future
periods to differ from forecasted results.  These risks and
uncertainties include, among other things, the continued demand
for the Company's products, availability of raw materials and the
state of the economy.  These and other risks are described in the
Company's Annual Report on Form 10-KSB and in the Company's
other filings with the Securities and Exchange Commission.

Result of Operations

For the fiscal year ended May 31, 2001, net sales increased
$277,091 (4.9%) from $5,650,512 in 2000 to $5,927,603 in 2001.
International net sales increased $391,485 (15.6%) from
$2,517,780 in 2000 to $2,909,265 in 2001.  This increase is
primarily in European sales.  Domestic net sales decreased
$114,394 (3.7%) from $3,132,732 in 2000 to $3,018,338 in 2001.
This decrease is primarily attributable to continuing increased
discounting due to competition pressures.  Management believes
that if the trend in increased discounting continues, it could
be significant to ongoing operations.  Lancer continues to
search for new sales representatives, distributors, private
label customers, products, and product ideas, any of which, if
successful, should result in increased sales.

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

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

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

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

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

Financial Condition, Liquidity, and Capital Resources

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

The line of credit is collateralized by substantially all the
assets of the Company, including inventories, receivables, and
equipment.  The lending agreement for the line of credit
requires, among other things, that the Company maintain a
tangible net worth of $2,800,000 and a debt to tangible net
worth ratio of no more than 1 to 1.  The Company is not required
to maintain compensating balances in connection with this
lending agreement.  The Company was in violation of certain of
its debt covenants at May 31, 2001.  A waiver has been requested
but not yet received as of the date of filing.

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

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

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

Recent Accounting Pronouncements

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

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

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

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

Item 7.  FINANCIAL STATEMENTS

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

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

PART III

Item 9.  DIRECTORS AND EXECUTIVE OFFICERS OF LANCER

Information regarding directors, set forth under the caption
"Election of Directors" in Lancer's annual proxy statement for
the annual meeting of shareholders to be held November 12, 2001,
which will be filed with the Commission not later than 120 days
after the end of Lancer's fiscal year period ended May 31, 2001,
is incorporated herein by reference.  Information regarding
executive officers, set forth under caption "Executive
Compensation and Other Information" in the annual proxy
statement for the annual meeting of shareholders to be held
November 12, 2001, which will be filed with the Commission not
later

than 120 days after the end of Lancer's fiscal year ended
May 31, 2001, is also incorporated herein by reference.
Information regarding Section 16 compliance, set forth under
caption "Section 16 Compliance" in the annual proxy statement
for the annual meeting of shareholders to be held November
12, 2001, which will be filed with the Commission not later
than 120 days after the end of Lancer's fiscal year ended
May 31, 2001, is incorporated herein by reference.

Item 10.   EXECUTIVE COMPENSATION

Information regarding executive compensation, set forth under the
caption "Compensation Committee Report on Executive Compensation"
in Lancer's annual proxy statement for the annual meeting of
shareholders to be held November 12, 2001, which will be filed
with the Commission not later than 120 days after the end of
Lancer's fiscal year ended May 31, 2001, is incorporated herein
by reference.

Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

Information regarding security ownership, set forth under the
caption "Beneficial Ownership of the Company's Securities" in
Lancer's annual proxy statement for the annual meeting of
shareholders to be held November 12, 2001, which will be filed
with the Commission not later than 120 days after the end of
Lancer's fiscal year ended May 31, 2001, is incorporated herein
by reference.

Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          Not applicable.

Item 13.  EXHIBITS AND REPORTS ON FORM 8-K


(a)  Documents filed as a part of the report
     1.  Financial Statements
         See Index to Financial Statements Exhibit A, attached
         hereto, wherein Lancer's financial statements are
         contained.
     2.  Exhibits Required to be Filed by Item 601 of
         Regulation S-B


     3(i)  Articles of Incorporation as amended
           Incorporated herein by reference to Exhibit 4.5
           of Lancer's S-8 filed March 8, 1994.
     3(ii) By-laws as amended - Incorporated herein by
           reference to Exhibit 4.6 of Lancer's S-8
           filed March 8, 1994.
     10    1993 Stock Option Plan as amended - Incorporated
           herein by reference to Exhibit 4.1 of Lancer's
           S-8 filed March 8, 1994.

