PROSPECTUS                                      FILED PURSUANT TO RULE 424(B)(1)
                                           REGISTRATION STATEMENT NO. 333-123302


                                2,563,873 SHARES

                            PACIFIC BIOMETRICS, INC.

                                  COMMON STOCK


                                 ---------------

Selling security holders of Pacific Biometrics, Inc. are offering for sale up to
2,563,873 shares of our common stock.


We will not receive any proceeds from the sale of shares offered by the selling
security holders; although, to the extent the selling security holders exercise
any stock purchase warrants for cash, we will receive proceeds from such
exercises.


The shares of common stock offered will be sold as described under the heading
"Plan of Distribution," beginning on page 17.


Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "PBME." On March 11, 2005, the last reported sale price of our common
stock on the OTC Bulletin Board was $1.25 per share.

                                 ---------------

THE COMMON STOCK OFFERED INVOLVES A HIGH DEGREE OF RISK. WE REFER YOU TO "RISK
FACTORS," BEGINNING ON PAGE 3.

                                 ---------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

                  The date of this prospectus is April 1, 2005


                               PROSPECTUS SUMMARY

You should read this summary together with the more detailed information
contained in this prospectus, including our financial statements and related
notes.

ABOUT THIS OFFERING

This prospectus covers the resale of up to an aggregate of 2,563,873 shares of
our common stock. These shares consist of shares that are issuable upon
conversion of currently outstanding convertible notes and shares that are
issuable upon the exercise of warrants. The selling security holders acquired
the notes and warrants in private placement transactions.

The selling security holders and the specific number of shares that they each
may resell through this prospectus are listed beginning on page 15. The
2,563,873 shares being offered for resale pursuant to this prospectus consist of

     o    1,932,523 shares of common stock reserved as our estimate of the
          maximum number of shares issuable upon conversion of principal and
          interest under an outstanding secured convertible term note in
          aggregate principal amount of $1.5 million; and

     o    631,350 shares of common stock underlying certain outstanding warrants
          that may be issued upon exercise of such warrants.

The number of shares outstanding before and after this offering are set forth
below:

     o    common stock outstanding before the offering      13,353,550 shares

     o    common stock outstanding after the offering       15,917,423 shares

The number set forth above for the shares of our common stock outstanding before
this offering is the number of shares outstanding as of March 11, 2005. The
number of shares of common stock outstanding after this offering is based on the
number of shares outstanding before the offering, and assumes the issuance of a
maximum of 1,932,523 shares of common stock upon conversion of the note
(including interest payments thereon) and the issuance of 631,350 shares of
common stock upon the exercise of the warrants held by the selling security
holders.

This prospectus may only be used where it is legal to offer and sell the shares
covered by this prospectus. We have not taken any action to register or obtain
permission for this offering or the distribution of this prospectus in any
country other than the United States.

ABOUT OUR COMPANY

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and development efforts. Our clients include a number of
the world's largest multi-national pharmaceutical, biotechnology and diagnostic
companies. Our specialty areas include cardiovascular disease (dyslipidemia,
atherosclerosis, and coronary heart disease), diabetes (and obesity), and bone
and joint diseases (osteoporosis and arthritis). Our significant competitors in
specialty reference laboratory services include Esoterix Inc., ARUP
Laboratories, Synarc, Inc., and the Mayo Clinic.

Coupled with our specialty testing, we also have central laboratory capability
and provide full-service central laboratory support for multi-center clinical
trials, including routine safety lab tests (general chemistry, hematology, and
urinalysis). Our significant competitors in central laboratory services include
Covance Central Laboratory Services, Inc., PPD, Inc., Quintiles Transnational
Corp., Parexel International Corporation, MDS Inc. and Quest Diagnostics
Incorporated, among others.

Our company is a Delaware corporation, incorporated on May 9, 1996, and we
conduct our operations primarily through our wholly-owned subsidiary, Pacific
Biometrics, Inc., a Washington corporation ("PBI, WA"). Our executive offices
are located at 220 West Harrison Street, Seattle, Washington 98119, and our
telephone number is (206) 298-0068. We also maintain a web site at
www.pacbio.com. Information accessed on or through our web site does not
constitute a part of this prospectus.

                                      -2-


                                  RISK FACTORS

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN OUR COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. ADDITIONAL
RISKS AND UNCERTAINTIES NOT CURRENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS AND ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.

RISKS RELATING TO OUR COMPANY AND OUR BUSINESS

         DURING FISCAL 2004 AND INTO FISCAL 2005, WE HAVE EXPERIENCED A
         SIGNIFICANT DECREASE IN REVENUE. OUR REVENUE IS UNPREDICTABLE AND
         VARIES SIGNIFICANTLY FROM QUARTER TO QUARTER.

         We have experienced significant quarterly fluctuations and reductions
in revenue during fiscal 2004 and through the first two quarters of fiscal 2005.
For fiscal 2004 compared to fiscal 2003, our revenues decreased 17% to
$4,801,000 from approximately $5,765,000, and we incurred a net loss for fiscal
2004. For the first six months of fiscal 2005, our revenues were 49% lower than
for the comparable period of fiscal 2004, although we believe that we are seeing
improvements in our revenues from the prior four quarters. The following table
shows the significant swings in our quarterly revenues for each quarter in the
current fiscal year and the past two fiscal years:

        (DOLLARS IN THOUSANDS,                         FISCAL YEAR
        ROUNDED TO NEAREST THOUSAND)         2003          2004          2005
        Q1, ended September 30..........   $   895       $ 2,300       $   434
        Q2, ended December 31...........     1,668           542         1,009
        Q3, ended March 31..............     2,088           548           N/A
        Q4, ended June 30...............     1,114         1,411           N/A

         Our revenue depends in large part on receiving new clinical or
diagnostic studies from our customers, and we cannot predict the timing or
amount of revenue we may recognize from quarter to quarter. During fiscal 2005,
we are planning to make additional investments in our business development,
technology infrastructure, operations and other areas of our business in an
effort to become more competitive and to increase our revenue. These efforts
will use significant amounts of time, effort and funding. These efforts may not
be successful in generating additional revenue.

         WE HAVE HISTORICALLY HAD WORKING CAPITAL DEFICITS. IF OUR REVENUES DO
         NOT INCREASE, OUR LOSSES, CASH AND WORKING CAPITAL POSITION MAY WORSEN.

         We regularly have had cash flow shortages and deficiencies in working
capital. Although at December 31, 2004, we had approximately $1.4 million in
cash and a positive working capital position of approximately $224,000, we also
had significant amounts of debt, including a secured convertible note and notes
payable of $1,877,000 and other liabilities of $1,901,000 and stockholders'
deficit of $500,000. Subsequent to December 31, 2004, we closed a $1.5 million
secured debt financing, raising net proceeds to us of $1,386,000. We also had
amounts of past due debt, including approximately $94,000 of accounts payable
that was 90 or more days old as of December 31, 2004. For the last two fiscal
years ended June 30, 2004 and 2003 and the six months ended December 31, 2004,
we had operating losses of approximately $1,717,000, $1,087,000 and $923,000,
respectively. At December 31, 2004, we had an accumulated deficit of
approximately $24,312,000.

         Currently, our cash, cash equivalents, and accounts receivable are
being used to fund our operating losses. Accordingly, unless revenues increase,
we will likely continue to experience significant losses and our cash and
working capital positions will be adversely impacted through fiscal 2005. To
improve our cash position, we are actively seeking to (i) increase revenues,
(ii) raise debt or equity financing, and (iii) cut expenses significantly. Our
efforts to improve our cash position, reduce expenses and generate revenue may
not be successful.

                                      -3-


         Our future capital requirements depend upon many factors, including,
but not limited to:

     o    the timing and number of clinical trials by customers, the number of
          samples submitted to us for testing, and the amount of revenues
          generated from these tests;
     o    our ability to enter into and build relationships with new customers,
          and obtain additional projects from existing customers;
     o    our ability to participate in and win bids from RFPs (requests for
          proposals) for clinical tests;
     o    capital expenditure requirements, including for research and
          development efforts, upgrading or replacing laboratory equipment and
          making investments in information technology;
     o    delays or early terminations of clinical testing agreements with
          customers;
     o    our plans to pursue additional business strategies;
     o    our ability to manage our cash flow, including by managing or reducing
          our expenses, such as insurance and professional fees of our
          accountants and attorneys associated with being a public company; and
     o    other business and economic factors that may occur from time to time.

None of these factors can be predicted with certainty. Additionally, if we
desire to invest in our laboratory technology or research and development, we
will require as much as $3-5 million in additional financing.

         WE CLOSED ON A TOTAL OF $4.0 MILLION IN SENIOR SECURED CONVERTIBLE DEBT
         FINANCINGS IN MAY 2004 AND JANUARY 2005. OUR ABILITY TO MAKE REQUIRED
         PAYMENTS OF PRINCIPAL AND INTEREST ON THE DEBT DEPENDS PRIMARILY ON
         CASH FLOW FROM OPERATIONS, WHICH MAY NOT BE SUFFICIENT TO SERVICE THE
         DEBT.

         In fiscal 2004 and 2005, we closed on two debt financings with Laurus
Master Funds, Ltd. ("Laurus"), consisting of $2.5 million effective May 28, 2004
and an additional $1.5 million effective January 31, 2005 (the "2004 Note" and
"2005 Note," respectively). See "BUSINESS - Laurus Debt Investment" below. Each
of these financing is subject to the terms of a three-year convertible term
note. For the $2.5 million debt, we are obligated to make monthly payments of
interest only through May 2005 (approximately $16,000 per month, based on
current interest rates of 7.5%), and monthly payments of principal and interest
thereafter beginning June 1, 2005 (approximately $101,000 per month, based on a
36 month amortization schedule and current interest rates of 7.5%), with the
principal balance due in full on May 28, 2007. For the $1.5 million debt, we are
obligated to make monthly payments of interest only through July 2005
(approximately $10,000 per month, based on current interest rates of 7.5%), and
monthly payments of principal and interest thereafter beginning August 1, 2005
(approximately $61,000 per month, based on a 36 month amortization schedule and
current interest rates of 7.5%), with the principal balance due in full on
January 31, 2008. Our actual required cash payments on the two notes will vary
depending on interest rates and whether amounts under the notes are converted
into our common stock.

         Our ability to make scheduled monthly payments under the two notes
primarily depends on our future performance and working capital, including our
ability to increase revenues and cash flows. We currently have other fixed
monthly commitments under various notes payable, equipment and facility leases.
See "Notes 7 and 8 to Notes to Consolidated Financial Statements" for the fiscal
year ended June 30, 2004 included in this prospectus. To a certain extent our
ability to increase revenues and control costs are subject to a number of
economic, financial, competitive, regulatory and other factors beyond our
control.

         However, if our cash flow is insufficient to enable us to service our
debt, we may be forced to find alternative sources of financing, or to take
further drastic measures, including significantly reducing operations, seeking
to sell the company, or pursuing a liquidation. Any future alternative sources
of debt or equity financing may not be available to us when needed or in amounts
required. Although we have a line of credit with Franklin Funding for an
aggregate amount of $250,000, we have fully utilized the facility and we
currently do not have available to us another bank line of credit or other
general borrowing facility. Alternatively, we may be forced to attempt to
negotiate with our debt holders on our payment terms, which may not be
successful or may be on terms onerous to us.

                                      -4-


         WE GRANTED A BLANKET SECURITY INTEREST IN ALL OF OUR ASSETS TO THE
         HOLDER OF OUR SECURED CONVERTIBLE DEBT. IF WE ARE UNABLE TO MAKE OUR
         REQUIRED MONTHLY PAYMENTS ON THE DEBT, OR ANY OTHER EVENT OF DEFAULT
         OCCURS, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
         OPERATIONS, AND THE DEBT HOLDER MAY FORECLOSE ON OUR ASSETS.

         As part of our two debt financings with Laurus, we granted to Laurus a
blanket security interest in all of our assets, including assets of our
subsidiaries. See "BUSINESS - Laurus Debt Investment" below. In the event we
default in payment on the debt, or any other event of default occurs under the
financing documents, the outstanding principal amount of the debt will
accelerate and we will be obligated to pay to Laurus an amount equal to 130% of
the outstanding principal of the notes, plus accrued and unpaid interest and
fees. See "BUSINESS - Laurus Debt Investment" for a list of such potential
events of default.

         The cash required to pay such accelerated amounts on the notes
following an event of default would most likely come out of our working capital.
As we rely on our working capital for our day to day operations, such a default
could have a material adverse effect on our business, operating results, or
financial condition to such extent that we are forced to restructure, file for
bankruptcy, sell assets or cease operations. In addition, upon an event of
default, the holders of the secured debt could foreclose on our assets or
exercise any other remedies available to them. If our assets were foreclosed
upon, or if we were forced to file for bankruptcy or cease operations,
stockholders may not receive any proceeds from disposition of our assets and may
lose their entire investment in our stock.

         WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND CONTINUING OPERATIONS.
         IF OUR FINANCING EFFORTS ARE NOT SUCCESSFUL, WE WILL NEED TO EXPLORE
         ALTERNATIVES TO CONTINUE OPERATIONS, WHICH MAY INCLUDE A MERGER, ASSET
         SALE, JOINT VENTURE, LOANS OR FURTHER EXPENSE REDUCTIONS.

         Our efforts to reduce expenses and generate revenue may not be
successful. Although we raised $4.0 million in gross proceeds from our two
secured convertible debt financings in May 2004 and January 2005, and
approximately $1.9 million in gross proceeds from our private placement of
common stock that closed in March 2004, if our revenues do not increase we
expect to need to raise additional capital through equity or debt financing or
through the establishment of other funding facilities in order to keep funding
operations. However, in the current market condition, raising capital has been,
and will continue to be difficult, and we may not receive sufficient funding.
For instance, under the terms of our May 2004 debt financing with Laurus, we had
the right to seek an additional $1.0 million in PARI PASSU debt from an investor
acceptable to Laurus within 30 days of closing of the initial financing;
however, we were not successful in closing on additional funds within such time
frame. Any future financing that we seek may not be available in amounts or at
times when needed, or, even if it is available, may not be on terms acceptable
to us. Also, if we raise additional funds by selling equity or equity-based
securities, the ownership of our existing stockholders will be diluted.

         We are also contemplating other alternatives to enable us to fund
continuing operations, which may or may not occur, including, but are not
limited to, any one or more of the following:

     o    engaging a financial advisor to explore strategic alternatives, which
          may include a merger, asset sale, joint venture or other similar
          transaction;
     o    forming a joint venture with one or more strategic partners to provide
          additional capital resources to fund operations; and
     o    loans from management or employees, salary deferrals and reductions,
          work force reductions or other cost cutting mechanisms.

These potential alternatives may not be open to us, or may only be available on
unfavorable terms. If we are unable to obtain sufficient cash either to continue
to fund operations or to locate a strategic alternative, we may be forced to
seek protection from creditors under the bankruptcy laws or cease operations.
Any inability to obtain additional cash as needed could have a material adverse
effect on our financial position, results of operations and ability to continue
in existence. During fiscal 2005, we are planning to make additional investments
in our business development, technology infrastructure, operations and other
areas of our business in an effort to become more competitive and to increase
our revenues. These efforts will use significant amounts of time, effort and
funding.

                                      -5-


         WE HAVE RECEIVED A GOING-CONCERN OPINION FROM OUR INDEPENDENT
         ACCOUNTANTS. IF WE CANNOT FUND OUR OPERATIONS FROM REVENUES OR
         FINANCING EFFORTS, WE MAY HAVE TO CHANGE OUR BUSINESS PLAN,
         SIGNIFICANTLY REDUCE OR SUSPEND OUR OPERATIONS, SELL OR MERGE OUR
         BUSINESS, OR FILE A PETITION IN BANKRUPTCY.

         Our negative working capital and any inability to secure additional
financing could have a material adverse effect on whether we would be able to
successfully implement our business plan and our ability to continue as a going
concern. For our fiscal year ended June 30, 2004, our independent accountants
included a "going concern" emphasis paragraph in their report on our financial
statements, stating that we have suffered recurring losses and have historically
had net working capital deficits. We have experienced significant recent
decreases in our revenues, and we have been actively seeking to decrease our
fixed expenses and other fixed costs with the objective of controlling expenses
while minimizing any adverse impact on our future business opportunities.
However, these conditions raise substantial doubt about our ability to continue
as a going concern. If we cannot generate sufficient revenue from operations or
raise additional financing, we may need to change our business plan,
significantly reduce or suspend our operations (which may include further
reducing our operating expenses and downsizing our staff), sell or merge our
business, or file a petition in bankruptcy.

         DURING EACH OF OUR PAST FISCAL YEARS, WE HAVE DEPENDED ON ONE OR TWO
         CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUE. ANY DECREASE IN
         REVENUE FROM THESE CUSTOMERS COULD MATERIALLY ADVERSELY AFFECT US.

         During fiscal years 2004 and 2003, respectively, revenues from Pfizer,
Inc. and Procter & Gamble Pharmaceuticals, Inc., our two largest customers,
represented in the aggregate approximately 76% and 78% of our total revenue. For
the three- and six-month periods ended December 31, 2004 these same two
customers accounted for 41% and 37% of our total revenues. For the three- and
six-month periods ended December 31, 2004 our top five customers accounted for
79% and 65% of our gross revenues, respectively. This compares to 68% and 86% of
our gross revenues, respectively for the top five customers in the comparable
periods ended December 31, 2003. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS -
Customers/Marketing" below. Because our revenue has been concentrated in these
one or two large customers, we can be materially adversely impacted by decreases
in work generated from these customers, including any delays in undertaking
clinical studies or submitting samples for testing services, any early
termination or reductions in work orders or clinical studies, or any decreases
in the volume or timing of new work orders. This was evidenced by the results
for the quarter ended December 31, 2003, in which our total revenue from these
two customers decreased to approximately $40,000, representing only 7% of our
revenues in that quarter.

         We have expanded our business development efforts and have continued to
submit bids and proposals to these and other companies for our services, to
increase our revenues and to diversify our customer base. Although we believe
that we have good relations with all of our large customers and other companies
in the industry, and we expect to receive additional work orders in the future,
we cannot predict the timing or amount of any such additional work or whether we
will be successful in further diversifying our customer base. If we are
unsuccessful in our sales and business development efforts with our existing
customers and potential customers, our revenues for the third and fourth
quarters and for the 2005 fiscal year ending June 30, 2005 will be less than our
revenues in the comparable prior periods. In addition, unless we are able to
attract additional customers for medium to large studies, we will continue to be
dependent on one or two large customers for a substantial majority of our
revenue.

         OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS DEPENDS IN LARGE PART ON
         OUR REPUTATION. IF OUR REPUTATION IS HARMED, OUR REVENUES, BUSINESS
         DEVELOPMENT, GROWTH AND OPERATING RESULTS MAY SUFFER.

         We compete with other specialty laboratories and central laboratories
in large part on the basis of our reputation for providing quality results in a
timely manner. Accordingly, timely, effective and quality service is essential
to establishing and maintaining our reputation, as well as to generating
customers and revenue. Our reputation may suffer damage, whether from actions
outside or within our control. If our reputation is harmed, our revenues,
business development, growth and operating results may suffer.

                                      -6-


         IF WE DO NOT GENERATE NEW CUSTOMERS AND NEW PROJECTS FROM OUR BUSINESS
         DEVELOPMENT EFFORTS, OUR GROWTH MAY BE LIMITED, SALES OF OUR SERVICES
         MAY DECREASE AND OUR OPERATING RESULTS MAY SUFFER.

         We generally do not have long-term contracts with customers for our
services. In addition, any project we undertake may generally be terminated at
any time by the customer on short notice. As a result, it is difficult for us to
forecast future sales, and our future revenues depend on our ability to generate
new customers and new projects. During fiscal 2005, we are making and plan to
make additional investments in our business development, technology
infrastructure, operations and other areas of our business in an effort to
become more competitive and to increase our revenues. These efforts will use
significant amounts of time, effort and funding. Our business development
efforts are substantially dependent on our ability to effectively manage our
time, personnel and resources. In particular, our Chief Science Officer and
Chief Medical Officer are often heavily involved in the marketing and business
development process, and time that they spend in this area detracts from their
available time for laboratory and development work. Our success in business
development depends in part on our reputation in the industry and client
perceptions (including as to our laboratory capacity and financial health), and
also to a degree on personal relationships between us and the customer. With the
significant consolidation in the pharmaceutical industry, it is often a long and
complex process in finding and meeting with the right person within the
customer. We also understand that some companies in the pharmaceutical industry
have "preferred vendor" lists, such that a vendor cannot participate in RFPs
(requests for proposal) or contract with the company unless the vendor is
pre-approved on the list. We are attempting to expand our efforts in this area.
If a client or prospective client has negative perceptions about our
capabilities, our laboratory capacity or our financial health, this may affect
our ability to develop new clients or projects. If our business development
efforts are not successful, our revenues and cash flow may decrease and our
operating results may suffer.

         THE LOSS OF OUR KEY PERSONNEL, INCLUDING OUR CHIEF SCIENTIFIC OFFICER
         AND CHIEF MEDICAL OFFICER, COULD ADVERSELY AFFECT OUR BUSINESS.

         Our success depends to a significant extent upon the efforts of our
senior management team and other key personnel, and in particular Dr. Elizabeth
Leary, our Chief Scientific Officer, and Dr. Mario Ehlers, our Chief Medical
Officer. See "MANAGEMENT" below. In addition to the services they provide in our
laboratory services, Drs. Leary and Ehlers are also important to our business
development efforts, both due to their reputations and skills, as well as their
contacts and relationships with clients and prospective clients. The loss of the
services of such personnel could adversely affect our business. Also, because of
the scientific and technical nature of our business, our success is dependent
upon our ability to attract and retain technologically qualified personnel.
There is substantial competition for qualified personnel, and an inability to
recruit or retain qualified personnel may impact our ability to grow our
business and compete effectively in our industry.

         OUR OBLIGATIONS UNDER OUR SECURED DEBT TO LAURUS MAY ADVERSELY AFFECT
         OUR ABILITY TO ENTER INTO POTENTIAL SIGNIFICANT TRANSACTIONS WITH OTHER
         PARTIES.

         As a result of our debt financings with Laurus in May 2004 and January
2005, we incurred significant repayment obligations, we granted a blanket
security interest in our assets, and we agreed to certain restrictive covenants.
In particular, for so long as 25% of the original principal is outstanding under
either note, we will need Laurus' consent before we can take certain actions,
including the following:

     o    pay any dividends;
     o    merge, effect a material reorganization, liquidate or dissolve;
     o    materially change the scope of our business; or
     o    create, incur or assume any debt (other than certain trade debt,
          equipment financings and debt for the purchase of assets in the
          ordinary course of business).

Accordingly, unless we obtain Laurus' consent, we may not be able to enter into
certain transactions. In addition, in connection with any potential significant
transaction (such as a merger, sale of substantially all our assets, joint
venture, or similar transaction), it is likely that we would have to pay off the
debt obligations to Laurus and have the security interests released. Although we
have the right at any time to prepay our secured debt obligations, we can only
do so upon payment of 130% of the then outstanding principal balance, plus all
other amounts owing under the notes. See "BUSINESS - Laurus Debt Investment."
Based on a total principal balance of $4.0 million under both

                                      -7-


notes, prepayment would require a cash payment of $5.2 million. These provisions
could have the practical effect of increasing the costs of any potential
significant transaction, and restrict our ability to enter into any such
transaction,

         WE MAY BEAR FINANCIAL LOSSES BECAUSE MOST OF OUR CONTRACTS ARE OF A
         FIXED PRICE NATURE AND MAY BE DELAYED, TERMINATED OR REDUCED IN SCOPE
         FOR REASONS BEYOND OUR CONTROL.

         Many of our contracts provide for services on a fixed price or
fee-for-service with a cap basis and they may be terminated, delayed or reduced
in scope by the other party either immediately or upon notice. See "BUSINESS -
Contractual Arrangements" below. Contract termination, delay or reduction in
scope may occur for a variety of reasons, most of which are beyond our control,
including:

     o    the failure of the customer's products to satisfy safety requirements;
     o    unexpected or undesired results of the customer's products;
     o    insufficient patient enrollment by the customer;
     o    insufficient investigator recruitment by the customer;
     o    the customer's decision to terminate the development of a product or
          to end a particular study; and
     o    our failure to perform properly our duties under the contract.

Because we primarily receive revenue solely on the basis of the number of
clinical samples we test and process, the loss, reduction in scope or delay of a
large contract or the loss or delay of multiple contracts could materially
adversely affect our business, results of operations, financial condition and
cash flows. Our contracts typically entitle us to receive payment for fees
earned by us up to the time of termination and reimbursement for out-of-pocket
costs incurred prior to termination. In certain limited instances, our contracts
also entitle us to a termination fee or payment for the costs of winding down
the terminated projects.

         WE MAY BEAR FINANCIAL RISK IF WE UNDERPRICE OUR CONTRACTS OR OVERRUN
COST ESTIMATES.

