MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA

CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND SUCCESS OR CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.

RESULTS OF OPERATIONS

Consolidated net sales for Biomerica were $1,148,521 for the first quarter of fiscal 2010 as compared to $1,194,345 for the same period in the previous year. This represents a decrease of $45,824 or 3.8% for the quarter ended August 31, 2009 as compared to the quarter ended August 31, 2008. The decrease was primarily due to a decrease in clinical laboratory sales primarily due to timing of orders.

Cost of sales in the first quarter of fiscal 2010 were $772,084, or 67.2% of sales as compared to $661,216, or 55.4% of sales in fiscal 2009. Cost of sales as a percentage of sales in fiscal 2009 increased by 11.8%. The increase in cost of goods was a result of a number of factors which included higher capitalization of labor and overhead in fiscal 2009. In addition, fiscal 2010 included higher CE Mark expenses, outside services, wages, and repairs and maintenance.

Selling, general and administrative costs decreased by $55,446, or 16.3% for the period ended August 31, 2009 as compared to the period ended August 31, 2008. The decrease was primarily due to decreased accounting, commissions and wages. Research and development increased by $41,293, or 87.8% for period ended August 31, 2009 as compared to the period ended August 31, 2008, due to increased personnel and other expenses related to increased research on new products.

For the three months ended August 31, 2009, other income of $1,060 was realized as compared to $6 in the same period in the prior fiscal year.

Interest income decreased by $6,428 due to lower cash balances and interest rates. Interest expense decreased by $6,238 (64.5%) due to lower interest rates and balances on loans.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31 and May 31, 2009, the Company had cash and available-for-sale securities in the amount of $1,692,165 and $1,595,823 and working capital of $3,802,237 and $3,831,112, respectively.

During the quarter ended August 31, 2009 the Company operations provided cash of $31,870 as compared to $49,595 in the prior fiscal year. Cash used by financing activities in fiscal 2010 was $10,270 as compared to $78,387 in fiscal 2009. The difference was primarily the result of payment of the shareholder loan in fiscal 2009. Cash provided by investing activities in fiscal 2010 was $75,086 compared to cash used in investing activities in the same period in fiscal 2009 of $32,762. This is primarily due to the maturity of a certificate of deposit in the amount of $100,000 and the investment of $24,914 for fixed assets in the first quarter of fiscal 2010 as compared to an investment in fixed assets in the amount of $32,762 in the prior fiscal year.

On February 13, 2009, the Company entered into a Small Business Banking Agreement with Union Bank of California for a one year business line (the "Line") of credit in the amount of $400,000. The interest rate for the line of credit is the prime rate in effect on the first day of the billing period, as published in the Wall Street Journal Prime West Coast Edition, plus a spread of 1.00%. Minimum monthly payments will be the sum of (i) the amount of interest charge for the billing period, plus (ii) any amount past due, plus (iii) any fees, late charges and/or out-of-pocket expenses assessed. If the Line is not renewed as of the last day of the term of the Line, the entire unpaid balance of the Line, including unpaid fees and charges will be due and payable. The Company has granted the bank security interest in the assets of the Company as collateral.

The Company must maintain for not less than thirty consecutive days in every calendar year, a period in which all amounts due under the revolving credit agreements with the bank are at a zero balance. The Company did not owe anything on this line of credit as of August 31, 2009.

On February 13, 2009, the Company entered into a Small Business Bank Agreement with Union Bank for a business loan ("Loan") for $133,000 and an interest rate of 6.50%. Loan proceeds were disbursed in one single funding on March 5, 2009. The Loan was used for the purpose of paying off a business loan which had been established with Commercial Bank of California. The fixed asset serves as collateral for the loan. The loan payable at August 31, 2009 and May 31, 2009 relating to this equipment loan is $112,511 and $122,781, respectively.

The Loan is payable in thirty-six monthly payments of approximately $4,000.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, bad debts, inventory overhead application, and inventory reserve. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Selected Financial Data.

Please refer to the annual report on Form 10-K for the period ended May 31, 2009 for an in-depth discussion of risk factors.

FACTORS THAT MAY AFFECT FUTURE RESULTS