(b)  Reports on Form 8-K

No reports on Form 8-K were filed in the quarter ended
May 31, 2001.






SIGNATURES

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

Dated:  May 13, 2002

LANCER ORTHODONTICS, INC.


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

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


Signature                          Title                 Date

/s/ Zackary Irani                                    May 13, 2002
    Zackary Irani           CEO,
                            Chairman of the Board
                            & Director

/s/ Janet Moore                                      May 13, 2002
    Janet Moore             Secretary & Director

/s/ Dr. Robert Orlando                               May 13, 2002
    Dr. Robert Orlando      Director

/s/ Dr. Francis Cano                                 May 13, 2002
    Dr. Francis Cano        Director



















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



Report of Independent Certified Public Accountants          FS-2


Financial Statements

Balance Sheet                                               FS-3

Statements of Operations                                    FS-4

Statements of Stockholders' Equity                          FS-5

Statements of Cash Flows                                    FS-6

Notes to Financial Statements                            FS 7-18









































Report of Independent Certified Public Accountants


The Board of Directors
Lancer Orthodontics, Inc.


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

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

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

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



                                                 BDO SEIDMAN, LLP




Orange County, California
July 26, 2001












May 31,                                                     2001

Assets

Current assets

  Cash                                                $  131,550

  Accounts receivable, net of allowance
   for doubtful accounts of $175,000                   1,160,951
  Inventories, net of reserve of $239,201              2,139,843
  Prepaid expenses                                        44,618

Total current assets                                   3,476,962

Property and equipment, net                               78,373

Intangible assets, net                                   162,152

Other assets                                              19,149

                                                      $3,736,636

Liabilities and Stockholders' Equity

Current liabilities
  Accounts payable                                    $  461,352
  Accrued payroll and related benefits                   117,725
  Other current liabilities                               60,385
  Line of credit                                         140,000

Total current liabilities                                779,462

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

Commitments and contingencies

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

Common stock, no par value; 50,000,000 shares authorized;
  2,098,620 shares issued and outstanding              4,815,074

  Accumulated deficit                                 (1,857,900)

Total stockholders' equity                             2,957,174

                                                      $3,736,636




Years ended May 31,                         2001          2000

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

Cost of sales                            3,994,161     3,866,001

Gross profit                             1,933,442     1,784,511

Operating expenses:
  Selling                                1,552,061     1,638,804
  General and administrative               407,478       465,387
  Product development                       71,505       184,249

Total operating expenses                 2,031,044     2,288,440

Operating loss                             (97,602)     (503,929)

Other income (expense):
  Interest expense                         (19,931)      (19,562)
  Interest income                              104            36
  Other income, net                          1,370       227,270

Total other (expense) income               (18,457)      207,744

Loss before income taxes                  (116,059)     (296,185)

Income taxes                                   800           800

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

Per share data:

Basic                                    $   (.06)     $    (.15)

Diluted                                  $   (.06)     $    (.15)

























<TABLE>
<CAPTION>
       Series D Preferred Stock     Common Stock      Accumulated
              Shares   Amount    Shares     Amount      Deficit       Total


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

Common stock
issued for
services           -         -      54,725      50,631           -       50,631

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

Repurchase
of common
stock              -         -    (114,998)   (117,914)          -     (117,914)

Net loss           -         -          -           -      (296,985)   (296,985)

Balances,
May 31, 2000       -         -   2,098,618   4,815,074   (1,741,041)  3,074,033


Share adjustment   -         -           2          -            -            -


Net loss           -         -          -           -      (116,859)   (116,859)

Balances,
May 31, 2001       -   $     -   2,098,620  $4,815,074  $(1,857,900) $2,957,174
</TABLE>

