         Since our contracts are often structured as fixed price or
fee-for-service with a cap, we bear the financial risk if we initially under
price our contracts or otherwise overrun our cost estimates. Such under pricing
or significant cost overruns could have a material adverse effect on our
business, results of operations, financial condition and cash flows.

         OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS ESSENTIAL TO THE
         GROWTH AND DEVELOPMENT OF OUR PRODUCTS AND SERVICES.

         We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage on our existing
intellectual property and any future intellectual property we develop. See
"BUSINESS - Technologies and Products" below. We protect our intellectual
property through a combination of license agreements, trademark, service mark,
copyright, trade secret laws and other methods of restricting disclosure and
transferring title. We have and intend to continue entering into confidentiality
agreements with our employees, consultants and vendors; entering into license
agreements with third parties; and generally seeking to control access to and
distribution of our intellectual property.

RISKS RELATING TO OUR INDUSTRY

         FAILURE TO KEEP PACE WITH CHANGES IN THE MARKETPLACE MAY CAUSE US TO
         LOSE MARKET SHARE AND OUR REVENUES MAY DECREASE.

         The market for specialty reference and central laboratory services is
subject to rapid technological change and innovation. In particular,
laboratories are regularly developing new assays to incorporate into clinical
testing and have to maintain up-to-date laboratory equipment to stay
competitive. In developing and enhancing our services, we have made, and will
continue to make, assumptions about which features, standards and performance
criteria will be attractive to, or demanded by, our customers. If we implement
features, standards and performance criteria that are different from those
required by our customers or if our competitors introduce products and systems
that better address these needs, market acceptance of our offerings may suffer
or may become obsolete. In that

                                      -8-


event, our market share and revenues would likely decrease. In addition, clients
are requiring that laboratories maintain secure and sophisticated information
technology systems, as a means for storing data and facilitating communication
between the laboratory and the client. Although we continue to expend efforts
and resources in these areas, we may not be successful in keeping up with
customer needs or expectations. In addition, if a client or prospective client
has negative perceptions about our abilities based on our balance sheet and
financial strength, this may affect our ability to develop new clients or
projects. Many of our competitors have greater resources than we do. We are also
exploring potential financing to be used to continue to update our laboratory
service capability; if we are unsuccessful in raising funds as and when needed,
we may, or it may be perceived, that we are less efficient and less economical
than our competitors and we may lose business to our competitors. If this
occurs, it would have a material adverse effect on our revenues and financial
performance.

         WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND MARKET NEW SERVICES.

         We may seek to develop and market new services that complement or
expand our existing business. If we are unable to develop new services and or
create demand for those newly developed services, our future business, results
of operations, financial condition and cash flows could be adversely affected.

         WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, AND WE MAY LOSE OR FAIL TO
         ATTRACT CUSTOMERS FOR OUR SERVICES TO OUR COMPETITORS.

         Competitors in the specialty reference and central laboratory industry
range from small, limited-service providers to full service global contract
research organizations. Our main competition consists of in-house departments of
pharmaceutical companies, full-service contract research organizations, and, to
a lesser degree, universities. See "BUSINESS - Competition" below. We compete on
a variety of factors, including

     o    technological expertise and efficient drug development processes,
     o    reputation for on-time quality performance,
     o    price,
     o    expertise and experience in specific areas,
     o    strengths in various geographic markets and global reach,
     o    ability to manage large-scale clinical trials both domestically and
          internationally,
     o    scope of service offerings,
     o    ability to acquire, process, analyze and report data in a time-saving
          and accurate manner, and
     o    expertise and experience in health economics and outcomes services.

Many of our competitors have greater resources than we do, have global
operations and greater name recognition. If we experience significant
competition which is based on factors which we do not have in our business, such
as global management of projects or size, our business could be materially
adversely affected.

         CHANGES IN GOVERNMENT REGULATIONS COULD DECREASE THE NEED FOR OUR
         SERVICES.

         Governmental agencies throughout the world, but particularly in the
United States, highly regulate the drug development and approval process. See
"BUSINESS - Government Regulation" below. Our business involves performing
safety and efficacy laboratory testing during clinical trials of new
pharmaceutical drugs. Clinical trial laboratory data is used by pharmaceutical
and biotechnology companies in the submission process to the FDA for the
marketing approval of a new drug. Changes in regulations, such as a relaxation
in regulatory requirements or the introduction of simplified drug approval
procedures or an increase in regulatory requirements that we have difficulty
satisfying, could eliminate or substantially reduce the need for our services.
Also, government efforts to contain drug costs and pharmaceutical and
biotechnology company profits from new drugs may have an impact on the drug
development and approval process, and our customers may spend less, or reduce
their growth in spending, on research and development.

                                      -9-


         FAILURE TO COMPLY WITH EXISTING GOVERNMENT REGULATIONS COULD RESULT IN
         A LOSS OF REVENUE OR EARNINGS FROM A PROJECT.

         Any failure on our part to comply with applicable government
regulations could result in the termination of on-going research or sales and
marketing projects or the disqualification of data for submission to regulatory
authorities. For example, if we failed to validate analytical test methods
performed on samples collected during and in support of a trial or if we fail to
comply with GCP (Good Clinical Practice) regulations, the generated test data
could be disqualified. If this were to happen, we could be contractually
required to repeat the trial at no further cost to our customer, but at
substantial cost to us.

         WE DEPEND ON THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.

         Our revenues depend greatly on the outsourcing expenditures made by the
pharmaceutical and biotechnology industries in research and development.
Accordingly, economic factors and industry trends that affect our clients in
these industries also affect our business. If companies in these industries were
to reduce the number of research and development projects they outsource, our
business could be materially adversely affected.

         Our customers in the pharmaceutical and biotechnology industries have
experienced significant consolidation over the last several years and we expect
that trend to continue. The uncertainty caused by consolidation, before, during
and after a business combination can result in product delays, changes in
strategy, and consolidation and/or elimination of research and development
efforts. Any of these effects can have a materially adverse affect on us if it
results in testing delays, sample volume reductions or termination of tests.

         WE MUST MAINTAIN CERTIFICATIONS FROM OUR CUSTOMERS IN ORDER TO BE
ELIGIBLE TO BID ON PROJECTS.

         Many of our customers require our laboratories to be tested from time
to time for certification that we comply with their internal requirements. If we
fail to comply, we will probably be terminated from existing contracts and we
will not be eligible to bid on that customer's future projects. While generally
we have been very successful in maintaining certifications and in gaining new
certifications, if we fail certification tests, especially for our major
customers, our business would be materially adversely affected.

         WE MAY EXPAND OUR BUSINESS THROUGH ACQUISITIONS.

         We may review acquisition opportunities. Factors which could affect our
ability to grow successfully through acquisitions include

     o    difficulties and expenses in connection with integrating the acquired
          companies and achieving the expected benefits,
     o    diversion of management's attention from current operations,
     o    the possibility that we may be adversely affected by risk factors
          facing the acquired companies, and
     o    acquisitions could be dilutive to earnings, or in the event of
          acquisitions made through the issuance of our common stock to the
          stockholders of the acquired company, dilutive to the percentage of
          ownership of our existing stockholders.

         WE MAY BE AFFECTED BY POTENTIAL HEALTH CARE REFORM.

         In recent years, governments of the United States, Europe and Asia have
considered various types of health care reform in order to control growing
health care costs. We are unable to predict what legislative proposals will be
adopted in the future, if any. Implementation of health care reform legislation
that contains costs could limit the profits that can be made from the
development of new drugs. This could adversely affect research and development
expenditures by pharmaceutical and biotechnology companies which could in turn
decrease the business opportunities available to us. In addition, new laws or
regulations may create a risk of liability, increase our costs or limit our
service offerings.

                                      -10-


         SPECIAL REFERENCE AND CENTRAL LABORATORY SERVICES CREATE A RISK OF
         LIABILITY.

         In contracting to work on drug development trials, we face a range of
potential liabilities, including

     o    errors or omissions in laboratory data being generated relating to the
          safety and efficacy of the drug, that could affect the regulatory
          approval of the drug, and
     o    errors and omissions during a trial that may undermine the usefulness
          of a trial or data from the trial.

         While we maintain what we believe is adequate insurance coverage and
obtain contractual indemnifications protecting us against liability arising from
our own actions (other than negligence or intentional misconduct), we could be
materially and adversely affected if we were required to pay damages or bear the
costs of defending any claim which is not covered by a contractual
indemnification provision or which is beyond the level of our insurance
coverage. Due to the rising costs of insurance, we may not be able to maintain
such insurance coverage at levels or on terms acceptable to us.

         WE RELY ON AIR TRANSPORTATION AND OVERNIGHT DELIVERY SERVICES.

         Our laboratories are heavily reliant on air travel for transport of
clinical trial kits and other material and people, and disruption to the air
travel system or package delivery system could have a material adverse effect on
our business. We generally receive revenue only on the basis of clinical tests
actually performed. Accordingly, any non-receipt or delay in receiving testing
materials will impact our ability to generate revenue.

RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK

         BECAUSE OUR COMMON STOCK IS TRADED ON THE OTC BULLETIN BOARD AND IS
         CONSIDERED A "PENNY STOCK," YOUR ABILITY TO SELL YOUR SHARES IN THE
         SECONDARY TRADING MARKET MAY BE LIMITED.

         Our common stock is currently quoted for trading on the OTC Bulletin
Board. As a result, the liquidity of our common stock is limited, not only in
the number of shares that are bought and sold, but also through delays in the
timing of transactions, and the lack of coverage by security analysts and the
news media of our company.

         In addition, because our stock is quoted on the OTC Bulletin Board, our
common stock is subject to certain rules and regulations relating to "penny
stock." A "penny stock" is generally defined as any equity security that has a
price less than $5.00 per share and that is not quoted on the Nasdaq Stock
Market or a national securities exchange. Being a penny stock generally means
that any broker who wants to trade in our shares (other than with established
customers and certain institutional investors) must comply with certain "sales
practice requirements," including delivery to the prospective purchaser of the
penny stock a risk disclosure document describing the penny stock market and the
risks associated therewith. In addition, broker-dealers must take certain steps
prior to selling a "penny stock," which steps include:

     o    obtaining financial and investment information from the investor;
     o    obtaining a written suitability questionnaire and purchase agreement
          signed by the investor; and
     o    providing the investor a written identification of the shares being
          offered and the quantity of the shares.

If these penny stock rules are not followed by the broker-dealer, the investor
has no obligation to purchase the shares. The application of these comprehensive
rules will make it more difficult for broker-dealers to sell our common stock,
and as a practical matter, these requirements may mean that brokers are less
likely to make recommendations on our shares to its general customers.

         As a result, for as long as our common stock is quoted on the OTC
Bulletin Board and subject to these penny stock rules, our stockholders may have
difficulty in selling their shares in the secondary trading market. In addition,
prices for shares of our common stock may be lower than might otherwise prevail
if our common stock were quoted on the Nasdaq Stock Market or traded on a
national securities exchange, like The New York Stock

                                      -11-


Exchange or American Stock Exchange. This lack of liquidity may also make it
more difficult for us to raise capital in the future through the sale of equity
securities.

         OUR QUARTERLY OPERATING RESULTS MAY VARY, AND THESE FLUCTUATIONS COULD
         AFFECT THE MARKET PRICE OF OUR STOCK.

         Our operating results may vary significantly from quarter to quarter
and are influenced by such factors as

     o    the commencement, completion or cancellation of large contracts,
     o    the progress of ongoing contracts,
     o    seasonality (particularly in the summer months as patient enrollment
          and participation in clinical testing typically decreases coinciding
          with summer vacations), and
     o    changes in the mix of our services.

         We believe that operating results for any particular quarter are not
necessarily a meaningful indication of future results. While fluctuations in our
quarterly operating results could negatively or positively affect the market
price of our common stock, these fluctuations may not be related to our future
overall operating performance.

         OUR STOCK PRICE IS VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK
COULD SUFFER A DECLINE IN VALUE.

         The trading price of our common stock has fluctuated significantly in
the past. The future trading price of our common stock may continue experiencing
wide price fluctuations in response to a number of factors, some of which are
beyond our control, such as

     o    actual or anticipated fluctuations in revenues or operating results,
     o    changes in market valuation of companies in our industry generally,
     o    announcements of research activities and technology innovations or new
          products or services by us or our competitors;
     o    failure to meet expectations of performance,
     o    developments in or disputes regarding copyrights, trademarks, patents
          and other proprietary rights, and
     o    general economic conditions.

         THE MARKET FOR OUR STOCK HAS NOT BEEN LIQUID.

         The average daily trading volume for our common stock during the
previous three months prior to the date of this prospectus has been less than
30,000 shares. Therefore, holders of our common stock may have difficulty
selling their shares in the public markets. As a result of two resale
registration statements that became effective in September 2004 and the
registration statement we are filing for this offering, a significant number of
restricted shares have been registered and will be available for sale (including
shares that may be issued in the future upon conversion of amounts due under the
Laurus notes and upon exercise of outstanding warrants). Sales of a substantial
number of shares of our common stock in the public market (including the shares
offered under this prospectus, under other registration statements and shares
available for resale under Rule 144 under the Securities Act) or the perception
that such sales could occur, could significantly depress the prevailing market
price of our common stock.

         SAIGENE CORPORATION OWNS A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON
         STOCK AND EFFECTIVELY CONTROLS OUR COMPANY, WHICH COULD DISCOURAGE OR
         PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
         STOCKHOLDERS.

         Our largest stockholder, Saigene Corporation, beneficially owns
approximately 23% of our outstanding voting stock. Accordingly, this single
stockholder may be able to influence the outcome of stockholder votes, involving
the election of directors, the adoption or amendment of provisions in our
certificate of incorporation and bylaws and the approval of certain mergers or
other similar transactions, such as a sale of substantially all of our

                                      -12-


assets. Such control by our existing stockholder could have the effect of
delaying, deferring or preventing a change in control of our company.

         AS WE ISSUE ADDITIONAL EQUITY SECURITIES IN THE FUTURE, INCLUDING UPON
         CONVERSION OF ANY OF OUR SECURED CONVERTIBLE DEBT, YOUR SHARE OWNERSHIP
         WILL BE DILUTED. IN PARTICULAR, THE SECURED CONVERTIBLE DEBT HAS A FULL
         RATCHET ANTI-DILUTION PROVISION THAT COULD SIGNIFICANTLY DILUTE OUR
         STOCKHOLDERS.

         In connection with our two debt financings with Laurus, we issued a
$2.5 million secured convertible note, a $1.5 million secured convertible note
and warrants to Laurus. See "BUSINESS - Laurus Debt Investment" below. The $2.5
million note is convertible into shares of our common stock at an initial
conversion price of $1.06 per share, and the $1.5 million note is convertible at
an initial conversion price of $1.17 per share. At these initial conversion
rates, for example, we would issue approximately 3,641,000 shares upon
conversion of the $4.0 million owing under the notes. The actual number of
shares to be issued will depend on the actual dollar amount of principal and
interest being converted. In addition, each note carries a full ratchet
anti-dilution provision, such that if we issue in the future convertible or
equity securities (subject to certain exceptions, including stock option grants
and issuances in connection with certain acquisition transactions) at a price
less than the initial conversion price, the note conversion price will be
automatically adjusted down to that lesser price. In addition to the conversion
rights of the convertible debt, as we issue stock or convertible securities in
the future, including for any future equity financing or upon exercise of any of
the outstanding stock purchase warrants and stock options, those issuances would
also dilute our stockholders. If any of these additional shares are issued and
are sold into the market, it could decrease the market price of our common stock
and could also encourage short sales. Short sales and other hedging transactions
could place further downward pressure on the price of our common stock.

         WE DO NOT INTEND TO PAY CASH DIVIDENDS, SO ANY RETURN ON YOUR
         INVESTMENT MUST COME FROM APPRECIATION.

         We have not declared dividends on our common stock in the past, and do
not intend to declare dividends on our common stock in the foreseeable future.
In addition, pursuant to our financing agreements with Laurus, for as long as
25% of the original principal amount is outstanding under the either secured
convertible note to Laurus, we may not declare or pay any dividends without
Laurus' consent. As a result, any return on your investment in our common stock
must come from increases in the fair market value and trading price of our
common stock.

         WE MAY BE SUBJECT TO FURTHER SANCTIONS FROM THE SEC IF WE FAIL TO
         COMPLY WITH THE MAY 10, 2001 FINAL JUDGMENT.

         On May 10, 2001, a Final Judgment of Permanent Injunction was issued by
the United States District Court for the District of Columbia ordering us to
file with the SEC, on or before June 29, 2001: (1) our Annual Report on Form
10-KSB for our fiscal year ended June 30, 2000; (2) our Quarterly Reports on
Form 10-QSB for our quarters ended March 31, September 30, and December 31,
2000; and (3) such other periodic reports which may become due prior to the
entry of the Final Judgment. The Final Judgment also ordered us in the future to
file with the SEC, in a timely manner and in proper form, accurate and complete
information and reports as are required to be filed under the U.S. securities
laws. All such delinquent reports were filed on June 29, 2001 and since that
date, we have filed all such subsequent reports by the required due dates.
Accordingly, we believe we are in compliance with the Final Judgment and we
intend to remain so in the future, failing which we might be subject to
sanctions from the SEC.

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements, including
statements about

     o    our existing working capital and cash flows and whether and how long
          these funds will be sufficient to fund our operations,
     o    the success of our business development efforts and our ability to
          enter into work orders for laboratory services and generate revenues,
     o    the development of new services and products and the expansion of the
          market for our current services and products,

                                      -13-


     o    implementing aspects of our business plan and strategies,
     o    financing goals and plans,
     o    our raising of additional capital through future equity and debt
          financings.

The forward-looking statements in this prospectus reflect management's current
views and expectations with respect to our business, strategies, services and
products, future results and events, and financial performance. In general, all
statements other than statements of historical fact, including future results of
operations or financial position, made in this prospectus should be considered
forward looking. Our forward-looking statements are primarily located in the
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and "Business." In addition, the
words "believe," "expect," "intend," "anticipate," "estimate," "desire," "goal,"
"may," "will," variations of such words, and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. Although we do not make forward-looking statements unless we
believe we have a reasonable basis for doing so, we cannot guarantee their
accuracy, and actual results may differ materially from those we anticipated due
to a number of uncertainties, many of which are unforeseen. You should not place
undue reliance on these forward-looking statements, which apply only as of the
date of this prospectus. Our actual results could differ materially from those
anticipated in or implied by these forward-looking statements for many reasons,
including, among others, the risks we face as described in the section entitled
"Risk Factors" and other factors discussed in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this prospectus.

Forward-looking statements involve known and unknown risks and uncertainties,
including those discussed in this prospectus. We make cautionary statements in
the "Risk Factors" section of this prospectus and in other parts of this
prospectus. You should read these cautionary statements as being applicable to
all related forward-looking statements wherever they appear in this prospectus,
as well as in the materials incorporated by reference into this prospectus.

We are not obligated nor do we undertake to publicly update or revise any
forward-looking statement, whether as a result of new information, future events
or otherwise, except as otherwise required by law. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus and other statements made from time to time from us or our
representatives might not occur.


                                 USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of common stock
offered by the selling security holders. However, to the extent that the selling
security holders exercise their stock purchase warrants for cash for up to
631,350 shares included in this prospectus, we would receive proceeds of up to
$886,950. Any such proceeds from the payment of warrant exercise prices will be
used for general working capital. We are paying all expenses incurred in
connection with the registration of the shares of common stock offered by this
prospectus. See "PLAN OF DISTRIBUTION."





                                      -14-


                            SELLING SECURITY HOLDERS

The 2,563,873 shares offered for resale pursuant to this prospectus consist of
the following:

o    In connection with our debt financing arrangement with Laurus Master Fund,
     Ltd. effective January 31, 2005, we issued to Laurus a $1.5 million secured
     convertible note with a term of three years and a seven-year warrant to
     purchase up to 326,087 shares of common stock. For more information, see
     "BUSINESS - Laurus Debt Investment" below. This prospectus covers the
     resale of (a) up to 1,932,523 shares as our estimate of the maximum number
     of shares of common stock that may be issuable to Laurus from time to time,
     subject to certain restrictions, upon conversion of principal and interest
     under the $1.5 million secured convertible term note, plus (b) up to
     326,087 shares, subject to certain restrictions, issuable to Laurus upon
     the exercise of the warrant. The Laurus 2005 Note is currently convertible
     into shares of our common stock at an initial conversion price of $1.17 per
     share. The warrant has an exercise price of $1.37 per share and expires on
     January 31, 2010.

o    This prospectus covers the resale of up to 200,000 shares issuable to
     Laurus upon the exercise of a warrant that we granted to Laurus in
     consideration for a waiver and six-month deferral on principal payments
     under our May 2004 $2.5 million secured convertible note. The warrant has
     an exercise price of $1.48 per share and expires on January 31, 2009. For
     more information, see "BUSINESS - Laurus Debt Investment."

o    This prospectus also covers the resale of 105,263 shares issuable upon
     exercise of a warrant issued to Source Capital Group, Inc., our broker in
     connection with the Laurus debt financing. As and to the extent that Laurus
     converts its 2005 Note into shares of our common stock, the warrant will be
     exercisable for a number of shares equal to the quotient obtained by
     dividing (a) 8% of the dollar amount of any principal and interest under
     the note being converted into common stock, by (b) $1.17, up to an
     aggregate maximum of 105,263 shares. The warrant has an exercise price of
     $1.37 per share and expires on January 31, 2010.

The table below sets forth certain information about the selling security
holders, including the number of shares of common stock known to us as being
beneficially owned by each selling security holder as of March 11, 2005, and the
number of shares being registered hereunder and that may be offered for sale
from time to time by the selling security holders. To our knowledge and except
as noted in the table below, following the offering and sale of the shares, none
of the selling security holders will beneficially own more than one percent of
the issued and outstanding shares of common stock. None of the selling security
holders has held any position or office with our company or has had, except as
described in this prospectus, any material relationship with us within the past
three years.

We have agreed with Laurus to register the shares underlying its convertible
note and warrant and to keep the registration statement of which this prospectus
constitutes a part effective until the earlier of (i) January 31, 2008, (ii) the
sale of all the shares, or (iii) such time that all unsold shares may be sold
immediately without registration under the Securities Act and without volume
restrictions pursuant to Rule 144(k). In addition, we agreed with Source Capital
Group, Inc. to register the shares underlying its warrant and to keep such
registration effective for 120 days from the effective date.

We have also agreed with our selling security holders to pay all expenses in
connection with the registration and sale of the shares, except any selling
commissions or discounts allocable to sales of the shares, fees and
disbursements of counsel and other representatives of the selling security
holders, and any stock transfer taxes payable by reason of any such sale.

The following table assumes that the selling security holders will convert all
amounts under the note and exercise the warrants in full, and sell all of the
shares offered by them in this offering. However, we are unable to determine the
exact number of shares that will actually be sold or when or if these sales will
occur. In addition, we are unable to determine the exact number of shares, if
any, that will be issued to the selling security holders upon conversion of the
note or upon exercise of the warrants. We will not receive any of the proceeds
from the sale of the shares offered under this prospectus; although we will
receive proceeds to the extent any of the warrants are exercised for cash.

                                      -15-



                                    BENEFICIAL OWNERSHIP PRIOR TO                         BENEFICIAL OWNERSHIP AFTER
                                               OFFERING                NO. OF SHARES                OFFERING
                                   ---------------------------------    OF COMMON        ------------------------------
     SELLING SECURITY HOLDER             NUMBER          PERCENT       STOCK OFFERED         NUMBER         PERCENT
================================== =================== ============= ================== ================= ============
                                                                                             
Laurus Master Fund Ltd.               700,602 (1)(2)      4.99%(2)      2,458,610 (3)     835,117 (1)(2)    4.99%(2)
Source Capital Group, Inc.            356,201 (4)         2.6             105,263 (5)     250,938 (4)       1.8
TOTAL                               1,056,803             7.3% (2)      2,563,873       1,086,055           6.4% (2)
================================== =================== ============= ================== ================= ============

- ------------------
(1)  As a result of the May 28, 2004 debt financing, Laurus is the holder of the
     2004 Note and a warrant to purchase up to 681,818 shares of common stock at
     exercise price of $1.25 per share ("2004 Warrant"). In addition, pursuant
     to our January 31, 2005 debt financing, Laurus is the holder of the 2005
     Note, a warrant to purchase up to 326,087 shares at an exercise price of
     $1.37 per share, and a warrant to purchase up to 200,000 shares at an
     exercise price of $1.48 per share. Our estimate of the maximum number of
     shares that may be issued to Laurus from time to time upon conversion of
     the outstanding principal and interest under the 2004 Note and 2005 Note,
     respectively, is 2,308,491 shares and 1,932,523 shares. However, as
     described in footnote (2) below, Laurus is currently the beneficial owner
     of a number of shares under the notes and warrants that represents a
     maximum of 4.99% of the outstanding common stock. The shares underlying the
     2004 Note and the 2004 Warrant held by Laurus have been registered for
     resale with the SEC, pursuant to a registration statement on Form SB-2
     declared effective by the SEC on September 28, 2004; and the above table
     assumes that Laurus will continue to hold the 2004 Note and the 2004
     Warrant (and the shares issuable upon conversion or exercise) after
     completion of the offering to which this prospectus relates. To our
     knowledge, Laurus has sole voting and investment power with respect to the
     shares of common stock beneficially owned by it, except that Laurus Capital
     Management, LLC, a Delaware limited liability company, may be deemed a
     control person of the shares owned by Laurus. David Grin and Eugene Grin
     are the principals of Laurus Capital Management, LLC, and their address is
     825 Third Avenue, 14th Floor, New York, New York 10022.
(2)  The terms of the convertible notes and warrants issued to Laurus effective
     May 28, 2004 and January 31, 2005 prohibit conversion of the notes or
     exercise of the warrants to the extent that such conversion or exercise
     would result in Laurus, together with its affiliates, beneficially owning
     in excess of 4.99% of our outstanding shares of common stock. Laurus may
     waive the 4.99% limitation upon 75 days' prior written notice to us. As of
     the date of this prospectus, Laurus has not waived the 4.99% limitation.
     Also, this limitation does not preclude Laurus from converting the notes or
     exercising the warrants and selling shares underlying the note or warrant
     in stages over time where each stage does not cause the holder and its
     affiliates to beneficially own shares in excess of the limitation amount.
(3)  Consists of (a) up to 1,932,523 shares as our estimate of the maximum
     number of shares of common stock that may be issued to Laurus from time to
     time upon conversion of the principal and interest over the term of the
     2005 Note, (b) up to 326,087 shares issuable upon exercise of outstanding
     warrants issued January 31, 2005 to Laurus with an exercise price of $1.37
     per share, and (c) up to 200,000 shares issuable upon exercise of
     outstanding warrants issued January 31, 2005 to Laurus with an exercise
     price of $1.48 per share.
(4)  In addition to the shares being offered for sale in this prospectus,
     includes (a) up to 181,818 shares issuable upon exercise of a warrant to
     Source Capital Group in connection with the May 2004 Laurus debt financing,
     which is exercisable only as and to the extent of conversion of principal
     and interest under the 2004 Note held by Laurus (currently exercisable only
     for 3,263 shares), at an exercise price of $1.25, and (b) up to 69,120
     shares underlying a warrant held by Source Capital Group to purchase common
     stock at a price of $0.60 per share, which is fully exercisable. The shares
     underlying these two warrants held by Source Capital Group have previously
     been registered for resale with the SEC, pursuant to a registration
     statement on Form SB-2 declared effective by the SEC on September 28, 2004.
     The above table assumes that the shares underlying both of these other
     warrants continue to be beneficially owned by Source Capital Group after
     completion of the offering to which this prospectus relates.
(5)  Consists of up to 105,263 shares issuable upon exercise of a warrant issued
     to Source Capital Group in connection with the January 2005 Laurus debt
     financing, which is exercisable only as and to the extent of conversion of
     principal and interest under the 2005 Note held by Laurus (not currently
     exercisable), at an exercise price of $1.37 per share.

                                      -16-


                              PLAN OF DISTRIBUTION

The shares covered by this prospectus may be offered and sold from time to time
by the selling security holders. The selling security holders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The selling security holders may sell the shares being
offered hereby on the OTC Bulletin Board or otherwise, at prices and under terms
then prevailing or at prices related to the then current market price or at
negotiated prices. Shares may be sold by one or more of the following means of
distribution:

     o    block trades in which the broker-dealer so engaged will attempt to
          sell such shares as agent, but may position and resell a portion of
          the block as principal to facilitate the transaction;
     o    purchases by a broker-dealer as principal and resale by such
          broker-dealer for its own account pursuant to this prospectus;
     o    over-the-counter distributions in accordance with the rules of the
          NASD;
     o    ordinary brokerage transactions and transactions in which the broker
          solicits purchasers;
     o    put or call option transactions relating to the shares;
     o    privately negotiated transactions;
     o    through the distribution of the shares by any selling security holder
          to its creditors, stockholders, partners, members or employees; and
     o    any combination of any of these methods of sale

We will not receive any of the proceeds from the sale of shares by the selling
security holders, but we will be responsible for expenses incurred in connection
with the registration of the shares. The selling security holders will be
responsible for all selling commissions, underwriting fees and stock transfer
taxes applicable to the sale of shares pursuant to this prospectus.

Laurus Master Fund, Ltd., one of the selling security holders, has agreed,
pursuant to the securities purchase agreement with us, that neither it nor any
of its affiliates and investment partners will (and it will not cause any person
or entity, directly or indirectly, to) engage in "short sales" of our common
stock for as long as its convertible term note is outstanding. "Short sales" are
contracts for the sale of shares of stock that the seller does not own, or
certificates which are not within the seller's control, so as to be available
for delivery at the time when, under applicable rules, delivery must be made.

In addition, selling security holders also may resell all or a portion of the
shares in open market transactions in reliance upon Rule 144 under the
Securities Act rather than pursuant to this prospectus, provided they meet the
criteria and conform to the requirements of Rule 144.

In effecting sales, brokers, dealers or agents engaged by the selling security
holders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling security holders in amounts to be negotiated prior to the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act of 1933 in
connection with such sales, and any such commissions, discounts or concessions
may be deemed to be underwriting discounts or commissions under the Securities
Act of 1933. We will pay all reasonable expenses incident to the registration of
the shares being offered hereby other than any commissions and discounts of
underwriters, dealers or agents.

In order to comply with the securities laws of certain states, if applicable,
the shares being offered hereby must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states such
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and there has been compliance thereof.

We have advised the selling security holders that the anti-manipulation rules of
Regulation M under the Securities Exchange Act of 1934 may apply to sales of
shares in the market and to the activities of the selling security holders and
their affiliates. In addition, we will make copies of this prospectus available
to the selling security holders and

                                      -17-


have informed them of the need for delivery of copies of this prospectus to
purchasers at or prior to the time of any sale of the shares offered hereby. The
selling security holders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act of 1933.

The selling security holders and any other persons participating in a
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder,
including Regulation M, which may restrict certain activities of, and limit the
timing of purchases and sales of the shares by the selling security holders and
other persons participating in a distribution of the shares. Furthermore, under
Regulation M, persons engaged in a distribution of the shares are prohibited
from simultaneously engaging in market making and certain other activities with
respect to the shares for a specified period of time prior to the commencement
of such distributions subject to specified exceptions or exemptions. All of the
foregoing may affect the marketability of the shares offered hereby. To the
extent required by law, we may require the selling security holders, and their
brokers, if applicable, to provide a letter that acknowledges compliance with
Regulation M under the Securities Exchange Act before authorizing the transfer
of the selling security holders' shares of common stock.

To the extent required, this prospectus may be amended and supplemented from
time to time to describe a specific plan of distribution. In particular, upon
being notified by a selling security holder that a material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, we will file a supplement to this prospectus, if required
pursuant to Rule 424(b) under the Securities Act, disclosing:

     o    the name of each such selling security holder and of the participating
          broker-dealer(s);
     o    the number of shares involved;
     o    the initial price at which the shares were sold;
     o    the commissions paid or discounts or concessions allowed to the
          broker-dealer(s), where applicable;
     o    that such broker-dealer(s) did not conduct any investigation to verify
          the information set out in this prospectus; and
     o    other facts material to the transactions.

In connection with the sale of shares of common stock being offered hereunder,
we have agreed to indemnify the selling security holders, and any person
controlling them, against certain liabilities, including liabilities under the
Securities Act of 1933, and those selling security holders have agreed to
indemnify us and certain related persons against certain liabilities, including
liabilities under the Securities Act of 1933.

We have agreed with Laurus Master Fund, Ltd. to register the shares underlying
its convertible note and warrant and to keep the registration statement of which
this prospectus constitutes a part effective until the earlier of (i) January
31, 2008, (ii) the sale of all the shares, or (iii) such time that all unsold
shares may be sold immediately without registration under the Securities Act and
without volume restrictions pursuant to Rule 144(k). In addition, we agreed with
Source Capital Group, Inc. to register the shares underlying its warrant and to
keep such registration effective for 120 days from the effective date.

            MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

Our common stock is currently quoted for trading on the OTC Bulletin Board under
the symbol "PBME." Initially, our common stock began trading in October 1996
(subsequent to the initial public offering) on The Nasdaq Stock Market under the
symbol "PBMI". In March 1999, our securities were delisted from The Nasdaq Stock
Market as we failed to meet the maintenance requirements for tangible net assets
and minimum stock price. The stock subsequently traded and continues to trade on
the OTC Bulletin Board. On January 10, 2003, our board of directors approved a
1:3 (one for three) reverse stock split on our common stock. The reverse split
was subsequently approved by our stockholders and became effective on March 14,
2003. All shares and per share calculations set

                                      -18-


forth in this prospectus reflect the 1:3 reverse stock split. In March 2003, the
ticker symbol for the common stock was changed to "PBME" from "PBMI" in
connection with the one-for-three reverse stock split.

The following table shows, for each quarter of fiscal 2004 and 2003 and the
first three quarters of fiscal 2005 (through March 11, 2005), the high and low
closing sales prices as reported by the OTC Bulletin Board. The quotations from
the OTC Bulletin Board reflect inter-dealer prices without retail mark-up,
mark-down, or commissions and may not represent actual transactions.

                                                              OTC BULLETIN BOARD
                                                               HIGH        LOW
         FISCAL 2005:
         Third quarter (through March 11, 2005)..........     $1.33       $0.87
         Second quarter, ended December 31, 2004.........      1.20        0.60
         First quarter, ended September 30, 2004.........      1.03        0.65

         FISCAL 2004:
         Fourth quarter, ended June 30, 2004.............      1.25        0.80
         Third quarter, ended March 31, 2004.............      1.25        0.65
         Second quarter, ended December 31, 2003.........      2.00        0.75
         First quarter, ended September 30, 2003.........      2.00        0.90

         FISCAL 2003:
         Fourth quarter, ended June 30, 2003.............      1.70        0.52
         Third quarter, ended March 31, 2003.............      1.10        0.36
         Second quarter, ended December 31, 2002.........      0.69        0.33
         First quarter, ended September 30, 2002.........      0.75        0.075

HOLDERS

As of March 11, 2005, there were 13,353,550 shares of common stock issued and
outstanding, held by approximately 261 holders of record.

DIVIDENDS

We have never declared or paid any cash dividends with respect to our common
stock, and do not plan to do so in the foreseeable future.

There are no dividends accruing on our Series A preferred stock. In September
2002, the holders of Series A preferred stock approved an amendment to the
Certificate of Designation with respect to the rights and preferences of the
Series A preferred stock to, among other things, convert the then-accrued 8%
dividend on the Series A preferred stock into an aggregate of 150,000 shares of
common stock and eliminate any further mandatory dividends on the Series A
preferred stock.

There are no shares of our Series B preferred stock issued and outstanding. In
June 2004, all three holders of Series B preferred stock voluntarily converted
their shares of Series B preferred stock and accrued and unpaid dividends
(approximately $3,295) into a total of 104,294 shares of common stock. See
"DESCRIPTION OF SECURITIES - Preferred Stock - Series B Preferred Stock" below.
Prior to such conversion, there were 33,666.66 shares of our Series B preferred
stock issued and outstanding, and the Series B preferred stock accrued dividends
at a rate of 8% per annum, compounded quarterly. For the fiscal year ended June
30, 2004, we paid cash dividends on the Series B preferred stock of
approximately $4,000, and approximately $3,295 of accrued and unpaid dividends
at May 31, 2004 were converted into shares of common stock. There are no
remaining accrued and unpaid dividends on the Series B preferred stock.

We anticipate that we will retain future earnings for use in the operation and
expansion of our business and do not anticipate paying cash dividends on our
equity in the foreseeable future. Any future determination with regard to the
payment of dividends will be at the discretion of our board of directors and
will be dependent upon our future

                                      -19-


earnings, financial condition, applicable dividend restrictions and capital
requirements and other factors deemed relevant by the board of directors.

RECENT SALES OF UNREGISTERED SECURITIES

On August 28, 2002, pursuant to the terms of the asset purchase agreement with
Saigene Corporation (see "BUSINESS - Saigene Investment Transaction"), we issued
to Saigene 6,541,430 shares of our common stock, and an additional 458,570
shares of common stock to certain of Saigene's designees, as consideration for
the purchased assets. The asset purchase agreement, entered into on June 27,
2002, and as amended August 28, 2002, provided for our purchase of certain
assets of Saigene, including technology, intellectual property and equipment
assets in connection with certain DNA amplification and cell viability and
related technologies and processes. We issued the shares of common stock in
reliance on the statutory exemption from registration provided by Section 4(2)
of the Securities Act.

In connection with the consummation of the transactions contemplated by the
asset purchase agreement with Saigene, the holders of our Series A preferred
stock consented to an amendment to the Certificate of Designation with respect
to the rights and preferences of the Series A preferred stock, and agreed to
convert all accrued dividends (approximately $910,000) on the Series A preferred
stock into an aggregate of 150,000 shares of our common stock. We issued the
shares of common stock in reliance on the statutory exemption from registration
provided by Section 4(2) of the Securities Act.

Further, in connection with the consummation of the transactions contemplated by
the asset purchase agreement with Saigene, effective August 28, 2002, we entered
into agreements with nine current and former executives and employees pursuant
to which such persons agreed to convert the full amount of their deferred
compensation and notes payable owed by us into shares of our common stock.
Pursuant to these agreements, we granted warrants to purchase 117,624 shares of
our common stock in consideration for conversion of an aggregate of $352,874
owing in deferred compensation and notes payable, and granted stock options
pursuant to our 1996 Stock Incentive Plan to purchase 183,917 shares of common
stock upon conversion of $580,598 in deferred compensation. The warrants and
options are exercisable at a price of $0.51 per share, and expire on August 27,
2012. The warrants to purchase common stock were granted in reliance on the
statutory exemption from registration provided by Section 4(2) of the Securities
Act. The stock options were granted pursuant to our 1996 Stock Incentive Plan,
pursuant to our Registration Statement on Form S-8 filed on March 18, 1997.

In December 2002, we and Transamerica Business Credit Corporation restructured
our debt obligations to Transamerica in the amount of approximately $470,000. In
settlement of our prior obligations, we issued to Transamerica 50,000 shares of
our common stock, and entered into a new promissory note payable to Transamerica
in the principal amount of $245,000. Saigene is a co-maker on the promissory
note with us. The promissory note carries an interest rate of approximately 10%
and is payable over a 36-month period with final payment due on October 1, 2005.
See "Note 7 to Notes to Consolidated Financial Statements" for the year ended
June 30, 2003, included in this prospectus. The shares of common stock were
issued to Transamerica in reliance on the statutory exemption from registration
provided by Section 4(2) of the Securities Act.

From March 2003 through July 31, 2003, we conducted a private placement for the
sale and issuance of up to 1,666,667 shares of our Series B preferred stock at a
purchase price of $3.00 per share. The Series B preferred stock is convertible
into shares of our common stock. See "DESCRIPTION OF SECURITIES - Preferred
Stock" below. In connection with the private offering, we engaged Joseph Carl
Securities, Inc. as placement agent to offer the Series B preferred stock on a
best efforts basis. As compensation for the placement agent's services, we paid
the placement agent a cash commission of 8% and a non-accountable expense
allowance of 2% of the amount of Series B preferred stock sold. In addition, we
agreed to issue to the placement agent one common stock purchase warrant at an
exercise price of $3.00 per share, expiring January 31, 2005, for each 10 shares
of Series B preferred stock sold in the offering. Through July 31, 2003, the
date of termination of the private placement, we had sold 33,666.66 shares of
Series B preferred stock for total net proceeds of $72,920, entitling the
placement agent to receive 3,366 warrants. The shares and warrants were sold and
issued solely to accredited investors in reliance on the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act.

                                      -20-


Effective May 31, 2003, we entered into a settlement agreement with our prior
landlord in California relating to certain defaults on two prior promissory
notes in the aggregate principal amount of approximately $365,000. See "Note 13
to Notes to Consolidated Financial Statements" for the year ended June 30, 2003,
included in this prospectus. As settlement for the prior obligations, we entered
into a new promissory note with the landlord in the principal amount of $320,315
and issued to the landlord 16,667 shares of our common stock. The promissory
note carries an interest rate of 10% per annum, and is payable over a 26-month
period with final payment due not later than July 31, 2005. In addition, as
partial security for repayment of the note, we issued a total of 666,666 shares
of our common stock into an escrow account, to be released back to us upon
payment in full of the promissory note. In addition, for each calendar quarter
in which we make aggregate payments of at least $50,000 on the note, 83,333
shares will be released to our transfer agent for cancellation. The shares were
issued in reliance on the statutory exemption from registration provided by
Section 4(2) of the Securities Act.

In August 2003, we entered into a Loan and Security Agreement with Franklin
Funding, Inc., pursuant to which we borrowed $250,000. In connection with the
Loan and Security Agreement, we agreed to grant to Franklin Funding stock
purchase warrants to purchase up to 25,000 shares of our common stock, in
increments of 5,000 shares, for each $50,000 borrowed, each with an exercise
price determined as of the respective date of borrowing. Accordingly, we granted
to Franklin Funding warrants to purchase 25,000 shares, consisting of warrants
for 5,000 shares at $1.10 per share, 5,000 shares at $1.00 per share, 10,000
shares at $0.95 per share, and 5,000 shares at $0.85 per share. The warrants
were granted in reliance on the statutory exemption from registration provided
by Section 4(2) of the Securities Act.

In November 2003, we initiated a best efforts private placement of unregistered
common stock through registered broker-dealers, for the sale of up to 3,000,000
shares of common stock at a purchase price of $0.50 per share, with up to a 10%
overallotment option. In connection with the private placement, we engaged
Source Capital Group, Inc. and Basic Investors, Inc. as non-exclusive placement
agents to offer the common stock on a best efforts basis. As compensation for
the placement agents' services, we agreed to pay aggregate cash commissions of
10% of the gross proceeds received and to issue stock purchase warrants to
purchase one share of common stock for each 10 shares of common stock sold. The
warrants have an exercise price of $0.60 per share and expire on December 31,
2006. In January 2004, our Board of Directors approved an increase in the size
of the private placement to up to 4,000,000 shares. The private placement
terminated in early March 2004. We received gross proceeds of $1,923,000 from
the sale of a total of 3,846,000 shares, and recorded aggregate commissions of
$192,300 and warrants covering 384,600 shares of unregistered common stock at
$0.60 per share, expiring December 31, 2006. The private placement shares were
offered and sold solely to accredited investors in reliance on the exemption
from registration provided by Rule 506 of Regulation D under the Securities Act.

Effective May 28, 2004, we issued to Laurus Master Fund, Ltd. a $2.5 million
secured convertible note with a term of three years, and a warrant to purchase
up to 681,818 shares of common stock at an exercise price of $1.25 per share
exercisable at any time prior to May 28, 2011. See "BUSINESS - Laurus Debt
Investment" below. The note is convertible into shares of our common stock at an
initial conversion price of $1.06 per share. The conversion price is subject to
certain anti-dilution adjustments, including if we issue convertible or equity
securities (subject to certain exceptions) at a price less than the conversion
price. We registered with the SEC for resale the shares of common stock that are
issuable upon conversion of the note and upon exercise of the warrant, pursuant
to a registration statement on Form SB-2 declared effective September 28, 2004.
The note and warrant were offered and sold in reliance on the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act.
Through January 31, 2005, Laurus has converted $53,000 of the outstanding
principal on the 2004 Note for 50,000 shares of our common stock. This
conversion of debt to common stock has left an outstanding principal balance of
$2,447,000 as of January 31, 2005. At closing, we paid cash commissions of
$75,000 to our broker, Source Capital Group, Inc.; in addition, for any amounts
of the outstanding principal and accrued and unpaid interest owing on the note
that are converted into shares of our common stock, we are also obligated to pay
our broker additional placement agent fees of 4% of the amount being converted,
for maximum additional fees of up to $100,000. In addition, we issued to our
broker a five-year warrant, exercisable as and to the extent that amounts owing
under the Laurus note are converted into common stock, for up to 181,818 shares
of common stock at an exercise price of $1.25 per share.

In May 2004, we offered to our three holders of Series B preferred stock the
opportunity to voluntarily convert all of their shares of Series B preferred
stock, and all accrued and unpaid dividends thereon through May 31, 2004

                                      -21-


(approximately $3,295), into shares of common stock. The conversion ratio was 3
shares of common stock for one share of Series B preferred stock, plus 1 share
of common stock for each $1 in accrued and unpaid dividends. In June 2004, all
three preferred holders accepted our conversion offer and canceled their shares
of Series B preferred stock and accrued and unpaid dividends, and we issued a
total of 104,294 shares of common stock upon such conversion and there are no
shares of Series B preferred stock issued and outstanding. The shares of common
stock were issued in reliance on the statutory exemption from registration
provided by Section 4(2) of the Securities Act.

Effective September 30, 2004, we signed an engagement agreement with Utek
Corporation, a public company listed on the American Stock Exchange. The
engagement calls for Utek to identify one or more licensing, royalty or asset
sale opportunities for some or all of the technology assets held in our
subsidiary, PBI Technology, Inc. Should Utek identify a potential licensing,
royalty or asset sale opportunity the Board of Directors, at its sole discretion
has the right to approve the terms. The engagement agreement is terminable by
either party at any time upon 30 days notice. The terms of the engagement
agreement call for no cash compensation to be paid to Utek. However, we agreed
to issue to Utek a minimum of 129,730 unregistered shares of common stock as
compensation, with 1/12th of the shares (10,810 shares) vesting each month
during the term of the Agreement. In the event the aggregate value of the shares
when they vest is less than $120,000, we will issue additional shares to Utek
upon successful completion of the 12-month term of the agreement. In the event
of termination before the completion of the 12-month term of the agreement, all
unvested shares of common stock shall be returned to the Company. The shares
were issued in reliance on the statutory exemption from registration provided by
Section 4(2) of the Securities Act. As of March 11, 2005 64,860 shares of common
stock had vested to Utek.

Effective January 31, 2005, we issued to Laurus Master Fund, Ltd. a $1.5 million
secured convertible note with a term of three years, and a warrant to purchase
up to 326,087 shares of common stock at an exercise price of $1.37 per share
exercisable at any time prior to January 31, 2010. See "BUSINESS - Laurus Debt
Investment" below. The note is convertible into shares of our common stock at an
initial conversion price of $1.17 per share. The conversion price is subject to
certain anti-dilution adjustments, including if we issue convertible or equity
securities (subject to certain exceptions) at a price less than the conversion
price. We have agreed to register with the SEC for resale the shares of common
stock that are issuable upon conversion of the note and upon exercise of the
warrant, and are obligated to file a registration statement on Form SB-2 prior
to March 15, 2005.

The note and warrant were offered and sold in reliance on the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act. In
connection with the January 2005 closing, we paid cash commissions of $45,000 to
our broker, Source Capital Group, Inc.; in addition, for any amounts of the
outstanding principal and accrued and unpaid interest owing on the note that are
converted into shares of our common stock, we are also obligated to pay our
broker additional placement agent fees of 4% of the amount being converted, for
maximum additional fees of up to $60,000. In addition, we issued to our broker a
five-year warrant, exercisable as and to the extent that amounts owing under the
Laurus 2005 Note are converted into common stock, for up to 105,263 shares of
common stock at an exercise price of $1.37 per share.

On January 31, 2005, we also issued to Laurus Master Fund, Ltd. a warrant to
purchase up to 200,000 shares of common stock at an exercise price of $1.48 per
share, in consideration for six-month principal payment deferral on the 2004
Note. The warrant expires on January 31, 2009. See "BUSINESS - Laurus Debt
Investment" below. The warrant was offered and sold in reliance on the statutory
exemption from registration provided by Section 4(2) of the Securities Act.

Effective January 31, 2005, we signed an agreement with The Investor Resource
Group (IRG) to provide certain investor relations services to us. Pursuant to
the terms of the agreement, we issued a total of 125,000 shares of common stock
to two principals of IRG. The shares of common stock were issued in reliance on
the statutory exemption from registration provided by Section 4(2) of the
Securities Act.

                                      -22-


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR
CONSOLIDATED AUDITED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE YEAR ENDED
JUNE 30, 2004, AND OUR CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED
CONDENSED NOTES FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004, BOTH
INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR HISTORICAL INFORMATION, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. SEE "CAUTIONARY NOTICE
REGARDING FORWARD LOOKING STATEMENTS" AND "RISK FACTORS" ABOVE

OVERVIEW

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and development efforts. Our clients include a number of
the world's largest multi-national pharmaceutical, biotechnology and diagnostic
companies. Our well-recognized specialty areas include cardiovascular disease
(dyslipidemia, atherosclerosis, and coronary heart disease), diabetes (and
obesity), and bone and joint diseases (osteoporosis and arthritis). Coupled with
our specialty testing, we also have central laboratory capability and provide
full-service central laboratory support for multi-center clinical trials,
including routine safety lab tests (general chemistry, hematology, and
urinalysis). Our company is a Delaware corporation, incorporated on May 9, 1996,
and we conduct our operations primarily through our wholly-owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including,
among others, those affecting revenues, the allowance for doubtful accounts, and
the useful lives of tangible and intangible assets. The discussion below is
intended as a brief discussion of some of the judgments and uncertainties that
can impact the application of these policies and the specific dollar amounts
reported on our financial statements. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form our basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, or if management made
different judgments or utilized different estimates. Many of our estimates or
judgments are based on anticipated future events or performance, and as such are
forward-looking in nature, and are subject to many risks and uncertainties,
including those discussed below and elsewhere in this prospectus. We do not
undertake any obligation to update or revise this discussion to reflect any
future events or circumstances.