Years Ended May 31,                            2001        2000

Cash flows from operating activities:

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


  Adjustment to reconcile net loss to net
cash provided by operating activities:
   Depreciation and amortization             121,699      151,117
   Provision for losses on accounts
    receivable                                     -         (986)
   Provision for inventory                   129,034            -
   Common stock issued for services                -       50,631
   Net change in operating assets and
    liabilities:
     Accounts receivable                      71,819      119,936
     Inventories                            (255,632)     193,909
     Prepaid expenses                          2,082        5,145
     Insurance claim receivable                    -      110,000
     Accounts payable                        111,228      (92,219)
     Accrued payroll                          16,162        8,912
     Other current liabilities                (9,295)    (104,146)

Net cash provided by operating activities     70,238      145,314

Cash flows from investing activities:
  Purchases of property and equipment         (9,306)     (10,485)
  Other assets                               (12,589)           -

Net cash used in investing activities        (21,895)     (10,485)

Cash flows from financing activities:
  Net decrease in line of credit agreement   (20,000)     (20,000)
  Repurchase of common stock                       -     (117,914)

Net cash used in financing activities        (20,000)    (137,914)

Net change in cash                            28,343       (3,085)

Cash, beginning of period                    103,207      106,292

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

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

Interest                                    $ 19,931     $ 19,562

Income taxes                                $    800     $    800

Supplemental disclosures of non-cash investing and
financing activities:

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

1.  Organization

Lancer Orthodontics, Inc. (the "Company") was incorporated on
August 25, 1967, in the state of California, for the purpose of
engaging in the design, manufacture, and distribution of
orthodontic products. The Company has a manufacturing facility
in Mexico where a majority of its inventory is manufactured
(Note 8). The Company also purchases certain orthodontic and
dental products for purposes of resale. Sales of manufactured
and resale products comprise approximately 78% and 22% of total
sales, respectively, for fiscal 2001 and 82% and 18% of total
sales, respectively, for fiscal 2000.

Sales are made directly to orthodontists worldwide through
Company representatives and independent distributors, with
approximately 51% and 55% during fiscal 2001 and 2000,
respectively, being domestic in nature. The Company also sells
certain of its products on a private label basis.

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

2.  Summary of Significant Accounting Policies

Liquidity

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

Accounting Methods

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

Fair Value of Financial Instruments

The Company has financial instruments whereby the fair value of
the financial instruments could be different than that recorded
on a historical basis on the accompanying balance sheet. The
Company's financial instruments consist of cash, accounts
receivable, accounts payable, and a line of credit. The
carrying amounts of the Company's financial instruments
generally approximate their fair values at May 31, 2001.

Use of Estimates in the Preparation of Financial Statements

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

Concentrations of Credit Risk

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

Customers - The Company performs periodic credit evaluations of
its customers and maintains allowances for potential credit
losses and returns. The Company estimates credit losses and
returns based on management's evaluation of historical
experience and current industry trends. Although the Company
expects to collect amounts due, actual collections may
materially differ from the estimated amounts. As of May 31,
2001, reserves for credit losses totaled $125,000.  Reserves
for sales returns totaled $50,000.  At May 31, 2001, three
customers accounted for approximately 13.8%, 13.6% and 10.2% of
gross accounts receivable.  No one customer accounted for 10%
or more of revenues for the years ended May 31, 2001 and 2000.

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

Risks and Uncertainties

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

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

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

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

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

Inventories

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

Property and Equipment

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

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

Intangible Assets

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



Impairment of Long-lived Assets

The Company assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of the
asset's balance over its remaining life can be recovered
through projected undiscounted future cash flows. The amount of
impairment, if any, is measured based on fair value and charged
to operations in the period in which the impairment is
determined by management.  Management has determined that there
is no impairment of long-lived assets as of May 31, 2001.