We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is neither a complete list of all of our accounting policies,
nor does it include all the details surrounding the accounting policies we have
identified. There are other accounting policies that are significant to our
company. For a more detailed discussion on the application of these and our
other accounting policies, see "Note 2 to the Consolidated Financial Statements"
for the year ended June 30, 2004, included elsewhere in this prospectus.

         REVENUE RECOGNITION

         We recognize revenue in the period that the related services are
performed. Historically, a majority of our revenues have been earned under
contracts which range in duration from six months to eighteen months, but can
extend in duration up to two years or longer. Service contracts generally take
the form of fixed-price arrangements. Under fixed-price contracts, revenue is
recognized as services are performed, with performance generally assessed using
output measures, such as units-of-work performed to date as compared to the
total units-of-work contracted. Changes in the scope of work generally result in
a renegotiation of contract pricing terms. Renegotiated amounts are not included
in net revenues until earned and realization is assured. We also receive
advances from certain

                                      -23-


customers related to the services to be performed for them. These advances are
deferred and recognized as revenue in the period the related services are
performed. Estimates of costs to complete are made, as appropriate, to provide
for losses expected on contracts. Costs are not deferred in anticipation of
contracts being awarded, but instead are expensed as incurred.

         IMPAIRMENT OF TECHNOLOGY ASSETS

         As of June 30, 2004, our periodic assessment of the impairment issues
on our technology assets led us to conclude that the recorded value of those
assets should be written off. We considered our ability to recover the value of
our technology assets from undiscounted cash flows of the related operations. In
particular, factors we considered included: reductions in our workforce,
generally as well as in research and development, in the second and third
quarters of fiscal 2004 (which was then considered to be temporary, but which
has since become more extended); our inability to secure a licensing or other
partnership arrangement to date for the intangible assets; and our inability to
obtain financing specifically for further development of the technology assets
to date. While we have obtained equity and debt funding for our general
operations through the Laurus debt financing in May 2004 and our private
placement in March 2004, and while we intend to continue to pursue development
efforts, partnership, licensing or other means to realize the value of our
intangible assets, we believe that current conditions have changed such that the
value of these assets are now less likely to be recovered in the near term, and
should be written off. Accordingly, as of June 30, 2004, we wrote off the entire
balance of $476,874 of technology assets as an operating expense, "Impairment of
technology assets" (in accordance with SFAS 144 - "ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS"). (See "Note 2 to Notes to Consolidated
Financial Statements" - Summary of Significant Accounting Policies - Technology
Assets ). We had no comparable expense in fiscal 2003.

         BENEFICIAL CONVERSION FEATURE

         In accordance with Financial Accounting Standards Board (FASB) Emerging
Issues Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, using the
relative fair value method of Accounting Principles Board Opinion 14 ("APB 14"),
we recorded a beneficial conversion feature (BCF) related to the issuance of
convertible debt that has conversion features at fixed rates that are
in-the-money when issued and recorded value allocated to warrants issued with
those instruments. The BCF for the convertible instrument and value allocated to
warrants are measured and recognized by allocating a portion of the proceeds to
additional paid-in capital with an offset to a discount on the convertible
instrument.

         For convertible debt and related warrants, the recorded discount is
amortized as interest expense using the effective interest method over the life
of the debt.

         BAD DEBT ALLOWANCE

         We endeavor to assess and monitor the creditworthiness of our customers
to which we grant credit terms in the ordinary course of business. We maintain a
provision for doubtful accounts to provide for the possibility that amounts due
to us may not be collected. As of June 30, 2004, the allowance for bad debt was
approximately 6% of our total accounts receivable. This bad debt provision is
monitored on a monthly basis and adjusted as circumstances warrant. As the
recorded bad debt provision is based upon management's judgment, actual bad debt
write-offs may be greater or less than the amount recorded. Historically bad
debt write-offs have not been material.

         OPERATING EXPENSES

         Historically, we have segregated our recurring operating expenses among
three categories: laboratory and cost of goods sold; selling, general and
administrative expenses; and research and development. For the fiscal period
ended June 30, 2004, operating expenses also included a fourth category,
impairment of technology assets, as described above. Laboratory expenses and
cost of goods sold consist of amounts necessary to complete the revenue and
earnings process, and include direct labor and related benefits, other direct
costs, and an allocation of facility charges and information technology costs,
and depreciation and amortization. Also, laboratory expenses and cost of goods
sold include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenues,
tends, and is expected, to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving studies
conducted during any period

                                      -24-


of time. Selling, general and administrative expenses include business
development activities, sales and marketing expenses and related commissions,
and laboratory administration expenses. Selling, general and administrative
expenses consist primarily of administrative payroll and related benefit
charges, Saigene management fees, legal and accounting fees, advertising and
promotional expenses, administrative travel and an allocation of facility
charges, information technology costs, and depreciation and amortization.
Research and development expenses consist of direct labor and related benefits,
supplies, legal fees for patent applications, travel expenses, and depreciation
and amortization. Impairment of technology assets resulted from the write-off of
our technology assets described above.

         We depreciate equipment and computers over three to five years, while
leasehold improvements are depreciated over the remaining life of the lease or
ten years. This estimate of a three to five-year useful life on equipment and
computers and a useful life based on the remaining years left on the building
lease for leasehold improvements reflects management's judgment that these
useful life periods reflect a reasonable estimate of the life over which the
equipment, computers and leasehold improvements will be used by us. However, the
amount of depreciation expense we record in any given period will change if our
estimates of the useful life of our equipment, computers or leasehold interests
were to increase or decrease.

RESULTS OF OPERATIONS FOR THREE-MONTH AND SIX-MONTH PERIODS ENDED DECEMBER 31,
2004 AND 2003

REVENUES:

- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
REVENUES                       $1,009        $542        $467     86%       $1,443      $2,842     $(1,399)     (49)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------


Our revenues are generated from clinical trials and diagnostic testing services.
Our revenues increased to $1,009,000 from $542,000 or approximately 86% between
the comparable quarters ended December 31, 2004 and 2003, respectively. This was
the result of an increase in the size and number of clinical trials testing
services we performed. This increase reflects increases in open work order and
ends the significant decline in revenues we had been experiencing over the past
several quarters. For the comparable six months ended December 31, 2004 and
2003, our revenues decreased to $1,443,000 from $2,842,000 or approximately 49%.
This was the result of a decrease in the size and number of clinical trials
testing services we performed during the comparable six-month periods,
especially during the comparable three-month period ended September 30, 2004.

Our quarterly fluctuations in total revenues are often explained by changes in
the testing and open work orders from our historically largest customers. This
is the result of prior work orders having been completed, clinical studies
having ended or clinical studies having been terminated early. In particular,
our recent fluctuations in revenues can be partially explained by the testing
requirements and open work orders our top five customers. For the three- and
six-month periods ended December 31, 2004, our current largest customer
accounted for 37% and 31% of our total revenues, compared to approximately 7%
and 8%, respectively, for the three- and six-month periods ended December 31,
2003. For the foreseeable future, we expect to remain substantially dependent on
our top five customers for a significant portion of our revenues, and as such, a
decline or increase in the volume of services performed for any one or more of
these customers will continue to have a significant impact on our revenues. The
concentration of credit risk is described above in the RISK FACTORS: Risks
Relating to Our Company and Our Business and below in BUSINESS:
Customers/Marketing.

During the quarter and six months ended December 31, 2004, revenue generated
from clinical trials testing services accounted for approximately 62% and 50%,
respectively, of our total revenues as compared to 29% and 81%, respectively,
during the quarter and six months ended December 31, 2003. During the quarter
and six months ended December 31, 2004, revenue generated from the provision of
diagnostic, referral and other services accounted for approximately 48% and 50%,
respectively, of our total revenues as compared to 71% and 19%, respectively,
during the quarter and six months ended December 31, 2003. In previous fiscal
years, the percentage of revenue generated from clinical trials testing services
has been in excess of 90%. We expect the trend to continue toward a higher
percentage of clinical trials testing, as we observed in the quarter ended
December 31, 2004.

                                      -25-


LABORATORY EXPENSE AND COST OF GOODS SOLD:


- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
LABORATORY EXPENSES AND
COST OF GOODS SOLD               $586         $450       $136       30%        $996        $1,744     $(748)    (43)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
PERCENTAGE OF REVENUES            58%          83%                              69%           61%
- ---------------------------- ------------ -----------                     ------------ ----------


Laboratory expense and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical trial
samples, the cost of supplies for analysis of clinical trial samples, payments
to subcontractors of laboratory services, and other expenses such as business
and occupation taxes. For the comparable quarters ended December 31, 2004 and
2003, laboratory expenses and cost of goods sold increased approximately 30% to
$586,000 from $450,000, respectively, and as a percentage of revenue, decreased
to approximately 58% from approximately 83%. The relative decrease in laboratory
expense and cost of goods sold as a percentage of revenue was primarily the
result of the significant increase in revenues over the comparable period and
the fixed components of laboratory expense and cost of goods sold.

For the comparable six-month periods ended December 31, 2004 and 2003,
laboratory expense and cost of goods sold decreased approximately 43%, and as a
percentage of revenue, increased to approximately 69% from approximately 61%,
respectively. The relative increase in laboratory expense and cost of goods sold
as a percentage of revenue was primarily the result of the significant decline
in revenues over the comparable periods and the fixed components of laboratory
expense and cost of goods sold.

The primary factor explaining the increase between the comparable quarters in
laboratory expense and costs of goods sold was the 252% increase in lab supplies
to $190,000 from $54,000 for the quarters ended December 31, 2004 and 2003,
respectively, representing approximately 32% and 12% of total laboratory expense
and cost of goods sold, respectively. The increase in lab supplies between the
comparable quarters is the result of the increase in the clinical and diagnostic
testing services we provided.

Salaries and related benefits fell 10% to $225,000 from $250,000 for the
quarters ended December 31, 2004 and 2003, respectively, accounting for
approximately 38% and 56% of total laboratory expense and cost of goods sold,
respectively. On December 31, 2004 we had 20 FTEs in our laboratory services as
compared to 20.5 FTEs on December 31, 2003. With approximately the same FTEs,
the relatively small decrease in salaries and benefits, even with the increase
in revenues, is a result of more efficient use of labor. In addition, the
decrease in salaries and related benefits for the comparable quarters partially
reflects actions to reduce and control employee expenses that we took during
fiscal 2004, subsequent to the quarter ended December 31, 2003.

Also for the comparable quarters, there was a 50% reduction in outside services
to $8,000 from $16,000 for the quarters ended December 31, 2004 and 2003,
respectively. As a percentage of laboratory expense and costs of goods sold,
outside services were approximately 1% and 4% for the quarters ended December
31, 2004 and 2003, respectively. This reduction was the result of the mix of
tests we provided during the quarter ended December 31 2004, which did not
require any significant amount of outside services.

For the comparable six-month periods, the most significant decrease in
laboratory expense and cost of goods sold was the 96% reduction in outside
services to approximately $21,000 from $508,000 for the six-month periods ended
December 31, 2004 and 2003, respectively. As a percentage of laboratory expense
and costs of goods sold, outside services were approximately 2% and 29% for the
six-month periods ended December 31, 2004 and 2003, respectively. This reduction
was the result of the mix of tests we provided during the six-month period ended
December 31, 2004, which did not require any significant amount of outsourcing.

                                      -26-


The second most critical component explaining the decrease in laboratory expense
and costs of goods sold for the six-month periods ended December 31, 2004 and
2003 was the 32% reduction in lab supplies to $259,000 from $379,000,
respectively. Lab supplies represented approximately 26% and 22% of laboratory
expense and cost of goods sold for the six-month periods ended December 31, 2004
and 2003, respectively. The reduction in lab supplies between the comparable
quarters is the result of the reduction in revenue, and thus services, between
the comparable periods.

Finally, for the comparable six months ended December 31, 2004 and 2003,
salaries and related benefits fell 19% to $423,000 from $525,000, respectively.
Salaries and related benefits accounted for approximately 42% and 30% of total
laboratory expense and cost of goods sold for the six-month periods ended
December 31, 2004 and 2003, respectively. On December 31, 2004 we had 20 FTEs in
our laboratory services as compared to 20.5 FTEs on December 31, 2003. With
approximately the same FTEs, the decrease in salaries and benefits for the
comparable six-month periods partially reflects actions to reduce and control
employee expenses that we took during fiscal 2004, subsequent to the six-month
period ended December 31, 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE           $ 612       $ 735      $(123)     (17)%      $1,327       $1,597     $(270)    (17)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
PERCENTAGE OF REVENUES             61%        136%                               92%          56%
- ---------------------------- ------------ -----------                     ------------ ----------


Our selling, general and administrative expense consists primarily of
compensation for our executive officers, board members and other selling,
general and administrative personnel, compensation expense on our stock options,
legal and accounting fees, and payments under consulting arrangements, and
management fees paid to Saigene (prior to August 31, 2004). Selling, general and
administrative expense decreased 17% to approximately $612,000 from $735,000 for
the quarters ended December 31, 2004 and 2003, respectively. As a percentage of
revenue, selling, general and administrative expenses were 61% and 136%,
respectively, for the quarters ended December 31, 2004 and 2003. For the
comparative six-month periods ended December 31, 2004 and 2003, selling, general
and administrative expense decreased 17% to approximately $1,327,000 from
$1,597,000, respectively, and represented approximately 92% and 56%,
respectively, as a percentage of revenue.

The reduction in our selling, general and administrative expense for both the
comparable quarters and the comparable six-month periods is due in large part to
decreased management fees we paid under the terms of our former management
agreement with Saigene Corporation. During fiscal 2004, we made several
reductions in the amount of the monthly management fee: effective July 1, 2003,
reduced to $70,000 from $90,000; effective February 1, 2004, reduced to $40,000
per month; and effective June 15, 2004, reduced to $20,000 per month. Finally,
effective August 31, 2004, we terminated the agreement, eliminating further
management fees. For the comparable quarters ended December 31, 2004 and 2003,
management fees decreased 100% to $0 from $210,000, respectively, and for the
comparable six-month periods ended December 31, 2004 and 2003, management fees
decreased 90% to approximately $40,000 from $420,000, respectively. Excluding
Saigene management fees, selling, general and administrative expenses increased
13% to approximately $612,000 from $525,000 (approximately 61% and 97% as a
percentage of revenue) for the quarters ended December 31, 2004 and 2003,
respectively, and increased 9% to approximately $1,287,000 from $1,177,000
(approximately 89% and 41% as a percentage of revenue) for the six-month periods
ended December 31, 2004 and 2003, respectively.

In both comparable periods, this increase in selling, general and administrative
expenses (net of the Saigene management fees) was primarily the result of our
legal fees, accounting expenses and printing expenses increasing to $176,000
from $72,000 for the quarters ended December 31, 2004 and 2003, respectively,
and increasing to $329,000 from $134,000 for the six-month periods ended
December 31, 2004 and 2003, respectively. This increase was primarily a result
of work on our two resale registration statements. In addition, in both
comparable periods there was an increase in laboratory administration and sales
salaries and benefits, increasing 24% for the quarters

                                      -27-


ended December 31, 2004 and 2003, respectively, to $191,000 from $154,000 and
increasing 15% for the six months ended December 31, 2004 and 2003,
respectively, to $359,000 from $312,000.

Although selling, general and administrative expenses increased (net of the
Saigene management fees), management salaries, consulting fees, commissions,
board fees and related benefits and taxes fell 4% to $178,000 from $185,000
between the quarters ended December 31, 2004 and 2003, and fell 23% to $398,000
from $519,000 between the six-month periods ended December 31, 2004 and 2003,
respectively. These expenses include certain consulting expense. Under the terms
of consulting agreements dated August 28, 2002 with two of our directors, Terry
Giles and Paul Kanan, we recorded aggregate consulting expenses of $30,000 in
the quarter ended December 31, 2004, and $39,000 in the quarter ended December
31, 2003 (and $66,000 and $78,000 in the six-month periods ended December 31,
2004 and 2003, respectively). The consulting agreement with Mr. Kanan terminated
on August 31, 2004, and thus there are no further consulting fees due to him.
Overall, board and consulting fees fell 25% to $300,000 from $401,000 between
the six-month periods ended December 31, 2004 and 2003, respectively.

The decrease in salaries, commissions, board fees and related benefits is a
result of 1) decreased headcount and ongoing salary reductions of 15% to 20% for
three management level selling, general and administrative employees, 2)
decreased board fees, and 3) decreased commissions as a result of decreased
revenues in the comparable year over year quarters. The decrease in board fees
between the comparable quarters was primarily because the fees for the six-month
period ended December 31, 2003 included a large accrual of $74,000 for past due
board compensation. We recently adopted a new board compensation program for
fiscal 2005. Commencing with the election of the board of directors at our
annual stockholders' meeting on November 10, 2004, each non-employee director is
entitled to an annual retainer of $15,000, plus $500 for each board meeting
attended by such director during the fiscal year in excess of six meetings. Also
any non-employee director serving on the audit committee or the compensation
committee is entitled to $250 for each such committee meeting attended during
the fiscal year in excess of six meetings for each such committee. Chairs of the
Audit and Compensation Committees also receive an annual retainer of $2,500. In
addition, effective at the annual stockholders' meeting, the size of the board
was decreased from six to four directors, and as a result we currently
anticipate that board fees for future quarters of fiscal 2005 will be less than
in comparable quarters of fiscal 2004. The actual amount of board fees will
depend on whether and when additional directors are added to the board.

Selling, general and administrative expenses also include compensation expense
or income resulting from the May 2002 repricing of all outstanding stock options
to the then-current market price of $0.06. To adjust these options to fair
market value, we recognized expense of $2,529 and income of $55,000 for the
quarters ended December 31, 2004 and 2003, respectively. For the comparable
six-month periods ended December 31, 2004 and 2003, respectively, we recognized
an expense of approximately $283 and income of $46,000. As of December 31, 2004,
7,902 repriced options remained outstanding, and as long as these options remain
outstanding we will continue to recognize compensation expense (or income) as
appropriate in future periods resulting from the repricing. The amount of
compensation expense or income we recognize in the future will fluctuate based
on the value of our common stock and the number of options that are outstanding
as of each valuation date. (See "Note 11 to Notes to Consolidated Financial
Statements" in our Report on Form 10-KSB for the fiscal year ended June 30,
2004).

We also incurred approximately $293,500 in fees and expenses in May 2004 (the
fourth quarter of fiscal 2004), related to the 2004 Note, and we are amortizing
these fees over the anticipated 36-month life of the 2004 Note. We recognized
$39,000 of expense in the quarter ended December 31, 2004 (and $52,000 in
expense for the six months then-ended) leaving an unamortized balance of
$236,000 at December 31, 2004. This expense included $15,000 that would been
recognized during the fiscal year ended June 30, 2004 and the quarter ended
September 30, 2004, had we accrued the additional fees due to Source Capital. We
began accruing for these fees during the quarter ended December 31, 2004. We had
no comparable expense for either of the comparable periods ended December 31,
2003. For future quarters of fiscal 2005, we anticipate recognizing similar
expense of $24,500 per quarter, assuming the 36-month term of the 2004 Note.

                                      -28-


RESEARCH AND PRODUCT DEVELOPMENT:

- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
RESEARCH AND PRODUCT
DEVELOPMENT                       $37         $39        $(2)      (5)%         $43         $77       $(34)     (44)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
PERCENTAGE OF REVENUES             4%          7%                                3%          3%
- ---------------------------- ------------ -----------                     ------------ ----------


Research and product development expenses consist mainly of our expenditures
incurred in connection with development of our LIDA and cell viability
technology held in our subsidiary PBI Technology.

For the comparable quarters ended December 31, 2004 and 2003, research and
product development expenses decreased 5% to approximately $37,000 from $39,000.
For the comparable six-month periods ended December 31, 2004 and 2003, research
and product development expenses decreased 44% to approximately $43,000 from
$77,000. Of these amounts for the periods ended December 31, 2004, $30,000
represented non-cash compensation to Utek Technologies. We engaged Utek as of
September 30, 2004. (See "Note 2 to Notes to Condensed Consolidated Financial
Statements (Unaudited), Summary of Significant Accounting Policies - Utek
Agreement" for further discussion). Since we are accounting for our agreement
with Utek in accordance with Financial Accounting Standards Board (FASB)
Emerging Issues Task Force Issue (EITF) No. 96-18, we will amortize additional
non-cash compensation of $10,000 per month during the balance of the term of the
agreement, and will apply this expense to our research and development expenses.

Excluding the amortization related to Utek's non-cash compensation, for the
comparable quarters ended December 31, 2004 and 2003, research and product
development expenses decreased 82% to approximately $7,000 from $39,000, and
decreased 83% to approximately $13,000 from $77,000 for the comparable six-month
periods ended December 31, 2004 and 2003. The decrease was primarily due to
decreased compensation expense as a result of fewer employees in research and
product development for the comparable periods. More specifically, in November
2003, as part of our efforts to reduce expenses, we enrolled our one employee in
research and development in the Shared Work Program, and in February 2004, this
employee was terminated, eliminating employee compensation expense in this area.
The remaining research and development expenses consist primarily of legal fees
for patent applications, supplies, and depreciation and amortization.

We anticipate that we will continue to incur research and development expenses
related to our technology. However, if we are unable to increase revenues or
raise additional funding to continue to fund our existing research and
development efforts, we will seek to further reduce our research and development
efforts and expenses.

OTHER EXPENSE:

- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
OTHER EXPENSE                   $(136)       $(29)      $(107)    (369)%      $(269)       $(116)     $(153)    (132)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
PERCENTAGE OF REVENUES           (13)%        (5)%                             (19)%        (4)%
- ---------------------------- ------------ -----------                     ------------ ----------


Total other expense increased 369% to $136,000 from $29,000 during the quarters
ended December 31, 2004 and 2003, respectively, and increased 132% to $269,000
from $116,000 during the six-month periods ended December 31, 2004 and 2003,
respectively. A major component of other expense in the quarter and six months
ended December 31, 2004 was approximately $142,000 and $277,000, respectively,
of interest expense on the Laurus 2004 Note, other notes payable and lease
obligations. Of this amount, approximately $44,000 and $84,000 was interest paid
on the 2004 Note, for the three- and six-month periods ended December 31, 2004,
respectively. In addition, we

                                      -29-


recorded $72,000 and $139,000 of expense related to the amortization of the
intrinsic value of the beneficial conversion feature of the 2004 Note for the
three- and six-month periods ended December 31, 2004, respectively. As of
December 31, 2004, of the total $1,257,000 of initially recorded discounts on
the 2004 Note, we had amortized as interest expense approximately $161,000, as
of December 31, 2004. Therefore, as of December 31, 2004, $1,096,000 remained
unamortized and will be amortized, using the effective interest method, over the
remaining life of the 2004 Note or upon its earlier conversion. (See "Note 8 to
Notes to Consolidated Financial Statements" in our Report on Form 10-KSB for the
fiscal year ended June 30, 2004). We entered into the financing arrangement with
Laurus effective May 28, 2004, so we had no such comparable expenses related to
the secured convertible note for the comparable quarter or six -month period
ended December 31, 2003.

Other expense in the quarter ended December 31, 2003 included approximately
$31,000 of interest expense on notes payable and lease obligations, $16,000 in
accrued interest income from a related party (Saigene), and $72,000 in expense
resulting from a loss on the receipt of common stock instead of cash in payment
of a $200,000 note receivable from Saigene. In the quarter ended December 31,
2004 there was no comparable loss, nor any material interest income.

For the six-month period ended December 31, 2003 , other expense included
approximately $61,000 of interest expense on notes payable and lease
obligations, $17,000 in accrued interest income from a related party (Saigene),
and $72,000 in expense resulting from a loss on the receipt of common stock
instead of cash in payment of a $200,000 note receivable from Saigene. In the
six-month period ended December 31, 2004 there was no comparable loss, nor any
material interest income.

NET LOSS:

- ---------------------------- ------------------------ --------- --------- ----------------------- ---------- ----------
DOLLARS IN THOUSANDS,
ROUNDED TO NEAREST              THREE MONTHS ENDED                            SIX MONTHS ENDED
THOUSAND                           DECEMBER 31,           $         %           DECEMBER 31,          $          %
                             ------------------------ --------- --------- ----------------------- ---------- ----------
                                2004         2003      Change    Change      2004        2003      Change     Change
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
                                                                                        
NET LOSS                        $(363)       $(711)        $348     49%      $(1,192)      $(692)     $(500)    (72)%
- ---------------------------- ------------ ----------- --------- --------- ------------ ---------- ---------- ----------
PERCENTAGE OF REVENUES            (36)%       (131)%                             (83)%       (24)%
- ---------------------------- ------------ -----------                     ------------ ----------


We had a net loss of approximately $363,000 for the quarter ended December 31,
2004 compared to a net loss of approximately $711,000 for the quarter ended
December 31, 2003. This difference between the net losses for the quarters was
primarily attributable to our significantly increased revenues in the comparable
quarters. The increase in gross margin along with the decrease in selling,
general and administrative expenses were offset partially by the increase in
other expense discussed above.

We had a net loss of approximately $1,192,000 for the six-month period ended
December 31, 2004 compared to a net loss of approximately $692,000 for the
six-month period ended December 31, 2003. This difference between the net losses
was primarily attributable to our significantly decreased revenues in the
comparable six-month periods and the increased interest expense related to the
2004 Note with Laurus. These additional expenses were only partially offset by
decreases in laboratory expenses and cost of goods sold and selling, general and
administrative expenses, and research and product development expenses discussed
above.

RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2004 AND 2003

REVENUES:

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                               
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
REVENUES                                           $4,801           $5,765           $(964)         (17)%
- --------------------------------------------- ---------------- --------------- --------------- --------------


Our revenues are generated from clinical trials testing services and from
diagnostic services. The approximately 17% decrease in fiscal 2004 revenues over
fiscal 2003 was primarily attributable to a decrease in the size and

                                      -30-


number of clinical trials testing services we performed. Except for the March
2004 clinical services contract we entered into and that was substantially
completed by June 30, 2004, these decreases reflect the recent significant
decreases in revenues and open work orders we have been experiencing. With
respect to the March 2004 clinical services contract, we recognized revenues of
approximately $1.4 million during fiscal 2004, of which we recognized
approximately $1.1 million in the fourth quarter (representing approximately 77%
of our total revenues for the quarter).

Our recent quarterly decreases in revenues reflect the fluctuations and
reductions in testing and open work orders with our historically two largest
customers, Pfizer, Inc. and Procter & Gamble Pharmaceuticals, Inc. Combined
revenues from these two customers were a total of approximately $3.6 million
(75.4% of our total revenues) for the fiscal year ended June 30, 2004, compared
to approximately $4.5 million (78.3% of our total revenues) for the fiscal year
ended June 30, 2003. Excluding the $1.4 million we received from the March 2004
clinical services contract we entered into and that was substantially completed
by June 30, 2004, the decreases in revenues from these customers year over year
is a result of prior work orders having come to completion or the clinical study
having ended or being terminated early, without being replaced with new work
orders for additional testing services. We have historically been dependent on
one or both of these customers for a significant portion of our revenues, and as
such a decline in the volume of services performed for these customers has a
significant impact on our revenues.

During the fiscal year ended June 30, 2004, revenue generated from clinical
trials testing services accounted for approximately 82% of our total revenues.
Revenue generated from diagnostic, referral and other services accounted for
approximately 18% of our total revenue during the same period. Historically,
over 90% of our total revenues have been generated from clinical trials. We
expect that clinical trials will continue to account for a significant portion
of our revenues in the future.

LABORATORY EXPENSE AND COST OF GOODS SOLD:

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
LABORATORY EXPENSE AND COST OF GOODS SOLD           $2,763         $2,801            $(38)       (1)%

PERCENTAGE OF REVENUES                                 58%             49%
- --------------------------------------------- ---------------- --------------- --------------- --------------


Laboratory expense and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical trial
samples, the cost of supplies for analysis of clinical trial samples, payments
to subcontractors of laboratory services, and other expenses such as payment of
business and occupation taxes. During the fiscal years ended June 30, 2004 and
2003, respectively, salaries and related benefits accounted for approximately
34.6% and 37.7% of total laboratory expense and cost of goods sold, lab supplies
were approximately 23.6% and 24.3%, and outside services were approximately
19.8% and 16.8%.

For the comparable fiscal years ended June 30, 2004 and 2003, laboratory expense
and cost of goods sold decreased approximately 1%. As a percentage of revenue,
laboratory expense and cost of goods sold increased in fiscal 2004 to
approximately 58% from approximately 49% in fiscal 2003.

For fiscal years 2004 and 2003, respectively, salaries and related benefits
decreased approximately 10% to approximately $955,000 from $1,057,000, lab
supplies decreased approximately 4% to approximately $653,000 from $680,000, and
outside services increased approximately 16% to approximately $548,000 from
$471,000. The decrease in salaries and benefits between the comparable periods
was primarily attributable to a decrease in the number of employees in this
area. The decrease in the components of lab supplies between the comparable
periods was primarily attributable to the decreased supplies needed to support
the commensurate decrease in revenues. The 16% increase in outside services
resulted from approximately $508,000 we paid for outside services in the first
quarter of fiscal 2004 (compared to approximately $64,000 for the same quarter
in fiscal 2003), for outsourcing of testing on a third-party proprietary assay.
However, for the remaining three quarters of fiscal 2004, fees for outside
services totaled approximately $40,000 (compared to approximately $407,000 for
the same period in fiscal 2003), reflecting a significant decrease in outsourced
services incurred within the scope of earning revenues.

                                      -31-


The decrease in salaries and related benefits for fiscal years 2004 and 2003
also partially reflects actions we took during fiscal 2004 to control employee
expenses. Through December 31, 2003, as part of our efforts to reduce expenses,
with respect to our laboratory operations, quality assurance, client services
and information technology employees, we terminated employment of five
laboratory employees, had one laboratory employee participate in the salary
deferral / reduction program, and enrolled the remaining 18 laboratory employees
in the Shared Work Program. Effective mid-March 2004, as we began ramping up to
work on the March 2004 clinical services contract, we pulled our employees out
of the Shared Work Program, and incurred overtime expense. We also restored the
employee information technology employee noted above who had been participating
in the salary deferral / reduction program to full salary effective March 16,
2004. From time to time we will continue to evaluate re-entering employees in
the Shared Work Program based on the timing and volume of our clinical testing
services projects.

RESEARCH AND PRODUCT DEVELOPMENT:

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
RESEARCH AND PRODUCT DEVELOPMENT                     $129             $214            $(85)         (40)%

PERCENTAGE OF REVENUES                                 3%               4%
- --------------------------------------------- ---------------- --------------- --------------- --------------


Research and development expenses consist mainly of our expenditures incurred in
connection with development of our LIDA and cell viability technology that is
being transferred into PBI Technology.

For the comparable fiscal years ended June 30, 2004 and 2003, research and
product development expenses decreased approximately 40% to approximately
$129,000 from $214,000. The decrease was primarily the result of decreased
compensation expense as a result of fewer employees in research and product
development in the current year period over the comparable prior year period.
For the fiscal years ended June 30, 2004 and 2003, the decrease was partially
offset by increased patent related legal expenses, including those related to
establishing a separate technology subsidiary (PBI Technology, Inc.) to more
effectively finance and manage the development of our technology portfolio.
Also, in November 2003, as part of our efforts to reduce expenses, we enrolled
our one employee in research and development in the Shared Work Program, and in
February 2004, this employee was terminated, further reducing our compensation
expense in this area.

We anticipate that we will continue to incur research and development expenses
related to the technology held by PBI Technology. However, if we are unable to
increase revenues or raise additional funding to continue to fund our existing
research and development efforts, we will seek to further reduce our research
and development efforts and expenses.

IMPAIRMENT OF TECHNOLOGY ASSETS:

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
IMPAIRMENT OF TECHNOLOGY ASSETS                      $477               $0            $477          100%

PERCENTAGE OF REVENUES                                10%               0%
- --------------------------------------------- ---------------- --------------- --------------- --------------


As of June 30, 2004, we re-assessed impairment issues on our technology assets
and we concluded that the recorded value of those assets should be written off.
We considered our ability to recover the value of those assets from undiscounted
cash flows of the related operations. In particular, factors we considered
included: reductions in our workforce, generally as well as in research and
development, in the second and third quarters of fiscal 2004 (which was then
considered to be temporary, but which has since become more extended); our
inability to secure a licensing or other partnership arrangement for the
intangible assets; and our inability to obtain financing specifically for
further development of the technology assets. While we have obtained equity and
debt funding for our general operations through the Laurus debt financing in May
2004 and our private placement in March 2004, and while we

                                      -32-


intend to continue to pursue development efforts, partnership, licensing or
other means to realize the value of our intangible assets, we believe that
current conditions have changed such that the value of these assets are now less
likely to be recovered in the near term, and should be written off. Accordingly,
as of June 30, 2004, we wrote off the entire balance of $476,874 of technology
assets as an operating expense, "Impairment of technology assets" (in accordance
with SFAS 144- "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS"). (See "Note 2 to Notes to Consolidated Financial Statements" - Summary
of Significant Accounting Policies - Technology Assets ). We had no comparable
write-off or expense in fiscal 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE        $3,150           $3,837           $(687)         (18)%

PERCENTAGE OF REVENUES                                66%              67%
- --------------------------------------------- ---------------- --------------- --------------- --------------


Our selling, general and administrative expense consists primarily of
compensation for our executive officers, board members and other selling,
general and administrative personnel, management fees paid to Saigene,
compensation income (expense) on our stock options, legal and accounting fees,
and payments under consulting arrangements.

For the comparable years ended June 30, 2004 and 2003, respectively, selling,
general and administrative expense decreased approximately 18% to approximately
$3,150,000 from $3,837,000. As a percentage of revenue, selling, general and
administrative expenses were approximately 66% and 67%, respectively, for the
comparable fiscal years ended June 30, 2004 and 2003.

The reduction in our selling, general and administrative expenses for the
comparable periods is due in large part to decreased management fees we paid to
Saigene under the terms of the amended and restated management agreement. This
reflects the reduction in monthly management fees, effective July 1, 2003, to
$70,000 from $90,000 and the further reductions of the management fees to
$40,000 per month from $70,000 per month effective February 1, 2004, and to
$20,000 per month from $40,000 per month, effective June 15, 2004. Subsequent to
the end of fiscal 2004, we terminated the management agreement effective August
31, 2004, thereby eliminating further monthly management fees payable to Saigene
after that date. For the comparable fiscal years ended June 30, 2004 and 2003,
respectively, management fees decreased 46% to approximately $680,000 from
$1,255,000.

Excluding Saigene management fees, selling, general and administrative expenses
were approximately $2,470,000 and $2,582,000 (approximately 51% and 45% as a
percentage of revenue), respectively, for the comparable fiscal years ended June
30, 2004 and 2003.

For the fiscal year ended June 30, 2004, our compensation costs consisted
primarily of salaries and wages, whereas in fiscal 2003, we also incurred
certain contract labor costs and relocation expenses. Contract labor costs in
fiscal 2003 consisted of approximately $74,000 for services provided by our
current Chief Executive Officer under a management agreement with Saigene before
he became our employee, and for contract accounting and contract chief financial
officer services. In fiscal 2003 we hired our Chief Executive Officer and a
Chief Financial Officer, resulting in decreased needs for contract labor
services. Also, in fiscal 2003, we incurred recruiting and relocation expenses
of approximately $115,000 relating to our Chief Medical Officer and a Business
Development Representative, where we had no comparable expenses in fiscal 2004.
Related to the decrease in contract labor services, we recognized increased
salaries and benefits of approximately $190,000 in fiscal 2004 over fiscal 2003.
The increase in salaries and wages was due primarily to the hiring of our Chief
Executive Officer, Chief Financial Officer and a business development
representative during fiscal 2003. These compensation increases were partially
offset by actions we took during fiscal 2004 to control employee expenses,
including salary reductions of 15% to 20% implemented for certain personnel
beginning February 1, 2004, enrolling one administrative employee in the State
of Washington's "Shared Work Program," having one hourly employee agree to
reduce her hours worked and terminating employment of two administrative
employees. Effective mid-March 2004, as we began ramping up to work on our large
clinical services contract, we pulled our employees out of the Shared Work
Program and we

                                      -33-


restored three of the selling, general and administrative employees who had been
participating in the salary deferral / reduction program to full salary
effective March 16, 2004. Subsequent to the end of fiscal 2004, we reinstated to
near full salary our Chief Executive Officer beginning July 1, 2004 and one
other selling, general and administrative manager became a part time employee
effective September 1, 2004, leaving salary reductions continuing for three
management level employees. From time to time we will continue to evaluate
re-entering employees in the Shared Work Program and additional salary deferrals
/ reductions based on the timing and volume of our clinical testing services
projects.

Selling, general and administrative expenses for the fiscal year ended June 30,
2004 included approximately $149,000 in Board of Director compensation, compared
to approximately $60,000 in fiscal 2003. In addition, under the terms of
consulting agreements dated August 28, 2002 with two of our directors, Terry
Giles and Paul Kanan, we recorded aggregate consulting expenses of $156,000 and
$130,000, respectively, in the comparable fiscal years ended June 30, 2004 and
2003.

Selling, general and administrative expenses also include compensation income
(expense) resulting from the May 2002 repricing of all outstanding stock options
to the then-current market price of $0.06. For the comparable fiscal years ended
June 30, 2004 and 2003, respectively, we recognized approximately $35,000 in
income and $129,000 in expense. As of June 30, 2004, 11,139 repriced options
remained outstanding. In the future, the amount of compensation expense (income)
we recognize will fluctuate based on the value of our common stock and the
number of options that are outstanding as of each valuation date. (See "Note 11
to Notes to Consolidated Financial Statements").

Further changes in our selling, general and administrative expenses include an
increase in legal and accounting expenses of approximately $26,000 between the
respective fiscal years ended June 30, 2004 and 2003 to $374,000 from $348,000.
Legal and accounting expenses for fiscal 2004 include costs associated with our
private placement financing in March 2004, our secured convertible debt
financing effective May 2004, and preparation and filing of our two resale
registration statements filed in the third and fourth quarters of fiscal 2004,
as well as costs associated with being a public company. We also incurred
approximately $193,500 in fees and expenses in the fourth quarter of fiscal
2004, related to the secured convertible note financing with Laurus, and we are
amortizing these fees over the anticipated 36-month life of the note, resulting
in approximately $5,375 of expense recognized in June 2004. For fiscal 2003,
legal and accounting expenses included fees incurred in connection with the
Saigene purchase transaction in August 2002. For fiscal 2005, we expect to
continue to amortize these expenses at the rate of $5,375 per month, or $16,125
per quarter.

OTHER INCOME (EXPENSE):

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
OTHER INCOME (EXPENSE)                              $(166)          $2,545         $(2,711)        (107)%

PERCENTAGE OF REVENUES                                 (3)%             44%
- --------------------------------------------- ---------------- --------------- --------------- --------------


We had approximately $166,000 in other expense in fiscal 2004, compared to
$2,545,000 in other income in fiscal 2003. The fiscal 2003 other income was
primarily due to our reversing a prior reserve and removing the prior $2,244,040
contingent liability relating to 3M from the balance sheet. (See "- Liquidity
and Capital Resources - Reversal of Technology License Payable in Fiscal 2003"
and "Note 13 to Notes to Consolidated Financial Statements.") For fiscal 2004,
our net "other expense" included approximately $42,000 in Washington state sales
and business and occupation tax refunds from a review of past years tax
remittances, approximately $155,000 of interest expense on notes payable and
lease obligations (net of interest income), and approximately $72,000 from a
loss on the receipt of common stock instead of cash in payment of a $200,000
note receivable and approximately $16,000 in accrued interest income from a
related party (Saigene) (see "Note 14 to Notes to Consolidated Financial
Statements").

In fiscal 2003, in addition to the reversal of the $2,244,040 contingent
liability referred to above, our net "other income" included one-time gains on
the restructuring of certain outstanding debt of approximately $169,000,

                                      -34-


approximately $(118,000) in net interest expense, and approximately $21,000 of
rent and fees paid to us by Saigene. In addition, primarily during the third
quarter of fiscal 2003, we reassessed all of our existing liabilities and wrote
off some of our old accounts payable and an old lease obligation, resulting in a
one-time gain associated with the write-off in the amount of approximately
$228,000.

NET EARNINGS (LOSS):

                                                        YEARS ENDED
- --------------------------------------------- -------------------------------- --------------- --------------
                                                                                   
Dollars in thousands,                                    JUNE 30,                    $               %
- --------------------------------------------- -------------------------------- --------------- --------------
rounded to nearest thousand                         2004             2003          Change         Change
- --------------------------------------------- ---------------- --------------- --------------- --------------
NET EARNINGS (LOSS)                               $(1,884)          $1,457         $(3,341)        (229)%
- --------------------------------------------- ---------------- --------------- --------------- --------------


We had a net loss of approximately $1,884,000 in fiscal 2004, reflective of our
significant decrease in revenues during fiscal 2004, compared to net earnings of
approximately $1,457,000 in fiscal 2003. The change in net earnings (loss) from
fiscal 2003 to fiscal 2004 was significantly as a result of our action in fiscal
2003 to reverse the prior reserve and remove the $2,244,040 contingent liability
relating to 3M from the balance sheet. (See "- Liquidity and Capital Resources -
Reversal of Technology License Payable in Fiscal 2003" and "Note 13 to Notes to
Consolidated Financial Statements.")

Excluding the reversal of the contingent liability of $2,244,040, in fiscal 2003
we had a pro forma net loss of approximately $787,000, compared to our net loss
of approximately $1,884,000 in fiscal 2004, representing an approximately
$1,097,000 or 139% increase in net loss over fiscal 2003.

Excluding the reversal of the contingent liability of $2,244,040, the increase
in our net loss is primarily attributable to our significantly decreased
revenues in the year over year periods, partially offset by improvements in
laboratory expenses and cost of sales, and selling, general and administrative
expenses, and research and product development expenses discussed above, and,
also impacted by the change in other income (expense) discussed above.

LIQUIDITY AND CAPITAL RESOURCES:

We had significant net operating losses for the six-month period ended December
31, 2004 and the fiscal year ended June 30, 2004. Revenues for the six-month
period ended December 31, 2004 and our fiscal year ended June 30, 2004 were
significantly lower than those in the comparable prior fiscal year periods,
although we saw improvements in revenues during the second quarter of the
current 2005 fiscal year. Unless revenues increase, we will likely continue to
experience significant losses and our cash and working capital positions will be
adversely impacted. Our operations historically have been funded through
revenues generated from operations and from the sale and issuance of our common
stock, preferred stock and debt.

At December 31, 2004, our cash and cash equivalents were approximately
$1,435,000, compared to approximately $2,941,000 at June 30, 2004. The decrease
in our cash and equivalents is primarily attributable to our net operating loss.
To a lesser degree the net decrease in our cash and cash equivalents is the
result of 1) certain payments made on our notes payable 2) our initial payment
on our annual D&O insurance policy (the future obligations are reflected on the
balance sheet as prepaid expenses and accrued liabilities), 3) other prepaid
expenses, and 4) payments we made on our accounts payable. In addition, in
connection with termination of the management agreement with Saigene, effective
July 1, 2004 we purchased from Saigene certain computer equipment and other
furniture and equipment that Saigene used in our laboratory, for approximately
$15,000 cash and a payable of $59,000 (as described in more detail below). We
have no off-balance sheet financing arrangements. As of December 31, 2004, we
also had restricted cash of approximately $71,000 which represents a security
deposit in connection with our office lease in Seattle, Washington that expires
in July 2007. We are obligated to maintain the restricted cash security deposit
through the term of the lease.

At December 31, 2004, we had approximately $823,000 in accounts receivable,
compared to approximately $367,000 as of June 30, 2004, reflecting the timing of
revenues billed and collected. We generally have a high collectibility rate on
our accounts receivable, and our allowance for doubtful accounts is only $22,100
which we believe is reasonable based on our past experience. Our accounts
receivable generally reflect our billings, and may include one or several
individually large customer receivables from time to time. For example, as of
June 30, 2004,

                                      -35-


approximately 41% of our receivables balance of approximately $367,000 was from
one clinical service contract, which was subsequently paid in full in the
quarter ended September 30, 2004. We had no such single receivable that
represented a significant portion of our accounts receivable balance as of
December 31, 2004.

Additionally, given the significant decrease in our revenues for the six-month
period ended December 31, 2004 as compared to the six-month period ended
December 31, 2003, accounts receivable represented a proportionately larger
percentage of revenues in the current quarter at approximately 57% compared to
15% as of December 31, 2003.

Total liabilities recorded on our balance sheet as of December 31, 2004 were
approximately $3,778,000 compared to approximately $3,519,000 as of June 30,
2004. The slight increase in liabilities was the result of an increase in
customer advances, an increase in the booked value of our 2004 Note as the
beneficial discount is amortized, and an increase in accrued liabilities,
offsetting our payments against accounts payable and certain notes payable. A
significant component of our liabilities are represented by the 2004 Note with
Laurus (See "BUSINESS -- Laurus Debt Investment" in our Annual Report on Form
10-KSB for the fiscal year ended June 30, 2004), and, to a lesser degree, our
prior borrowings in fiscal 2004 under our $250,000 credit facility with Franklin
Funding. As required by U.S. generally accepted accounting principles, the
liability we recorded for the 2004 Note reflected a discount from the face value
of the note by approximately $1,096,000, related to the valuation of the
beneficial conversion feature and the warrants. During the six-month period
ended December 31, 2004, Laurus converted $37,100 of the principal amount due
and as of December 31, 2004 the remaining principal balance on the 2004 Note was
$2,462,900. Accordingly, if the discount to face value is disregarded, our total
liabilities as of December 31, 2004 and June 30, 2004, respectively, would be
approximately $4,874,000 and $4,755,000.

Included in liabilities at December 31, 2004 was an obligation of approximately
$59,000 payable to Saigene from our purchase of certain computer equipment and
other furniture and equipment from Saigene in July 2004. We also entered into an
office sharing agreement for Saigene to use some of our office space. For each
month of that office-sharing agreement, our $59,000 payable to Saigene will be
reduced at a (non-cash) rate of $1,540 per month. At December 31, 2004 our
obligation to Saigene was approximately $52,000.

At December 31, 2004, we had working capital of approximately $224,000, compared
to working capital of approximately $1,415,000 at June 30, 2004. The
approximately $1,191,000 decrease in working capital is attributable to several
changes in the components of working capital. Changes providing favorable impact
include increases in accounts receivable, prepaid expenses, deferred financing
costs related to the 2004 Note, property and equipment, along with decreases in
accounts payable, and, except for additional borrowings of (and the additional
long-term portions, net of discounts, payable on) $2.5 million under our 2004
Note and $250,000 under our loan and security agreement with Franklin Funding,
decreases in our current and long term notes payable and lease obligations.
Changes negatively impacting our working capital since June 30, 2004 include
decreases in our cash, along with increases in our advances from customers,
accrued liabilities, and the long-term portion of our 2004 Note and $250,000
under our loan and security agreement with Franklin Funding. In addition, our
working capital position at December 31, 2004 and June 30, 2004, respectively,
gives effect to approximately $363,000 and $304,000 of discounts recorded on the
current portion of our 2004 Note, as required by U.S. generally accepted
accounting principles. If this discount were disregarded, we would have a
working capital deficit of approximately $140,000 and working capital surplus of
$1,111,000, respectively, at December 31, 2004 and June 30, 2004.

Net cash used in operating activities was approximately $1,181,000 for the
six-month period ended December 31, 2004, primarily to fund our net loss and
changes in our working capital. For the six-month period ended December 31,
2004, net cash used in operations included the effect of approximately $77,000
in depreciation and amortization, approximately $139,000 of amortization related
to the 2004 Note and $283 in income recognized in accordance with accounting for
stock options under variable pricing rules as it relates to our May 2002
repricing of stock options. Our investing activities used approximately $105,000
for the six-month period ended December 31, 2004 primarily for the purchase of
capital equipment from Saigene discussed above. Cash flows used in financing
activities included approximately $221,000 in payments on notes payable, notes
payable to related parties, and payments on capital lease obligations.

As described above, although we experienced a significant increase in revenues
for the quarter ended December 31, 2004, we incurred significant net losses.
Except for the proceeds from our 2004 Note with Laurus, we have realized

                                      -36-


a degradation of our cash and working capital position from operations,
throughout fiscal 2004 that has continued through the first six months of fiscal
2005. We expect these trends will continue during fiscal 2005, although possibly
at a lower rate. In an effort to become more competitive and to increase our
revenues, we are currently actively increasing our business development
activities, and planning to make additional investments in our technology
infrastructure, operations and other areas of our business. These efforts will
use significant amounts of time, effort and funding. Our efforts to control
expenses, generate revenue and raise sufficient capital may not be successful.
With the prior cash infusions from the Laurus debt investment in May 2004 (See
"BUSINESS -- Laurus Debt Investment" below) and our private placement in March
2004, and the recent additional Laurus debt investment in January 2005 and
six-month principal payment deferral on the 2004 Note (see "Note 6 to Notes to
Condensed Consolidated Financial Statements - Subsequent Events" and "BUSINESS
- -- Laurus Debt Investment"), we expect that our current cash, current assets and
any cash flows from operations will be sufficient to fund operations through
February 1, 2006. However, any further decreases in revenue would adversely
affect our financial condition, and we may need to seek additional capital
during fiscal 2005 or 2006. We may not be able to raise sufficient financing,
whether debt or equity. We have no additional amounts available to us under our
Franklin Funding credit facility, and we do not have any other credit facility
in place. In addition, based on the terms of the Laurus debt financings, raising
additional capital may be difficult or highly dilutive to existing stockholders.