Stock Based Compensation

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

Revenue Recognition

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

Research and Development

Research and development expenses are expensed as incurred.
The Company expensed approximately $72,000 and $184,000 of
research and development expenses during the years ended
May 31, 2001 and 2000, respectively.

Income Taxes

The Company accounts for income taxes using the asset and
liability approach under Statement of Financial Accounting
Standards No. 109, ("SFAS 109").  Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases.  Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is provided
for certain deferred tax assets if it is more likely than not
that the Company will not realize tax assets through future
operations.



Net Income per Common Share and Dividends

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

Net income per common share is computed based on the weighted
average number of shares of common stock and, if applicable,
common stock equivalents outstanding during the year.  Potential
common shares, which relate to shares issuable upon the exercise
of common stock purchase options, were not included in the per
share calculations for fiscal 2001 and 2000 as their effect was
anti-dilutive.

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

May 31,                                   2001            2000

Basic loss per share:
Net loss                               $(116,859)     $(296,985)

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

Weighted average number of common
 Shares                                2,098,620      2,047,687

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

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

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

Weighted average number of shares
 used in calculating basic
 earnings per common share             2,098,620      2,047,687

Add:
 Stock options                                 -              -
 Convertible preferred stock                   -              -

Weighted average number of shares
used in calculating diluted
earnings per share                     2,098,620      2,047,687

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

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

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

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

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

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

3.  Other Income

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

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

4.  Inventories

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

Raw materials                                       $515,818
Work in progress                                     161,809
Finished products                                  1,701,417
Inventory reserves                                  (239,201)

Total                                             $2,139,843

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

5.  Property and Equipment

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

Machinery and equipment                           $1,888,562
Dies, tools, and patterns                            375,518
Furniture and fixtures                               126,063
Leasehold improvements                                15,492
Construction in progress                               7,400

                                                   2,413,035

Less accumulated depreciation and amortization    (2,334,662)

Total                                             $   78,373

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

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

6.  Intangible Assets

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


Marketing and distribution rights                   $442,750
Technology use rights                                858,328
Subtotal                                           1,301,078
Less accumulated amortization                     (1,138,926)

Total                                               $162,152

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

7.  Line of Credit

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

The line of credit is collateralized by substantially all the
assets of the Company, including inventories, receivables, and
equipment.  The lending agreement for the line of credit
requires, among other things, that the Company maintain a
tangible net worth of $2,800,000 and a debt to tangible net
worth ratio of no more than 1 to 1. The Company is not required
to maintain compensating balances in connection with this
lending agreement.  The Company was in violation of certain of
its debt covenants at May 31, 2001.  A waiver has been
requested but not yet received as of the date of filing.

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

May 31,                                                    2001

Average month end balance                               $193,333

Maximum balance outstanding at any month end            $220,000

Weighted average interest rate (computed by dividing
 interest expense by average monthly balance)             10.31%

Interest rate at year end                                  8.25%

8.  Commitments and Contingencies

Leases

The Company leases its main facility under a non-cancelable
operating lease expiring December 31, 2003, as extended, which
requires monthly rentals that increase annually, from $2,900
per month in 1994 to $6,317 per month in 2004. The lease expense
is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash
paid aggregates $11,032 at May 31, 2001, and is included in
accrued liabilities in the accompanying balance sheet. Total
rental expense for this facility for each of the years ended
May 31, 2001 and 2000 was approximately $69,000.

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




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

Years Ending May 31,                                   Amount

2002                                                 $133,543
2003                                                  136,397
2004                                                  106,511
2005                                                   62,292
2006                                                   51,910