Management continues to contemplate alternatives to enable us to fund continuing
operations, including loans from management or employees, salary deferrals and
reductions and other cost cutting mechanisms, and raising additional capital by
private placements of equity or debt securities or through the establishment of
other funding facilities. In addition, we are exploring strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction. None of these potential alternatives may be available to us, or may
only be available on unfavorable terms. If we are unable to obtain sufficient
cash to continue to fund operations or if we are unable to locate a strategic
partner, we may be forced to seek protection from creditors under the bankruptcy
laws or cease operations. Any inability to obtain additional cash as needed
could have a material adverse effect on our financial position, results of
operations and our ability to continue in existence. Our auditors added an
explanatory paragraph to their opinion on our fiscal 2004 financial statements
stating that there was substantial doubt about our ability to continue as a
going concern.

         REVERSAL OF TECHNOLOGY LICENSE PAYABLE IN FISCAL 2003

         In December 1997, we entered into an exclusive license agreement and
supply agreement with Sudormed, Inc. The technology licensed from Sudormed was
the basis for our development of our sweat and saliva products. Due to a lack of
funding and the failure to obtain FDA approval for the products, all development
efforts relating to the products were suspended in August 1998. The license
agreement required us to make a $1.6 million license payment in December 1998,
which was subsequently extended to March 1999. In May 1999, Sudormed terminated
the license agreement and the supply agreement due to our failure to make the
$1.6 million license payment.

         The Minnesota Mining and Manufacturing Company ("3M") manufactured
certain of the products that Sudormed supplied to us pursuant to the supply
agreement. As described above, Sudormed terminated both the license agreement
and the supply agreement in May 1999 due to our failure to make required
payments. 3M subsequently foreclosed upon certain assets of Sudormed and became
a party in possession of secured property of Sudormed. In May 2000, 3M notified
us that, in its capacity as a secured party in possession of the Sudormed
assets, it demanded payment in full of the $1.6 million plus accrued interest
and fees due under the Sudormed license agreement. We dispute 3M's demand, and
will vigorously defend any action that 3M may bring. We have not had any
correspondence or communication with 3M since 2000, and to our knowledge no
action has been filed.

         During fiscal 2003, we reassessed our potential liability to 3M. We
believe based on advice from legal counsel that any claims by 3M under the
license agreement are now barred by the applicable statute of limitations
(having expired in the third and fourth quarters of fiscal 2003), and
accordingly that the likelihood of liability to 3M is remote. We previously
reserved on our balance sheet a contingent liability in the amount of
$2,240,040, representing the full potential amount owing under the technology
license plus accrued interest and fees. At June 30, 2003, we reversed the
reserve and removed the contingent liability from the balance sheet.

                                      -37-


                                    BUSINESS
GENERAL

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and development efforts. Our clients include a number of
the world's largest multi-national pharmaceutical, biotechnology and diagnostic
companies. Our well-recognized specialty areas include cardiovascular disease
(dyslipidemia, atherosclerosis, and coronary heart disease), diabetes (and
obesity), and bone and joint diseases (osteoporosis and arthritis). Coupled with
our specialty testing, we also have central laboratory capability and provide
full-service central laboratory support for multi-center clinical trials,
including routine safety lab tests (general chemistry, hematology, and
urinalysis). Our company is a Delaware corporation, incorporated in May 1996,
and we conduct our operations primarily through our wholly-owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation.

BUSINESS STRATEGY

Specialty reference and central laboratory services companies like ours
typically derive substantially all of their revenue from the research,
development and marketing expenditures of the pharmaceutical and biotechnology
industries. Participants in the pharmaceutical and biotechnology industries
typically outsource a significant quantity of these services to both central
labs and specialty reference labs. In addition, central laboratories outsource
to specialty reference labs some of the specialty testing where the central
laboratory lacks expertise. We believe that such outsourcing will continue and
may increase in the future because of many factors, including continuing
pressures on the pharmaceutical and biotechnology industries to contain costs,
limitations on pharmaceutical companies' internal capacity, a need for faster
development time for new drugs, research in multiple countries simultaneously,
stringent government regulation, and expertise that pharmaceutical companies or
central labs may lack internally. We believe the investment and amount of time
required to develop new drugs has been increasing, and that these trends create
opportunities for companies like ours to provide our expertise and services to
help reduce the time in the drug development process and make the process of
drug development more efficient.

Our strategy is to meet the needs for outsourcing, by pharmaceutical and
biotechnology companies and other central laboratories, and to assist in
enhancing the drug development process by developing and delivering innovative
services that apply science and technology to provide high quality service
within our areas of specialty.

Our primary business strategy is to continue our focus on providing high quality
specialty central laboratory services in our core areas, including
cardiovascular disease and bone and joint diseases. In addition, we also intend
to pursue other strategies identified below to further our business. However,
because of the significant expense associated with some of these strategies, we
may not pursue some of these strategies unless our revenues increase
significantly or we are able to raise equity or debt financing to adequately
fund these strategies. There can be no assurance that we will pursue any or all
of the strategies below or if pursued, that any of such strategies will be
successful.

INCREASE SPECIALTY AREAS

         In addition to our core specialties of cardiovascular disease and bone
and joint diseases, our goal is to further expand our specialty laboratory
expertise within our other existing specialty areas (including diabetes,
obesity, metabolic syndrome, and osteoarthritis), as well as to develop new
fields where we can provide our laboratory services (including rheumatoid
arthritis and immunogenicity testing for biologic drugs).

         Further, to strengthen our specialty central lab services, in August
2002, we acquired certain DNA-based proprietary technologies, processes and
equipment. See "- Technologies and Products - Saigene Technologies" and "-
Saigene Investment Transaction" below. This novel intellectual property
(patented and patent-pending) includes a proprietary isothermal DNA
amplification method ("LIDA") and a genetic method for distinguishing live from
dead cells ("Cell Viability"). We have transferred these assets into our wholly
owned subsidiary, PBI Technology, Inc. We intend to further develop and leverage
these technologies to enhance our specialty laboratory activities in the area of
pharmacogenetic testing and offer attractive prospects for licenses to companies
interested in IN VITRO diagnostics, biothreat, food safety testing and other
applications. See also "MANAGEMENT'S DISCUSSION

                                      -38-


AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Impairment of
Technology Assets."

DIVERSIFY CUSTOMER BASE

         Another of our goals is to diversify our customer base. Historically,
our two largest customers have been Pfizer, Inc. and Procter & Gamble
Pharmaceuticals, Inc. During fiscal years 2004, 2003 and 2002, Pfizer
represented approximately 36%, 76% and 63%, respectively, of our total revenues.
In May 2003, we entered into a master contractor service agreement with Procter
& Gamble Pharmaceuticals and started performing services on work orders
submitted under that agreement, and for fiscal 2004, Procter & Gamble
Pharmaceuticals represented approximately 40% of our total revenues. We
currently have no significant work orders with either of these two customers
and, accordingly, we expect revenues from both of these customers to decrease in
fiscal 2005, both on an absolute and a percentage basis. Because our revenue has
been concentrated in these one or two large customers, we can be materially
adversely impacted by any delays in undertaking clinical studies or submitting
samples for testing services, any early termination or reductions in work orders
or clinical studies, or any decreases in the volume or timing of new work
orders. This was evidenced by the results for the quarter ended December 31,
2003, in which our total revenue from these two customers decreased to
approximately $40,000, representing only 7% of our revenues. We are actively
pursuing business development and marketing activities to broaden our customer
and revenue base.

CREATE GLOBAL CENTRAL LABORATORY

         We believe that in the central laboratory services business it is
important to provide a broad range of drug research and development services
globally. Through partnering with a major central laboratory, we believe that we
can compete with central laboratories that have offices, monitoring sites and
laboratories in many countries around the globe. We have commenced and expect to
continue discussions with several major central laboratory services companies
about potential partnering relationships.

ACQUISITIONS AND STRATEGIC RELATIONSHIPS

         Our customers and our competitors have experienced significant
consolidation over the last several years and we expect that trend to continue.
The uncertainty caused by the consolidation trend may result in other companies
in the industry seeking to form strategic relationships or joint ventures or to
be acquired in order to stay competitive. This may make it possible for us to
make strategic acquisitions that are complementary to our existing services and
that expand our ability to serve our clients. We are also exploring other
strategic alternatives for our business and operations, which may include joint
ventures, co-marketing relationships, or other strategic relationships.
Additionally, we will evaluate, as appropriate, any potential business
combinations involving our company as a whole, or involving a portion of our
assets. On November 19, 2004 we announced that we had established a
non-exclusive co-marketing arrangement with Quintile Transnational.

INFORMATION TECHNOLOGY

         We intend to focus future capital expenditures and investments in
carefully selected hardware and software products, information technology
systems and networks. During fiscal 2005, we intend to invest in our information
technology systems. We believe capital improvements in these areas are important
to meet the changing demands of drug development by improving and facilitating
our data reporting and storage capabilities and our communications with clients.

SERVICES

SPECIALTY REFERENCE LABORATORY SERVICES

         Our specialty reference laboratory in Seattle, Washington has
established itself as a technical leader due to our strong expertise in certain
core areas. Our three general areas of expertise include

     o    cardiovascular disease (dyslipidemia, atherosclerosis, and coronary
          heart disease),

                                      -39-


     o    diabetes (and obesity), and
     o    bone and joint diseases (osteoporosis and arthritis).

Management believes that among prospective new drugs, these areas of expertise
represent three of the top ten areas of focus by the pharmaceutical industry.

         With respect to cardiovascular disease, we are one of the leaders in
lipid services for clinical drug development in the U.S. Our expertise is
concentrated on the measurement of cardiovascular disease markers, especially
cholesterol and lipoproteins, including HDL, LDL and, HDL and LDL subfractions,
remnant cholesterol, apolipoproteins, Lp, and lipoprotein fraction compositions.
Furthermore, the Pacific Biometrics Research Foundation, a non-profit
organization affiliated with us, is one of only three U.S. standardization
centers in the National Clinical Reference Method Laboratory Network sponsored
by the Centers for Disease Control and the National Heart Blood & Lung
Institute. There are only ten such laboratories worldwide.

         We are enhancing our activities in the area of diabetes and related
disorders, notably obesity and metabolic syndrome. Metabolic syndrome is a
collection of abnormalities that include central obesity, dyslipidemia (low HDL
cholesterol and high triglycerides), insulin resistance, pre-diabetes, and
pre-hypertension. In the U.S. the prevalence of metabolic syndrome is estimated
at 47 million individuals (Heart Disease and Stroke Statistics - 2003 Update,
American Heart Association). People with metabolic syndrome are at increased
risk for cardiovascular disease and associated morbidity and mortality and as a
result this population is coming under increased scrutiny for pharmacological
intervention. Because of our established strengths in testing for lipids,
cardiovascular risk and diabetes, we believe we are well-positioned to take
advantage of this emerging area of pharmaceutical drug development. Moreover, we
are expanding our test menu in areas related to diabetes and metabolic syndrome,
notably in markers of inflammation, such as hsCRP, IL-6, TNF-(alpha), sCD40L and
Lp-PLA2.

         As it relates to bone and joint diseases, we are active in promoting
the standardization of bone metabolism biomarkers, and are involved in
technologies for monitoring treatment response in diseases such as osteoporosis.
We have used our bone biomarker assays in osteoporosis to manage the first
proficiency-testing programs for bone-resorption markers. We developed our
expertise in osteoporosis laboratory assessments through our work with
diagnostic manufacturers of assays for bone markers such as Ostex International,
Inc. (now Wampole Laboratories) and Metra Biosystems, Inc., in addition to
pharmaceutical manufacturers of drugs that prevent bone loss such as Merck &
Co., Inc. and The Procter & Gamble Company. In the areas of bone metabolism and
women's health, we also specialize in the measurement of hormones including
pyridinolines, various C- and N- terminal telopeptides, procollagens,
osteocalcin and bone-specific alkaline phosphatase.

         In addition, in November 2003, we entered into an agreement with Nordic
Bioscience Diagnostics A/S under which our laboratory has been named the
exclusive testing site in North America for Nordic's proprietary arthritis
marker CartiLaps(R) ELISA. This test was developed and produced by Nordic to
detect fragments of type II collagen in urine. Type II collagen is the major
structural component of joint cartilage, and degradation of type II collagen is
a critical step in the progression of both rheumatoid arthritis and
osteoarthritis. We have added this test as part of our services to
pharmaceutical and biotech companies in support of clinical research in
arthritis, as a means to detect and monitor rheumatoid arthritis and
osteoarthritis disease progression and therapeutic effectiveness. On June 29,
2004, we were notified by Nordic that our agreement with them will be amended
effective September 25, 2004 to be non-exclusive, and that should there be no
additional increases in the level of the CartiLaps(R) ELISA business generated
by us by September 25, 2004, it is their intention to take subsequent steps to
terminate the agreement in its entirety. Subsequent to September 25, 2004,
Nordic has not taken any action to terminate the agreement and we have continued
to purchase kits from Nordic and to provide this test as part of our services.
We continue to engage in discussions with Nordic about our on-going
relationship.

         Further, to strengthen our specialty central laboratory services, in
August 2002 we acquired certain DNA-based proprietary technologies, processes,
and equipment. See "Technologies and Products - Saigene Technologies" and
"Saigene Investment Transaction" below. This novel intellectual property
(patented and patent-pending) includes a proprietary isothermal DNA
amplification method (LIDA) and a genetic method for distinguishing live from
dead cells. We have transferred these assets into our wholly owned subsidiary,
PBI Technology, Inc. We intend to further develop and leverage these
technologies to enhance our specialty laboratory

                                      -40-


activities in the area of pharmacogenetic testing and offer attractive prospects
for licenses to companies interested in IN VITRO diagnostics, biothreat, food
safety testing and other applications.

         In connection with these stated areas of expertise, we offer a variety
of services through our specialty reference laboratory, including

     o    clinical testing services,
     o    development of laboratory reference methods,
     o    development of clinical trial protocols, and
     o    contract research and development.

Our involvement with clients frequently begins at the protocol design stage.
Clinical trial support includes coordinating the receipt of specimens from
investigative sites, processing the samples and reporting the consolidated data
to study sites and sponsors. The extensive knowledge we have in test development
and our close collaboration with diagnostic manufacturers frequently allow us to
offer novel tests to our clinical-research clients before such tests are
commercially available.

CENTRAL LABORATORY SERVICES

         Coupled with our expertise in specialty testing, we also have central
laboratory capability and provide full-service central laboratory support for
multi-center clinical trials, including routine safety lab tests (general
chemistry, hematology and urinalysis). Our operations support clinical trials by
producing study-specific supplies, coordinating the receipt of specimens from
clinical sites, processing the samples, generating test databases, and reporting
data to sites and sponsors.

         We generally provide central laboratory services in support of Phase I
and Phase II FDA clinical trials. These trials are typically smaller and more
geographically focused than Phase III trials.

         Through partnering with another major central laboratory, we intend to
compete with other central laboratories that have offices, monitoring sites and
laboratories in countries around the globe, both for Phase I and Phase II
trials, as well as Phase III trials. We have commenced and expect to continue
discussions with several major central laboratory services companies about
potential partnering relationships. We may not be able to successfully complete
any such partnering relationship or that such a relationship will successfully
generate revenue.

TECHNOLOGIES AND PRODUCTS

During fiscal 2004, we formed a new wholly owned subsidiary, PBI Technology,
Inc., for the purpose of holding, developing and seeking commercialization of
certain of our technologies and intellectual property portfolio, including our
isothermal DNA amplification method (LIDA), our Cell Viability technology, and
Saliva Sac(R). These technologies are described in more detail below.

SAIGENE TECHNOLOGIES

         In August 2002, we acquired certain technology from Saigene
Corporation, including certain DNA-based proprietary technologies, processes and
equipment. (See "Saigene Investment Transaction" below and "Note 14 to the Notes
to Consolidated Financial Statements" for the year ended June 30, 2004, included
in this prospectus.") This novel intellectual property (patented and
patent-pending) includes a proprietary isothermal DNA amplification method
(LIDA) and a genetic method for distinguishing live from dead cells.

         Since August 2002, we have been engaged in further research and
development efforts with regard to these acquired technologies, and we recently
were issued two patents on these technologies by the U.S. Patent and Trademark
Office. On January 28, 2003, we were issued U.S. Patent No. 6,511,804, entitled
"A Selective Assay for Determining the Identity of Live Microorganisms in a
Mixed Culture." This patent encompasses a technology for discriminating live
cells from dead cells and may have potential application towards pathogen
detection and testing for drug-resistant microorganisms. We are currently
developing a test that can distinguish drug-susceptible from

                                      -41-


drug-resistant MYCOBACTERIUM TUBERCULOSIS, the causative agent of tuberculosis
infections in humans. This new test would reduce the diagnostic time for a
drug-resistant tuberculosis infection from three weeks to only two days.

         In addition, on March 21, 2003, we were issued U.S. Patent No.
6,531,300 entitled "Target Amplification of Nucleic Acid with Mutant RNA
Polymerase." This patent encompasses a technology that provides a method to
amplify genetic material and may play a strategic role in our development of
proprietary molecular technologies.

         Management believes that the acquisition of these technology assets and
associated intellectual property from Saigene may provide potential future value
to our company and our business to the extent the technologies can be
successfully developed and exploited. As of June 30, 2004, these technology
assets still require additional development prior to commercialization and their
future value, as well as timing of their ongoing development, is dependent upon
additional capital being available to fund continuing research and development.
We expect to need additional capital to fund continuing research and development
efforts related to these technologies, and there are no assurances that such
funds will be available to us. In fact, Saigene has informed us that in order to
develop and commercialize these technologies, we will likely require in the near
term a capital infusion in excess of $5 million. Moreover, management believes
that a minimum additional $15 million would be required to achieve regulatory
approval and commercialization of these technologies and the technologies that
may be acquired under the option agreement. We intend to seek suitable financing
to continue research and development efforts, commence the regulatory approval
process and commercialization of the technologies, but we may not be able to
obtain such financing, on favorable terms or at all.

         While we intend to continue to pursue development efforts, partnership,
licensing or other means to realize the value of these intangible assets,
current conditions led us to believe that the value of these assets may not be
recoverable over their remaining useful lives, and thus should be written off.
Accordingly, we have written off the entire balance ($476,874) of technology
assets as of June 30, 2004. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Impairment of Technology Assets"
above.

         As such, although we believe these technologies are valuable assets, we
may not be able to successfully develop these technologies and they may not
generate revenue. In addition, even if we are ultimately successful in
developing products from these technologies, those products would likely be
subject to regulatory approval, and could always be the subject of litigation or
other claims from competitors or others with respect to such products or the
patents and methodologies upon which they are based.

OTHER TECHNOLOGIES

         During the 1990's, we developed an intellectual property position in
sweat and saliva collection technologies. In 1998, due to lack of funding and
our failure to obtain FDA approval for resultant products, we suspended all
further development efforts relating to these technologies and products. We
subsequently wrote off the value of these assets on our balance sheet in 1999.
We believe there may be potential commercial application for some of these
technologies, but we currently have no plans to resume any active development
efforts relating to these technologies or products.

         Set forth below is a brief description of some of these technologies:

         SALIVASAC(R) - SALIVA COLLECTION & PROCESSING DEVICE. This proprietary
device, developed by us, collects a non-invasive saliva sample that we had hoped
would be able to replace blood and urine testing in various applications. The
SalivaSac(R), which contains a small quantity of a substance that acts as an
osmotic driver, is placed in the mouth and rapidly fills with an ultrafiltrate
of saliva that is filtered as it passes through the semi-permeable outer
membrane. The resulting fluid is clear, easy to use, and does not contain
interfering substances. The SalivaSac(R), as a sample collection device, can be
combined with currently available testing technologies to permit new,
non-invasive diagnostic test applications. We believe the SalivaSac(R) design
has the potential to lend itself to point-of-care diagnostic applications,
including as a screening product to detect diabetes in the general population,
or as a monitoring product to produce detailed quantitative measurements of
blood glucose levels.

                                      -42-


         MONITORING MARKERS OF BONE METABOLISM. This patented technology
involves a method to measure the presence or absence of markers, typically
cross-linked amino acids such as pyridinoline, from body fluids such as sweat.
The presence of these markers can be considered useful to ascertain possible
bone disease states or conditions.

OTHER INTELLECTUAL PROPERTY

         In addition to the technologies acquired from Saigene and our patented
technologies, we have developed certain computer software and internal
procedures and products intended to enhance the quality and effectiveness of our
services. Although our intellectual property rights are important to our results
of operations, we believe that such factors as the technical expertise,
knowledge, ability and experience of our laboratory professionals are more
important, and that, overall, these technological capabilities provide
significant benefits to our clients.

CUSTOMERS / MARKETING

We provide specialty reference and central laboratory services to, among others,
the pharmaceutical and biotechnology industries. We also act as a subcontractor
for large central laboratories for our specialty reference laboratory services.
In fiscal years 2004 and 2003, our customers included companies ranging from the
world's largest pharmaceutical companies and biotechnology companies to small
and start-up organizations. Over the past several years, our two largest
customers for our laboratory services have been Pfizer, Inc. and Procter &
Gamble Pharmaceuticals, Inc. In fiscal years 2004 and 2003, Pfizer represented
approximately 36% and 76%, respectively, of our total gross revenues, and in
fiscal 2004, Procter & Gamble represented approximately 40% of our total
revenues. In addition, for fiscal 2004 and 2003, our top five customers
accounted for approximately 86% and 88%, respectively, of our gross revenues.
For the three- and six-month periods ended December 31, 2004 our top five
customers accounted for 79% and 65% of our gross revenues, respectively. This
compares to 68% and 86% of our gross revenues, respectively for the top five
customers in the comparable periods ended December 31, 2003.

Our scientific expertise is an integral and interrelated part of our marketing
and sales process. Our Chief Science Officer and our Chief Medical Officer are
directly involved in sales and marketing and, as part of the sales process,
often are involved with customers at the protocol design stage. Our extensive
knowledge in test development and our close collaboration with diagnostic
manufacturers frequently allow us to offer novel tests to our clinical research
clients before such tests are commercially available. Additionally, our
affiliation with the Centers for Disease Control through our affiliate, Pacific
Biometrics Research Foundation, which allows us to participate in the
development of reference methods, creates further expertise that we can bring to
bear on our clients' testing needs. By marketing and selling our expertise, we
believe we have a competitive advantage over our competitors.

CONTRACTUAL ARRANGEMENTS

Our contracts with customers are, for the most part, either fixed price or
fee-for-service with a cap. To a lesser extent, contracts are fee-for-service
without a cap. In cases where the contracts are fixed price, we generally bear
the cost of overruns, but we benefit if the costs are lower than we anticipated.
In cases where our contracts are fee-for-service with a cap, the contracts
contain an overall budget for the trial based on time and cost estimates. If our
costs are lower than anticipated, the customer generally benefits from the
savings. If our costs are higher than estimated, we bear the responsibility for
the overrun unless the increased cost is a result of a change requested by the
customer, such as an increase in the number of patients to be enrolled or the
type or amount of data to be collected. Contracts may range from a few months to
several years depending on the nature of the work performed. For most contracts,
a portion of the contract fee is paid at the time the study or trial is started
with the balance of the contract fee payable in installments upon the progress
of the work completed or achievement of milestones over the study or trial
duration. We recognize revenue in the period that we perform the related
services.

We have master contractor service agreements with each of our two largest
customers, Pfizer, Inc. and Procter & Gamble Pharmaceuticals, Inc. (one of which
was entered into in February 2002 and the other in May 2003). Under these master
service agreements, which we perform laboratory research services based on work
orders submitted to us by the customer. There is no guaranteed minimum number of
work orders or revenues to us under either agreement. Each work order is
separately negotiated with the customer and is usually limited to a specific
project with limited duration.

                                      -43-


Most of our contracts may be terminated at any time by the customer either
immediately or upon notice. Our contracts typically entitle us to receive
payment for fees earned by us up to the time of termination and reimbursement
for out-of-pocket costs incurred prior to termination. In certain limited
instances, our contracts also entitle us to a termination fee or payment for the
costs of winding down the terminated projects.

Most of our contracts also provide for the customer to indemnify us for any
third party damages and claims arising from our providing services under the
contract. The typical exception to this indemnification is that no
indemnification will be provided if the damage or claim results from our
negligence or intentional misconduct.

COMPETITION

The specialty reference and central laboratory services industries have many
participants ranging from small, limited-service providers to a limited number
of full-service laboratories with global capabilities.

For specialty reference laboratory services in our areas of expertise, we
primarily compete against in-house departments of pharmaceutical companies,
other full-service and limited service specialty and central laboratory services
organizations and, to a lesser extent, universities. Many of these organizations
have significantly greater resources than we do. Our significant competitors in
specialty reference laboratory services include Esoterix Inc., ARUP
Laboratories, Synarc, Inc., and the Mayo Clinic.

In the central laboratory services area, we primarily compete against in-house
departments of pharmaceutical companies, full-service and limited-service
specialty and central laboratory services organizations and, to a lesser extent,
universities. Many of these organizations have significantly greater resources
than we do and many have international operations. Our significant competitors
in central laboratory services include Covance Central Laboratory Services,
Inc., PPD, Inc., Quintiles Transnational Corp., Parexel International
Corporation, MDS Inc. and Quest Diagnostics Incorporated, among others.

There is significant competition for customers on the basis of many factors for
both specialty reference and central laboratory services, including

     o    technological expertise and efficient drug development processes,
     o    reputation for on-time quality performance,
     o    strengths in various geographic markets and global reach,
     o    ability to manage large-scale clinical trials both domestically and
          internationally,
     o    expertise and experience in specific areas,
     o    scope of service offerings,
     o    size,
     o    price,
     o    ability to acquire, process, analyze and report data in a time-saving
          and accurate manner, and
     o    expertise and experience in health economics and outcomes services.

While size and global reach are more important competitive factors in central
laboratory services business, we believe that technological expertise is more
important for specialty reference laboratory services. Except as to size and
international capacity where we know certain other competitors have an
advantage, we believe we compete very favorably in a majority of these areas,
particularly with respect to our technical expertise in our three specialty
areas.

GOVERNMENT REGULATION

Our laboratory services are subject to various regulatory requirements designed
to ensure the quality and integrity of our laboratory testing in support of
clinical trials. The industry standards for conducting clinical laboratory
testing are embodied in the Clinical Laboratory Improvement Amendments of 1988
("CLIA"). As a medical test site in the State of Washington, we have established
quality assurance programs at our laboratory facilities which monitor ongoing
compliance with CLIA. In addition, we are a CAP-certified test site. This
certification provides external monitoring for CLIA compliance by the College of
American Pathologists ("CAP") on a yearly basis.

                                      -44-


The industry standards for conducting preclinical laboratory testing are
embodied in the Good Laboratory Practice ("GLP") regulations as defined by the
FDA. It is management's experience that the pharmaceutical industry generally
does not require compliance with the GLP regulations, other than specific
provisions for discrete tests. Although we do not perform testing related to
preclinical research, we do comply with specific sections of the GLP
regulations, at our discretion, when it is either important to our clients or is
perceived by management as advantageous to our quality assurance program.

Our clinical laboratory services are subject to industry standards for the
conduct of clinical research and development studies that are embodied in the
regulations for Good Clinical Practice ("GCP"). The FDA and other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. Noncompliance with GCP can result in
the disqualification of data collection during the clinical trial.

We are subject to licensing and regulation under federal, state and local laws
relating to hazard communication and employee right-to-know regulations, the
handling and disposal of medical specimens and hazardous waste and radioactive
materials, as well as the safety and health of laboratory employees. Our
laboratory is subject to applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens including the
regulations of the Environmental Protection Agency, the Nuclear Regulatory
Commission, the Department of Transportation, the National Fire Protection
Agency and the Resource Conservation and Recovery Act. Although we believe that
we are currently in compliance in all material respects with such federal, state
and local laws, failure to comply could subject us to denial of the right to
conduct business, fines, criminal penalties and other enforcement actions.

In addition to its comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. Our employees receive initial and periodic training focusing on
compliance with applicable hazardous materials regulations and health and safety
guidelines.

In the past few years, both the United States and foreign governments have
become more concerned about the disclosure of confidential personal data. The
European Union prohibits the disclosure of personal confidential information,
including medical information, to any entity that does not comply with certain
security safeguards. The U.S. Department of Health and Human Services recently
promulgated final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") that will govern the disclosure of
confidential medical information in the United States. We do not process IIHI
(Individually Identifiable Health Information) during any phase of our business
practices related to clinical testing. We therefore are currently exempt from
HIPAA regulations.

The regulations of the U.S. Department of Transportation, the U.S. Public Health
Service and the U.S. Postal Service apply to the surface and air transportation
of laboratory specimens. We also comply with the International Air Transport
Association regulations, which govern international shipments of laboratory
specimens. Furthermore, when materials are sent to a foreign country, the
transportation of such materials becomes subject to the laws, rules and
regulations of such foreign country.

LAURUS DEBT INVESTMENT

         Effective May 28, 2004, we entered into a $2.5 million debt financing
with Laurus Master Fund, Ltd., a New York City based investment fund. The
financing consisted of a $2.5 million secured convertible note with a term of
three years (the "2004 Note"). In connection with the May 2004 financing, we
also issued to Laurus a warrant to purchase up to 681,818 shares of common stock
at an exercise price of $1.25 exercisable at any time prior to May 28, 2011.

         Under the terms of the 2004 Note, we started making monthly payments of
accrued interest only beginning on July 1, 2004, and the 2004 Note provided for
monthly payments of principal in the amount of $83,333.33, plus accrued
interest, commencing December 1, 2004. Prior to December 1, 2004, we initiated
discussions with Laurus

                                      -45-


for a six-month deferral on all principal payments and we did not make the
principal payments on either December 1, 2004 or January 1, 2005. On January 31,
2005 Laurus formally agreed to the six-month deferral and also waived all events
of default, including our failure to make the scheduled amortization payments in
December and January. Laurus agreed that we would not be required to pay the
principal portion of any monthly amount due for the six-month period from
December 2004 through May 2005, and instead such deferred principal amounts will
be due on May 1, 2007, the maturity date of the 2004 Note. There was no change
in the interest rate charged by Laurus on the unpaid principal. In consideration
for the principal payment deferral and the waiver, on January 31, 2005, we
issued an additional common stock purchase warrant to Laurus to purchase up to
200,000 shares of common stock of at an exercise price of $1.48. The warrant
expires on January 31, 2009.

         On January 31, 2005, we entered into another debt financing with
Laurus, consisting of a $1.5 million secured convertible note with a term of
three years (the "2005 Note"). In connection with the 2005 financing, we also
issued to Laurus a warrant to purchase up to 326,087 shares of common stock at
an exercise price of $1.37 exercisable at any time prior to January 31, 2010.
Under the terms of the 2005 Note, we are obligated to make monthly payments of
accrued interest only beginning on March 1, 2005, and monthly payments of
principal in the amount of $50,000.00, plus accrued interest, commencing August
1, 2005.

         The May 2004 and the January 2005 debt financings are on substantially
the same terms.

         Both the 2004 Note and the 2005 Note bears interest at an initial rate
equal to the prime rate plus two percent (2%). The interest rate on each note is
subject to reduction on a month by month basis if specified conditions are met.
In particular, if (a) we register the common stock underlying the note and the
related warrant on a registration statement declared effective by the SEC, and
(b) our common stock is trading at a 25% or greater premium to the respective
note conversion price, then the interest rate will be adjusted downward by 2.0%
for each incremental 25% increase over the note conversion price. Alternatively,
if (x) we have not registered the common stock under an effective registration
statement, but (y) our common stock is trading at a 25% or greater premium to
the note conversion price, then the interest rate will be adjusted downward by
1.0% for each incremental 25% increase over the note conversion price.

         For any cash payments we make on the note (e.g., any amounts due that
are not converted into common stock), we are required to pay an amount equal to
102% of the principal amount due. In addition, we can prepay the note at any
time upon payment of an amount equal to 130% of the then-outstanding principal
balance, plus accrued and unpaid interest.

         Laurus has the option at any time to convert any or all of the
outstanding principal and accrued and unpaid interest on either note into shares
of our common stock at the respective initial conversion price. The 2004 Note
has an initial conversion price of $1.06 per share, and the 2005 Note has an
initial conversion price of $1.17 per share. In addition, for each monthly
payment under either note, Laurus will be obligated to convert a portion of the
monthly payment into common stock at the applicable conversion price, so long as

     o    the average closing price of the common stock (for the five trading
          days immediately preceding the payment date) is greater than 115% of
          the respective note conversion price (e.g., $1.22 per share for the
          2004 Note based on the initial conversion price of $1.06, and $1.35
          per share for the 2005 Note based on the initial conversion price of
          $1.17),
     o    such amount being converted does not exceed 25% of the aggregate
          dollar trading volume for such immediately preceding five trading
          days, and
     o    the shares of common stock underlying the note are registered under an
          effective registration statement with the SEC.

Each note's conversion price is subject to certain anti-dilution adjustments,
including full ratchet anti-dilution if we issue convertible or equity
securities at a price per share less than the conversion price. However, the
following issuances will not trigger the anti-dilution adjustments to the
conversion price:

     o    pursuant to options, warrants, or other rights to acquire our common
          stock that were outstanding as of the respective date of issuance of
          the note;

                                      -46-


     o    pursuant to securities that may be issued under any employee stock
          option and/or any stock plan adopted by us;
     o    pursuant to stock options and/or stock granted under our stock option
          plan for our officers, directors, employees and advisors pursuant to
          arrangements, plans or contracts approved by our board of directors;
     o    upon conversion of any of our preferred stock outstanding as of the
          respective date of issuance of the note; and
     o    in connection with acquisition transactions approved by our board of
          directors provided, however, that the aggregate consideration for any
          individual acquisition may not exceed $2,500,000 without the prior
          written consent of Laurus.

The terms of Laurus' convertible note and warrant prohibit conversion of the
note or exercise of the warrant to the extent that conversion of the note and
exercise of the warrant would result in Laurus, together with its affiliates,
beneficially owning in excess of 4.99% of our outstanding shares of common
stock. Laurus may waive the 4.99% limitation upon 75 days' prior written notice
to us. Also, this limitation does not preclude Laurus from converting or
exercising the note or warrant and selling shares underlying the note or warrant
in stages over time where each stage does not cause Laurus and its affiliates to
beneficially own shares in excess of the limitation amount.

As security for our obligations to Laurus, we and each of our subsidiaries
granted to Laurus a blanket security interest in all of our assets, and we
entered into a stock pledge with Laurus for the capital stock in our
subsidiaries. If an event of default occurs under either note or the other
investment agreements, 130% of the unpaid principal balance on the notes, plus
accrued interest, shall become immediately due and Laurus shall be entitled to
payment of a default interest rate of 1.5% per month on all amounts due under
the notes. Events of default include the following:

     o    a failure to pay interest, principal or other payments arising under
          either the 2004 Note or the 2005 Note within three days of when due;
     o    a breach by us of any covenant or term or condition of either the 2004
          Note or the 2005 Note or in any of the investment agreements in any
          material respect, if not cured within 30 days of such breach;
     o    a breach by us of any representation or warranty in any material
          respect made in either the 2004 Note or the 2005 Note or in any of the
          investment agreements;
     o    if we make an assignment for the benefit of our creditors, or a
          receiver or trustee is appointed for us, or any form of bankruptcy or
          insolvency proceeding is instituted by us, or any involuntary
          proceeding is instituted against us if not vacated or dismissed within
          60 days;
     o    the filing of any money judgment or similar final process against us
          for more than $250,000, which remains unvacated, unbonded or unstayed
          for a period of 44 days;
     o    if trading of our common stock is suspended for 5 consecutive days or
          for 5 days during any 10 consecutive days from a principal market or
          pursuant to an SEC stop order;
     o    a failure by us to timely deliver shares of common stock when due upon
          conversions of the note; and
     o    the occurrence of an event of default under any of our other
          indebtedness.

Upon an event of default, Laurus will be entitled to specified remedies,
including remedies under the Uniform Commercial Code.

With respect to the assets of our subsidiary, PBI Technology Inc., Laurus has
agreed that those assets will be automatically released from Laurus' security
interest upon the occurrence of any of the following, provided that an event of
default has not occurred:

     o    our obtaining financing in excess of $1,000,000 to be secured by such
          PBI Technology assets;
     o    our entering into a definitive strategic joint venture arrangement
          where the PBI Technology assets are contributed to the venture; or
     o    our entering into one or more bona fide licensing agreements with
          unaffiliated third parties on commercially reasonable terms and
          providing for either (a) up front payments and royalties which

                                      -47-


          based on such third party's projected sales, would reasonably be
          expected to produce, in the aggregate, more than $1,000,000 in gross
          revenue, or (b) a grant of security interest in the licensed
          technology to the third party licensee.

For both the May 2004 and January 2005 financings, we entered into a
registration rights agreement with Laurus, and we agreed to register with the
SEC for resale the shares of common stock that are issuable upon conversion of
the notes and upon exercise of the related warrants. With respect to the May
2004 financing, we filed a registration statement on Form SB-2 with the SEC,
which was declared effective September 28, 2004. As part of Laurus' agreement to
the six-month deferral on principal payments under the 2004 Note and the
issuance of the warrant for 200,000 shares of common stock, we agreed to amend
the registration rights agreement to maintain the effectiveness of the
registration statement until January 31, 2008. For the January 2005 financing,
we have agreed to (a) file a registration statement with the SEC on or before
March 15, 2005, and (b) use our best efforts to have the registration statement
declared effective not later than June 1, 2005. We will be required to maintain
the effectiveness of the registration statement for up to three years, until
January 31, 2008. If we fail to comply with any of our registration obligations,
Laurus will be entitled to certain specified remedies, including monetary
liquidated damages. In particular, for each 30 days (or such pro rated number of
days) that we are out of compliance with our registration obligations, we will
be subject to a liquidated damage assessment of 2% of the outstanding principal
amount of the note.

Laurus has agreed, pursuant to the securities purchase agreement between Laurus
and us that neither Laurus nor any of its affiliates and investment partners
will (and will not cause any other person or entity to) engage in "short sales"
of our common stock for as long as the convertible note is outstanding. "Short
sales" are contracts for the sale of shares of stock that the seller does not
own, or certificates which are not within the seller's control, so as to be
available for delivery at the time when, under applicable rules, delivery must
be made.

Following the May 2004 debt financing, we also agreed with Laurus that for a
limited period of up to 30 days following the closing date, we could accept
additional secured PARI PASSU debt financing for up to an additional $1.0
million by an investor reasonably acceptable to us and Laurus. However, we were
not successful in closing on additional funds within such time frame.

In conjunction with the May 2004 financing, we paid a closing fee equal to
$87,500 to the manager of Laurus, $29,500 for Laurus' legal and due diligence
expenses and $1,500 to the escrow agent. In addition, we paid placement agent
fees of $75,000 to our broker, Source Capital Group, Inc. For any amounts of the
outstanding principal and accrued and unpaid interest owing on the 2004 Note
that are converted into shares of our common stock, we are also obligated to pay
our broker additional placement agent fees of 4% of the amount being converted,
for maximum additional fees of up to $100,000. In addition, we issued to our
broker a five-year warrant, exercisable as and to the extent that amounts owing
under the 2004 Note are converted into common stock, for up to 181,818 shares of
common stock at an exercise price of $1.25 per share. We also incurred
approximately $34,500 in legal fees related to the Laurus transaction. We
recorded approximately $293,500 in fees and expenses, which are being amortized
to general and administrative expenses at the rate of $8,153 per month over the
36-month life of the 2004 Note beginning in June 1, 2004. As of December 31,
2004, there was an unamortized balance of $236,431. We also recorded discounts
of $683,962 and $573,266, respectively, representing the intrinsic value of the
beneficial conversion feature of the 2004 Note and value allocated to 681,818
warrants. At June 30, 2004, of the total $1,257,228 of initially recorded
discounts, we had amortized $21,746 as interest expense, and $1,235,482 remained
unamortized and will be amortized, using the effective interest method, over the
remaining life of the 2004 Note or upon its earlier conversion. The balance due
under the 2004 Note is shown net of the remaining unamortized discount on our
balance sheet. We estimated the valuation of the beneficial conversion feature
and the warrant for 681,818 shares using the Black-Scholes pricing model and
other assumptions we deemed reasonable. See "Note 8 to Notes to Consolidated
Financial Statements."

In conjunction with the January 2005 financing, we paid a closing fee equal to
$52,500 to the manager of Laurus, $10,000 for Laurus' legal and due diligence
expenses and $500 to the escrow agent. In addition, we paid placement agent fees
of $45,000 to our broker, Source Capital Group, Inc. For any amounts of the
outstanding principal and accrued and unpaid interest owing on the 2005 Note
that are converted into shares of our common stock, we are also obligated to pay
our broker additional placement agent fees of 4% of the amount being converted,
for maximum additional fees of up to $60,000. In addition, we issued to our
broker a five-year warrant, exercisable as and to the

                                      -48-


extent that amounts owing under the 2005 Note are converted into common stock,
for up to 105,263 shares of common stock at an exercise price of $1.37 per
share. We also incurred approximately $8,000 in legal fees related to the Laurus
transaction. We are amortizing the aggregate amount of these fees and expenses
of $176,000 to general and administrative expenses at the rate of approximately
$4,889 per month over the 36-month life of the 2005 Note, beginning February
2005. As with the 2004 Note, we also recorded discounts of $397,436 and
$279,191, respectively, representing the intrinsic value of the beneficial
conversion feature of the 2005 Note and value allocated to 326,087 warrants. At
March 1, 2005, of the total $676,627 of initially recorded discounts, we had
amortized $12,004 as interest expense, and $664,623 remained unamortized and
will be amortized, using the effective interest method, over the remaining life
of the 2005 Note or upon its earlier conversion. The balance due under the 2005
Note is shown net of the remaining unamortized discount on our balance sheet. We
estimated the valuation of the beneficial conversion feature and the warrant for
326,087 shares using the Black-Scholes pricing model and other assumptions we
deemed reasonable. See "Note 8 to Notes to Consolidated Financial Statements."

SAIGENE INVESTMENT TRANSACTION

On August 28, 2002, we purchased certain technology, intellectual property and
equipment assets from Saigene Corporation pursuant to an asset purchase
agreement. The purchased technologies include certain DNA amplification and cell
viability and related technologies and processes.

In consideration for the purchased assets, we issued to Saigene a total of
6,541,430 shares of our common stock, and we issued an additional 458,570 shares
of our common stock to certain of Saigene's designees. In addition, we executed
an option agreement with Saigene whereby we have the right, in our sole
discretion, to purchase certain additional assets from Saigene in exchange for,
at our election, either $5,147,118 in cash, the issuance of an additional
1,715,706 shares of our common stock, or a combination of cash and shares, and
the assumption of additional liabilities associated with such transferred
assets. We have not exercised the option agreement and it continues in full
force and effect.

Further, in connection with the Saigene asset purchase agreement, in fiscal 2003
(or the dates otherwise noted) the following additional actions were taken:

     o    We entered into an amended and restated management agreement with
          Saigene, under which Saigene continued to operate and manage our
          laboratory (through August 31, 2004) in exchange for a monthly
          management fee. The original monthly management fee of $90,000 was
          reduced to $70,000 effective July 1, 2003, further reduced from
          $70,000 to $40,000 effective February 1, 2004 and further reduced to
          $20,000 effective June 15, 2004. Subsequently, in July 2004, we and
          Saigene agreed to terminate the management agreement effective August
          31, 2004, thereby eliminating the management fee payable to Saigene
          after that date;

     o    We agreed with Saigene to terminate a prior purchase agreement, dated
          June 22, 2000, for the proposed purchase by Saigene of our laboratory
          operations;

     o    Holders of our Series A preferred stock consented to an amendment of
          the Certificate of Designation with respect to the rights and
          preferences of the Series A preferred stock, and agreed to convert all
          accrued dividends (approximately $910,000) on the Series A preferred
          stock into an aggregate of 150,000 shares of our common stock;

     o    We entered into consulting arrangements with Paul Kanan and Terry
          Giles, who then were former founders and officers, and are now current
          directors (see " Executive Compensation -- Employment / Consulting
          Agreements" below);

     o    Several of our current and former employees agreed to convert $933,472
          of deferred compensation and notes payable into warrants and options
          to purchase an aggregate of 301,541 shares of our common stock; and

                                      -49-


     o    Each of Saigene, Paul Kanan, Terry Giles and certain other holders of
          our common stock agreed not to sell any of our securities until August
          28, 2003, except at a price per share equal to or greater than $3.00,
          in a private transaction, in a transaction solely for estate planning,
          or, in the event we completed a private financing, at a per share
          price equal to or greater than the per share price set forth in such
          private financing.

Subsequently, in December 2002, we entered into an investment agreement with
Saigene, reflecting a contribution by Saigene to us toward the development and
commercialization of the technologies we acquired from Saigene. Under the terms
of this investment agreement, Saigene:

     o    executed in our favor a promissory note in the principal amount of
          $200,000 payable on or before September 30, 2003 (the principal amount
          and accrued interest on which was subsequently paid in full by Saigene
          on September 30, 2003 by tender of 72,072 shares common stock held by
          Saigene at an attributed value of $3.00 per share and $2.36 cash);
     o    assumed a creditor obligation (that we had previously assumed pursuant
          to the Saigene asset purchase agreement) in the aggregate amount of
          approximately $229,000;
     o    assumed another creditor obligation in the aggregate amount of
          approximately $150,000; and o surrendered for cancellation 10,000
          shares of our common stock held in Saigene's name.

EMPLOYEES

At March 11, 2005, we had 32 full-time employees, 2 independent contractors and
1 part-time employee for a total of 35 FTEs, 26 of who were employed in
laboratory operations, laboratory administration and client services (including
our Chief Medical Officer and Chief Scientific Officer), 4 were employed in
sales, marketing and business development, and 7 were employed in administrative
capacities. One of our employees holds an M.D. degree, five employees hold Ph.D.
degrees, and five other employees hold masters degrees or other postgraduate
degrees. None of our employees are represented by labor unions. We believe that
our relationship with our employees is good.

In November and early December, 2003, we implemented certain cost reductions and
deferrals which included generally all of our employees. In addition to
headcount reductions, all of our senior management and certain other employees
accepted salary deferrals ranging from 15% to 20%, and the majority of our other
employees were subjected to the State of Washington's "Shared Work Program."
Under the State of Washington's Shared Work Program, full-time employees' hours
worked may be reduced by up to 50%, and the employees are eligible to apply for
unemployment benefits for the reduction in hours worked. Effective mid-March, we
began ramping up to work on a clinical services contract for a study with
anticipated revenues of approximately $1.4 million that was substantially
completed by June 30, 2004, and we pulled most of our employees out of the
Shared Work Program.

As a further cost reduction, effective February 1, 2004, we changed the prior
salary deferrals, which we had implemented with our senior management and
certain other employees, into salary reductions, and we made one-time grants of
stock options in connection with the reductions. Other than for three department
managers who have been restored to full salary effective March 16, 2004, our
Chief Executive Officer who was restored to near full salary effective July 1,
2004, and one other manager who became a part time employee effective September
1, 2004, these salary reductions are continuing for three employees, with no
further stock options granted in connection with the reductions. Effective March
1, 2004, the prior salaries deferred from December 2003 and January 2004 were
paid pro rata monthly through June 30, 2004.

In addition, pursuant to our prior management agreement with Saigene, through
August 31, 2004, Saigene provided operational and management services for our
laboratory, in exchange for a monthly management fee. During fiscal 2004, the
original monthly management fee of $90,000 was reduced to $70,000 effective July
1, 2003, further reduced from $70,000 to $40,000 effective February 1, 2004, and
further reduced to $20,000 effective June 15, 2004. Subsequently, in July 2004,
we and Saigene agreed to terminate the management agreement effective August 31,
2004, thereby eliminating the management fee payable to Saigene after that date.
Under this management arrangement, Saigene had made available to us the services
of up to five contract employees.

                                      -50-


PROPERTIES

We lease approximately 15,000 square feet of office and laboratory space in
Seattle, Washington for our executive offices and laboratory. This lease has a
term of ten years, expiring on October 31, 2007, and carries an average annual
rental of approximately $233,000 through the remainder of the lease term
subsequent to June 30, 2004. In addition, under the terms of the lease, we are
required to place a $100,000 security deposit in an interest bearing account in
our name, with interest earned accruing to us. This amount has been classified
as restricted cash on the accompanying consolidated balance sheet and has a
current balance of approximately $71,000 as modified by mutual agreement with
the landlord.

We believe the leased premises are suitable and adequate for their use. In the
opinion of management, the leased premises are adequately covered by insurance.

We do not own any real property. We do not have a policy pertaining to
investments in real estate. Our current practice is to invest solely in
short-term money market securities.

LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.

                                   MANAGEMENT

The following table sets forth as of March 11, 2005, the names and ages of our
current directors and executive officers, and the principal offices and
positions with our company held by each person. Our board of directors currently
consists of four directors. Our executive officers are elected annually by our
board of directors and serve terms of one year or until their death, resignation
or removal by the board of directors. There are no family relationships between
any of the directors and executive officers.