Total                                                $490,653

Manufacturing Agreement

In May 1990, the Company entered into a manufacturing
subcontractor agreement (the "Manufacturing Agreement"), whereby
the subcontractor agreed to provide manufacturing services to
the Company through its affiliated entities located in Mexicali,
B.C., Mexico. The Company moved the majority of its manufacturing
operations to Mexico during fiscal 1992 and 1991. Under the terms
of the original agreement, the subcontractor manufactured the
Company's products based on an hourly rate per employee based on
the number of employees in the subcontractor's workforce. As the
number of employees increase, the hourly rate decreases. In
December 1992, the Company renegotiated the Manufacturing
Agreement changing from an hourly rate per employee cost to a
pass through of actual costs, plus a weekly administrative fee.
The amended Manufacturing Agreement gave the Company greater
control over all costs associated with the manufacturing
operation. In July 1994, the Company again renegotiated the
Manufacturing Agreement reducing the administrative fee and
extending the Manufacturing Agreement through June 1998.  In
March 1996, the Company agreed to extend the Manufacturing
Agreement through October 1998, to coincide with the building
lease.  Effective April 1, 1996, the Company leased the Mexicali
facility under a separate arrangement, as discussed in the
preceding paragraph. During 1999, the Company extended the
Manufacturing Agreement through October 2000.  Currently the
manufacturing agreement is operated month to month.  Should the
company discontinue operations in Mexico, it is responsible
for the accumulated employee seniority obligation as
prescribed by Mexican law.  At May 31, 2001, this obligation
was approximately $361,000.  Such obligation is contingent in
nature and accordingly has not been accrued in the accompanying
balance sheet.

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



License and Royalty Agreements

The Company has entered into various license and/or royalty
agreements pursuant to which it has obtained rights to
manufacture and market certain products. The agreements are
for various durations expiring through 2007 and
they require the Company to make payments based on the sales of
the individual licensed products.

The Company has entered into license agreements expiring in 2006
whereby, for cash consideration, the counter party has obtained
the rights to manufacture and market certain products patented
by the Company.

Litigation

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

9.  Stockholders' Equity

Manditorily Redeemable Convertible Preferred Stock - Series C

The Company has authorized 250,000 shares of Series C preferred
stock. Each share is entitled to a $.06 non-cumulative dividend
and is convertible at the option of the holder into common stock
at the rate of seven shares of preferred stock for one and
one-half shares of common stock. The Company, at its option,
can redeem outstanding shares of the preferred stock for cash at
$.75 per share after December 31, 1994.  At May 31, 2001, there
were no shares issued and outstanding.

Redeemable Convertible Preferred Stock - Series D

The Company has authorized 500,000 shares of Series D preferred
stock.  Each share is entitled to a $.04 non-cumulative dividend
and is convertible at the option of the holder into common stock
at the rate of seven shares of preferred stock for one share of
common stock.  The Company, at its option, can redeem
outstanding shares of the preferred stock for cash at $.50 per
share after December 31, 1994.  In May 2000, all 370,483 issued
and outstanding shares were converted into 52,926 shares of
common stock.  At May 31, 2001, there were no shares issued and
outstanding.

Common Stock

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

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

Stock Option Agreements

The Company has incentive stock option and non-qualified stock
option plans for directors, officers, and key employees.  The
plans provide for the granting of options for common shares
at exercise prices equal to or exceeding the fair market value
at the date of grant, as determined by the Board of Directors.
Options may become exercisable over a period of up to four
years from the date of grant and may be exercised over a period
of three to seven years from the date of the grant, as
determined by the Board of Directors.  The Company's
shareholders have authorized a total of 357,143 shares to be
available for grant under the Company's stock option plan.
Options granted prior to May 31, 1995, generally vested on the
date of grant and expired through August 1999.

During the year ended May 31, 2000, the Company granted 15,000
options to purchase shares of the Company's common stock at an
exercise price of $0.85 to certain employees of the Company,

which vest ratably over a term of one year and have a term of
five years.

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

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

SFAS 123 Pro Forma Information

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

The Black Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable.  In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee
stock options.  For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense
over the options vesting period. Adjustments are made for
options forfeited prior to vesting.  The effect on
compensation expense, net loss, and net loss per common share
had compensation costs for the Company's stock option plans
been determined based on a fair value at the date of grant
consistent with the provisions of SFAS 123, for the years
ended May 31, 2001 and 2000, are as follows:

May 31,                                   2001            2000

Net loss, as reported                 $(116,059)      $(296,985)
Adjustment to compensation expense
 under SFAS 123                        ( 57,126)       (  6,505)

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

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


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



The following summary presents the options granted, exercised,
expired, and outstanding as of May 31, 2001:
                                                       Weighted
                                                        Average
                     Number of Shares                  Exercise
                    Employee  Non-employee    Total       Price
Outstanding,
 May 31, 1999        149,786      29,000    178,786       $1.06
  Granted             15,000           -     15,000        0.85
  Exercised                -           -          -           -
  Expired                  -           -          -           -

Outstanding,

 May 31, 2000        164,786      29,000    193,786        1.04
  Granted            177,000           -    177,000         .80
  Exercised                -           -          -           -
  Expired            (19,000)          -    (19,000)        .93

Outstanding,
 May 31, 2001       322,786       29,000    351,786       $ .93







The following table sets forth the exercise prices, the number
of options outstanding and exercisable, and the remaining
contractual lives of the Company's stock options at May 31, 2001:

                 Number of Options       Weighted    Contractual
                                         Average     Life
                                         Exercise    Remaining
            Outstanding    Exercisable   Price       Years

$  0.25         20,000        10,000     $0.25       5.00
$  0.85-0.875  161,000        80,500     $0.87       4.20
$1.00          156,500       156,500     $1.00       2.25
$1.75           14,286        14,286     $1.75        .42

Total          351,786       261,286     $0.93

10.  Retirement Savings Plan

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

11.  Income Taxes

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

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

                                                           2001
Deferred tax assets:
  Accounts receivable, principally due to allowance
   for doubtful accounts and sales returns              $79,000
  Inventories, principally due to additional costs
   inventoried for tax purposes pursuant to the Tax
   Reform Act of 1986 and allowance for inventory
   Obsolescence                                         129,000
  Compensated absences principally due to accrual
   for financial reporting                               21,000
  Net operating loss carryforwards                      736,000
  Business tax credit carryforwards                     121,000
  Less valuation allowance                           (1,052,000)

Net deferred tax assets                                  34,000

Deferred tax liabilities:
  Unamortized marketing rights                          (34,000)

Net deferred tax liabilities                           $      -


Lancer has provided a valuation allowance with respect to
substantially all of its deferred tax assets as of May 31,
2001. Management provided such allowance as it is currently
more likely 2002. than not that tax-planning strategies will
not generate taxable income sufficient to realize such assets
in foreseeable future reporting periods.

Income tax expense for the years ended May 31, 2001 and 2000
differed from the amounts computed by applying the U.S. Federal
income tax rate of 35% to pre-tax income as a result of:

May 31,                                    2001            2000

Computed "expected" tax  expense       $(40,621)       (103,665)
Increase (decrease) in income taxes
 resulting from:
  Meals and expenses                      4,662          13,048
  Change in beginning of the year
   balance of the valuation allowance
   for deferred tax assets allocated
   to income tax expense                35,959           90,617
  State and local income taxes, net
   of tax benefit                          800              800

                                       $   800           $  800

As of May 31, 2001, the Company has net tax operating loss
carryforwards of approximately $2,049,000 and business tax
credits of approximately $98,000 available to offset future
Federal taxable income and tax liabilities, respectively. The
Federal carryforwards expire in varying amounts through the
year 2021.  As of May 31, 2001, the Company has net tax
operating loss carryforwards of approximately $205,000 and
business tax credits of approximately $23,000 available to
offset future state income tax liabilities.  The state
carryforwards expire through the year 2011.

12.  Export Sales

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

May 31,                                  2001             2000

Net Sales
  Domestic                          $3,018,000       $3,133,000
  Europe                             1,852,000        1,379,000
  South America                        415,000          489,000
  Other                                643,000          650,000

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

Long-lived assets
  Domestic                          $   33,000       $   47,000
  Mexico                                45,000           70,000

Total                               $   78,000       $  117,000