               NAME          AGE                      POSITION
Ronald R. Helm                53       President, Chief Executive Officer,
                                       Chairman and Director
Michael L. Hartzmark          49       Interim Chief Financial Officer
Dr. Elizabeth Teng Leary      56       Chief Scientific Officer
Dr. Mario Ehlers              46       Chief Medical Officer
Terry M. Giles                56       Director
Paul G. Kanan                 58       Director
Richard W. Palfreyman         62       Director

DIRECTORS:

- ----------------------- ----------------------------------------------------------------------------------- ------------
                                                                                                             DIRECTOR
   NAME OF DIRECTOR                                          POSITION                                          SINCE
- ----------------------- ----------------------------------------------------------------------------------- ------------
                                                                                                      
Ronald R. Helm          Ronald R. Helm has served as a Director, Chairman and Chief Executive Officer       2002
                        since August 28, 2002.  From 1996 to August 28, 2002, Mr. Helm served as the
                        Chairman and CEO of Saigene Corporation, was a co-founder of Saigene Corporation
                        in 1996, and served on the board of directors of Saigene until January 2004.  Mr.
                        Helm was previously in a private law practice with the California law firm of
                        Helm, Purcell & Wakeman.  Mr. Helm was a Senior Vice-President and General
                        Counsel for ComputerLand Corporation and also served as the Managing Director of
                        ComputerLand Europe.  Prior to that, Mr. Helm was the Associate Dean for
                        Development and a Professor of Law at Pepperdine University School of Law.  He
                        received his B.S.Ed from Abilene Christian University and his J.D. from
                        Pepperdine University School of Law.

Paul G. Kanan           Paul G. Kanan has served as a Director since July 1996, and as President and        1996


                                      -51-


- ----------------------- ----------------------------------------------------------------------------------- ------------
                                                                                                             DIRECTOR
   NAME OF DIRECTOR                                          POSITION                                          SINCE
- ----------------------- ----------------------------------------------------------------------------------- ------------
                                                                                                      
                        Chief Executive Officer from October 1996 through August 2002.  Mr. Kanan served
                        as President and Chief Executive Officer of our wholly owned subsidiary, Pacific
                        Biometrics, Inc., a Washington corporation, from October 1996 through August
                        2002, and as President and a director of BioQuant from October 1993 through
                        August 2002.  Since May 2001, Mr. Kanan has served as Vice President of
                        Operations and Chief Financial Officer of Agensys, Inc., a biotechnology firm in
                        California.  Mr. Kanan is also an officer and director of CEO Advisors, a health
                        care consulting firm that he co-founded in 1992.  Mr. Kanan received his B.S.E.
                        degree from the University of Michigan and an M.B.A. degree from Harvard
                        University Graduate School of Business.

Terry M. Giles          Terry M. Giles was elected to the Board of Directors in September 2003.  Mr.        2003
                        Giles previously served on our Board of Directors from 1995 to 2001.  Mr. Giles
                        currently is in private law practice in California, and is also an adjunct
                        professor with the Pepperdine University School of Law.  Mr. Giles currently also
                        serves as Chairman of Giles Enterprises, a private holding company for various
                        business enterprises, as Chairman of the Board of Landmark Education Corporation,
                        a private company providing seminars on personal growth and responsibility, as
                        Chairman of Mission Control Productivity, Inc., a private company, and as the
                        owner of GWE, LLC, a private company specializing in lender financing.  Mr. Giles
                        serves on the Pepperdine University Board of Regents and is a member of the Board
                        of Visitors for the Pepperdine University School of Law.  Mr. Giles also serves
                        on the board of directors of The Terry M. Giles Foundation, a charitable
                        foundation.  Mr. Giles received his B.A. from California State University at
                        Fullerton and his J.D. degree from Pepperdine University School of Law.

Richard W. Palfreyman   Richard W. Palfreyman became a Director effective on August 28, 2002.  Mr.          2002
                        Palfreyman is currently the President, CEO and Director of the Relax the Back
                        Acquisitions Corporation, serving since November 2001.  Mr. Palfreyman's prior
                        business positions include serving as President and Chief Executive Officer of
                        BackSaver Acquisitions Corporation from November 2001 to October 2002, as Chief
                        Operating Officer and Chief Financial Officer of Spafinder, Inc. from October
                        2000 to August 2001, as Chief Operating Officer of Spectra Entertainment
                        Corporation from October 1996 to June 2000.  He has also served as President and
                        Chief Executive Officer of the Photo & Sound Corporation and as the Chief
                        Financial Officer of ComputerLand Corporation.  Mr. Palfreyman holds a B.S.
                        degree in Economics and an M.B.A. from the University of Utah.


EXECUTIVE OFFICERS:

In addition to Mr. Helm, following is biographical information for our other
executive officers. Mr. Helm's biographical information is set forth above under
"Directors."

                     
Michael L. Hartzmark,   Dr. Michael L. Hartzmark has served as Interim Chief Financial Officer since October 2004.
Ph.D.                   Previously, Dr. Hartzmark served as a Director from August 2002 to November 2004.  Since
                        April 2004, Dr. Hartzmark has served as Vice President of Chicago Partners LLC, a private
                        company providing consulting and forensic service in economics, finance, accounting and
                        technology.  Previously, from 1993 to March 2004, Dr. Hartzmark was the Chairman and CEO of
                        Cragar Industries, Inc., until its acquisition by Global Entertainment Corporation.  Dr.
                        Hartzmark also provides advisory services to individuals and companies and currently serves
                        on the Financial Advisory Boards of Shaker Investments, Inc. and The Board Institute, as well
                        as on the Board of Directors of Global Entertainment Corporation.  Dr. Hartzmark earned his

                                      -52-


                     
                        MA and Ph.D. degrees in economics at the University of Chicago. He holds a BA in economics
                        from the University of Michigan.

Elizabeth Teng Leary,   Dr. Elizabeth Leary has served as our Chief Scientific Officer since 2000, prior to which Dr.
Ph.D, DABCC             Leary was our Vice President of Laboratory Services from 1998.  Dr. Leary co-founded Pacific
                        Biometrics Inc., a Washington corporation (PBI-WA), in 1989 and from 1989 to 1998, she was
                        Vice President and Director of the Laboratory Division of PBI-WA. In l989, Dr. Leary also
                        co-founded the Pacific Biometrics Research Foundation (PBRF), a non-profit corporation
                        affiliated with us, and currently serves as the director of the CDC Cholesterol Reference
                        Network Laboratory at PBRF (one of eleven such reference laboratories in the world). Prior to
                        joining Pacific Biometrics, Dr. Leary served as a director of clinical chemistry and industry
                        consultant for 13 years. She is a diplomate of the American Board of Clinical Chemistry. She
                        is past chair of the Pacific Northwest chapter of American Association for Clinical Chemistry
                        (AACC) and the Lipids and Vascular Disease Division of AACC, and past president of the North
                        America Chinese Clinical Chemist Association. She has published over 80 articles in
                        peer-reviewed journals and books and is a recipient of several grants and awards. Dr. Leary
                        received her B.A. from the University of California at Berkeley and her Ph.D. in Biochemistry
                        from Purdue University. She is a graduate of the post-doctoral training program in clinical
                        chemistry at the University of Washington Department of Medicine.

Mario R. Ehlers,        Dr. Mario Ehlers has served as our Chief Medical Officer since September 2002.  From June
M.D., Ph.D.             1998 to September 2002, Dr. Ehlers was the Vice President and Chief Medical Officer of
                        Restoragen, Inc., a privately-held biotechnology company.  Subsequently, in December 2002,
                        Restoragen, Inc. filed for chapter 11 reorganization and bankruptcy protection.  Prior to
                        1998, Dr. Ehlers has 11 years of experience in academic research.  He was formerly chairman
                        of an academic department at the University of Cape Town Medical School in South Africa and
                        an instructor in biochemistry at Harvard Medical School.  He is author to over 40
                        publications, two patents and two additional patent applications, with an international
                        reputation in research on ACE and related proteases and in mycobacterial infectious
                        diseases.  Dr. Ehlers received both his MBChB (M.D. equivalent) and Ph.D. degrees from the
                        University of Cape Town in South Africa.


MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

Our Board of Directors, which held seven meetings during the fiscal year ended
June 30, 2004, has an Audit Committee and a Compensation Committee. The Board of
Directors does not have a nominating committee; the functions customarily
attributable to the nominating committee are performed by the Board of Directors
as a whole.

The Audit Committee assists the Board in fulfilling its responsibilities to
provide oversight with respect to our financial statements and reports, our
independent auditors, the system of internal controls and the audit process. Its
primary duties include reviewing the results and scope of the audit and other
services provided by our independent auditors, and reviewing and evaluating our
internal control functions. The Committee also has authority for selecting and
engaging our independent auditors and approving their fees. The Board has
adopted a written charter for the Audit Committee. Each of the Directors on the
Audit Committee is considered an "Independent Director" as defined in Rule
4200(a)(15) of the National Association of Securities Dealers listing standards.
During the 2004 fiscal year, the Audit Committee met five times. During fiscal
2004, the members of the Audit Committee were Michael Hartzmark (Chairman),
Richard Palfreyman and Timothy Wudi; subsequently, in November 2004, Dr.
Hartzmark's and Mr. Wudi's service on the Board expired and Mr. Palfreyman is
now the sole director on the Audit Committee.

The Compensation Committee makes recommendations to the Board of Directors
concerning compensation, including stock option grants, for our executive
officers. The Compensation Committee met two times during fiscal 2004. During
fiscal 2004, the members of the Compensation Committee were Timothy Wudi
(Chairman), Michael

                                      -53-


Hartzmark and Richard Palfreyman; subsequently, in November 2004, Mr. Wudi's and
Dr. Hartzmark's service on the Board expired and Mr. Palfreyman is now the sole
director on the Compensation Committee.

During the 2004 fiscal year, all of the directors attended more than 75% of the
total number of meetings of the Board of Directors and committees on which they
served, other than Mr. Giles who attended 3 of the 6 Board meetings subsequent
to his election on September 25, 2003.

AUDIT COMMITTEE REPORT

The Audit Committee serves as the representative of the Board for general
oversight of our financial accounting and reporting process, system of internal
control, audit process, and process for monitoring compliance with laws and
regulations. Management has primary responsibility for preparing our financial
statements, our internal controls and our financial reporting process. Our
independent public accountants, Grant Thornton LLP, were responsible for
performing an independent audit of our consolidated financial statements for the
fiscal year ended June 30, 2004 in accordance with U.S. generally accepted
auditing Public Company Accounting Oversight Board standards and to issue its
report. For the three and six months ended December 31, 2004, our newly engaged
independent public accountants, Williams & Webster, PS, were responsible for
reviewing our unaudited consolidated financial statements in accordance with
U.S. generally accepted auditing Public Company Accounting Oversight Board
standards.

In this context, the Audit Committee has met and held discussions with
management and the independent accountants. Management represented to the Audit
Committee that the Company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements with
management and the independent accountants. The Audit Committee discussed with
the independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61 (Communications with Audit Committees).

The Company's independent accountants also provided to the Audit Committee the
written disclosures and letter required by Independence Standards Board Standard
No. 1 (Independence Discussions with Audit Committees), and the Audit Committee
discussed with the independent accountants that firm's independence.

Based upon the Audit Committee's discussion with management and the independent
accountants, and upon the Audit Committee's review of the representations of
management and the report of the independent accountants to the Audit Committee,
the Audit Committee recommended that the Board of Directors include the audited
consolidated financial statements in the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2004 for filing with the Securities and
Exchange Commission.

                    AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
                              MICHAEL L. HARTZMARK
                              RICHARD W. PALFREYMAN
                                 TIMOTHY A. WUDI

THE FOREGOING AUDIT COMMITTEE REPORT SHALL NOT BE DEEMED TO BE "SOLICITING
MATERIAL" OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSSION, NOR SHALL
SUCH INFORMATION BE INCORPORATED BY REFERENCE INTO ANY PAST OR FUTURE FILING
UNDER THE SECURITIES ACT OR THE EXCHANGE ACT, EXCEPT TO THE EXTENT THE COMPANY
SPECIFICALLY INCORPORATES IT BY REFERENCE INTO SUCH FILING.

COMPENSATION OF DIRECTORS

Our policy is not to pay compensation to directors who are also employees for
their services as directors.

For fiscal 2005, our Board of Directors approved a new compensation program for
our non-employee directors for their service during the fiscal year. Under this
new program, each non-employee director is entitled to an annual retainer of
$15,000, plus $500 for each Board meeting attended by such director during the
fiscal year in excess of six meetings. Any non-employee director serving on the
audit committee or the compensation committee is entitled

                                      -54-


to $250 for each such committee meeting attended during the fiscal year in
excess of six meetings for each such committee. The Board also generally
approved awards of stock options to the non-employee directors, in an amount to
be determined at a later date by the Board. In addition, non-employee directors
will be reimbursed their expenses associated with attending Board meetings.

In January 2004, the Compensation Committee recommended and our Board of
Directors ratified a compensation program for our outside directors (the
"Director Compensation Program") covering fiscal 2004 for the period subsequent
to September 30, 2003. Pursuant to the Director Compensation Program, each
outside director received an annual retainer of $10,000, with an additional
retainer of $10,000 for the Chair of the audit committee and $5,000 for the
Chair of the compensation committee. In addition, outside directors were
reimbursed their expenses associated with attending Board meetings, and received
a fee for participation in meetings as follows:

                                        In-Person          Telephonic
                                        ---------          ----------
         Board                          $  1,500            $   750
         Audit Committee                   1,500                750
         Compensation Committee            1,000                500

Accordingly, under the Director Compensation Program for the period in fiscal
2004 subsequent to September 30, 2003, we accrued estimated Board fees of
$22,125 per quarter for each of the quarters ended December 31, 2003 and March
31, 2004. As of June 30, 2004, we had recorded Board fees of $95,500 for the
period subsequent to September 30, 2003, of which we paid $44,250 in cash
through June 30, 2004, and we paid $22,125 in August 2004, with $0 remaining due
and payable as of March 11, 2005.

For fiscal 2004, each outside director also received common stock option grants
consisting of 6,000 shares upon initial election to the Board, 1,000 shares upon
re-election to the Board, and 1,000 shares for each fiscal quarter of service.
As of November 12, 2003, for past due option awards due through September 30,
2003, the Board of Directors granted to each of our three outside directors
stock options for 10,000 shares of common stock at an exercise price of $0.8075
per share and stock options for 2,000 shares at $1.75 per share. In addition,
for the quarterly option grants, on each of December 24, 2003, March 25, 2004
and June 25, 2004, the Board granted to each of our three outside directors a
stock option covering 1,000 shares of common stock at an exercise price per
share of $0.90, $0.90 and $1.01, respectively, which was the closing sale price
of our common stock on the OTC Bulletin Board on each such date.

In addition, as of September 30, 2003, we had accrued $123,500 in past due cash
compensation payable to the outside directors for prior periods. For the past
due amounts owed the directors through September 30, 2003, the Board extended
the outside directors the right to elect to receive payment of their past due
compensation in cash, restricted common stock, stock options, or by promissory
note. As of November 12, 2003, of the total $123,500 owed, $24,840 was elected
to be paid in the form of options for 30,761 shares of common stock at $0.8075
per share, with the $98,660 balance to be paid in cash. As of March 11, 2005 ,
we had made all the cash payments to the directors for fiscal 2003.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our executive officers and directors,
and persons who own more than 10% of the common stock, to file reports of
ownership and change in ownership with the SEC. Officers, directors and greater
than 10% stockholders are required by SEC regulations to furnish us with copies
of all forms they file pursuant to Section 16(a).

Based solely on our review of the copies of such forms we received, or written
representations from certain reporting persons, we believe that, during the 2004
fiscal year, all such filing requirements applicable to our executive officers,
directors and greater than 10% beneficial owners were complied with, except that
the following filings were not made on a timely basis:

     o    Ronald Helm, our Chief Executive Officer and a director, filed three
          Forms 4 reporting late two grants of stock options made to him in
          fiscal 2004 and stock transfer received from Saigene.

                                      -55-


     o    Michael Carrosino, our Chief Financial Officer, filed a late Form 3 in
          September 2003 following his appointment as an executive officer in
          June 2003, and filed a Form 4 reporting late two stock option grants
          made to him in fiscal 2004;
     o    Mario Ehlers, our Chief Medical Officer, filed one Form 4 reporting
          late two stock option grants made to him in fiscal 2004;
     o    Dr. Elizabeth Leary, our Chief Scientific Officer, filed a late Form 3
          in October 2003 following her designation as a Section 16 officer in
          September 2003, and filed two Forms 4 reporting late three stock
          option grants made to her in fiscal 2004;
     o    Terry Giles, one of our directors, filed a late Form 3 in October
          2003, following his election as a director in September 2003;
     o    Michael Hartzmark, one of our directors, filed three Forms 4 reporting
          late five stock option grants made to him in fiscal 2004, and filed a
          Form 5 in July 2003 to report one late Form 4 transaction of in
          February 2003;
     o    Paul Kanan, one of our directors, filed a Form 5 in August 2003, to
          report one late Form 4 transaction of his exercise of stock options
          for 8,333 shares of common stock in September 2002;
     o    Richard Palfreyman, one of our directors, filed three Forms 4
          reporting late six stock option grants made to him in fiscal 2004;
     o    Timothy Wudi, one of our directors, filed three Forms 4 reporting late
          five stock option grants made to him in fiscal 2004; and
     o    Saigene Corporation, a greater than 10% stockholder, filed four Forms
          4 reporting late 11 transactions that occurred during fiscal 2004.

















                                      -56-


                             EXECUTIVE COMPENSATION

         The following table shows for each of the three fiscal years ended June
30, 2004, 2003, and 2002, respectively, certain compensation awarded or paid to,
or earned by, the following persons (collectively, the "NAMED EXECUTIVE
OFFICERS"):

         o        Ronald R. Helm, our current Chief Executive Officer; and
         o        other executive officers whose salary and bonus during fiscal
                  2004 exceeded $100,000.

Other than the Named Executive Officers, no executive officer who was serving in
such capacity at the end of fiscal 2004, earned more than $100,000 in salary and
bonus for the 2004 fiscal year:

                           SUMMARY COMPENSATION TABLE

                                              SUMMARY COMPENSATION TABLE

                                                                                      LONG-TERM
                                                 ANNUAL COMPENSATION                 COMPENSATION
                                      ------------------------------------------- -------------------
                                                                                     SECURITIES
                                                                                       UNDER
         NAME AND            FISCAL                               OTHER ANNUAL        OPTIONS               ALL OTHER
    PRINCIPAL POSITION        YEAR       SALARY        BONUS      COMPENSATION       GRANTED(1)            COMPENSATION
- ---------------------------- -------- ------------ ------------ ----------------- ------------------- ------------------
                                          ($)          ($)            ($)                (#)                  $
                                                                                     
Ronald R. Helm (1).........   2004    $223,065           --              --               344,049           $2,148 (1)
CHIEF EXECUTIVE OFFICER       2003     138,252           --         $61,867                    --            6,446
AND CHAIRMAN                  2002          --           --              --                    --               --


Elizabeth T. Leary (2) ....   2004     125,445       58,510              --               157,887               --
CHIEF SCIENTIFIC OFFICER      2003      97,690      113,371              --                21,922 (2)           --
                              2002      68,200       76,647              --                    --               --

Mario R. Ehlers (3) .......   2004     208,288           --              --               121,178            2,112 (3)
CHIEF MEDICAL OFFICER         2003     166,134           --              --                    --           27,434
                              2002          --           --              --                    --               --

- ----------------
(1)  Mr. Helm became a Director, Chairman and Chief Executive Officer effective
     on August 28, 2002, in connection with the closing of the transactions set
     forth in the Asset Purchase Agreement with Saigene. Other Annual
     Compensation consists of amounts paid to Saigene as reimbursement for Mr.
     Helm's salary for the period beginning September 2002 through January 2003,
     during which time Mr. Helm was our employee but was being paid by Saigene
     pursuant to the management agreement. All Other Compensation in fiscal 2004
     consists of life insurance premiums paid by us in the amount of $2,148.
(2)  The amounts in the Bonus column consist of sales commissions. On August 28,
     2002, we granted Dr. Leary stock options for 21,922 shares of common stock
     in full satisfaction of deferred compensation owing to Dr. Leary in the
     amount of $65,765 for prior fiscal years.
(3)  Dr. Ehlers became Chief Medical Officer on September 30, 2002. The amounts
     listed under All Other Compensation for fiscal 2004 consist of life
     insurance premiums paid by us in the amount of $2,112.

                                      -57-


STOCK OPTION GRANTS DURING FISCAL 2004

The following table shows information regarding stock options granted to the
Named Executive Officers during the 2004 fiscal year:


                                                           PERCENTAGE OF
                                    NO. OF SHARES          TOTAL OPTIONS          EXERCISE
                                 UNDERLYING OPTIONS         GRANTED TO              PRICE
            NAME                       GRANTED               EMPLOYEES            PER SHARE         EXPIRATION DATE
- --------------------------------------------------------------------------------------------------------------------
                                                                                          
Ronald R. Helm                         344,049                 34.0%               $0.81              1/30/2014
Elizabeth T. Leary                     157,887                 15.6                 0.81              1/30/2014
Mario R. Ehlers                        121,178                 12.0                 0.81              1/30/2014


AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

The following table presents information about options exercised by the Named
Executive Officers during fiscal 2004, including the aggregate value of any
gains realized on such exercise. The table also shows information regarding the
number and value of unexercised in-the-money stock options held by the Named
Executive Officers as of June 30, 2004.


                                                       NUMBER OF SHARES UNDERLYING          VALUE OF UNEXERCISED
                                                          UNEXERCISED OPTIONS AT            IN-THE-MONEY OPTIONS
                                                              JUNE 30, 2004                   AT JUNE 30, 2004
                            SHARES                   ------------------------------------------------------------------
                          ACQUIRED ON      VALUE
   NAME                    EXERCISE       REALIZED    EXERCISABLE     UNEXERCISABLE   EXERCISABLE     UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------
                                                                                        
                              (#)           ($)           (#)              (#)             ($)              ($)
Ronald R. Helm                  --              --      107,937          236,112         $23,746          $51,945
Elizabeth T. Leary          10,000         $10,200       48,243          109,644          10,613           24,122
Mario R. Ehlers                 --              --       43,443           77,735           9,557           17,102


EMPLOYMENT / CONSULTING AGREEMENTS

Effective October 1, 2004, we entered into a new at-will employment agreement
with Dr. Elizabeth Leary, pursuant to which she continues to serves as our Chief
Scientific Officer. Pursuant to the agreement, Dr. Leary receives an annual base
salary of $190,000. In addition, Dr. Leary is entitled to bonuses for up to 20%
of her salary if the company meets certain revenue and booked sales numbers for
the 12 months beginning October 1, 2004.

In connection with the transactions contemplated by the Asset Purchase Agreement
with Saigene, on August 28, 2002, we entered into a consulting agreement with
Paul G. Kanan, a director and former officer. Pursuant to the consulting
agreement, we agreed to engage Mr. Kanan as a consultant for a period of 12
months beginning September 1, 2002, and to pay Mr. Kanan $3,000 per month. The
consulting arrangement was extended on a month-to-month basis for up to 12
additional months until August 31, 2004, or until such time as the shares of
common stock held by Mr. Kanan have been registered for resale pursuant to an
effective registration statement filed with the SEC. The consulting agreement
was not further extended beyond such additional 12 months and expired by its
terms on August 31, 2004. For the fiscal year ended June 30, 2004, we recorded
$36,000 in consulting expense to Mr. Kanan under this consulting agreement, and
as of March 11, 2005 we have made all payments subject to this agreement.

Also in connection with the Asset Purchase Agreement, on August 28, 2002, we
entered into a consulting agreement with Terry M. Giles, a then-former director
and greater than 5% stockholder. As described above, in September 2003, Mr.
Giles was elected to our Board of Directors. Pursuant to the consulting
agreement, we agreed to engage Mr. Giles as a consultant and to pay Mr. Giles
compensation of $10,000 per month until the conversion of Mr. Giles shares of
Series A preferred stock into common stock, and until such shares are either (a)
registered pursuant to an

                                      -58-


effective registration statement, or (b) deemed tradable pursuant to Rule 144.
Pursuant to the consulting agreement, we accrued the first year's payments
(totaling $120,000) and such payments will be amortized and paid over the
following four years (i.e., an additional $2,500 per month over 48 months
beginning September 2003), with any accrued amounts due being payable upon
termination of the consulting agreement, if terminated earlier than 60 months.
For the fiscal year ended June 30, 2004, we recorded $120,000 in consulting
expense to Mr. Giles under this consulting agreement, of which $37,154 was
accrued and owing to Mr. Giles as of June 30, 2004, which has been paid as of
March 11, 2005.

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On June 27, 2002, we and our wholly-owned subsidiary, Pacific Biometrics, Inc.,
a Washington corporation ("PBI-WA"), entered into an Asset Purchase Agreement,
as amended August 28, 2002 (the "Asset Purchase Agreement"), with Saigene,
providing for the purchase by PBI-WA of certain technology, intellectual
property and equipment assets in connection with certain DNA amplification and
cell viability and related technologies and processes. On August 28, 2002,
pursuant to the Asset Purchase Agreement, as consideration for the purchased
assets, we issued to Saigene 6,541,430 shares of common stock, and an additional
458,570 shares of common stock to certain of Saigene's designees. In addition,
as part consideration for the purchased assets, on August 28, 2002, PBI-WA
issued to Saigene a promissory note in aggregate principal amount of $223,697.
We are a guarantor on the note. The note bears interest at a rate of 8% per
annum and is payable in equal monthly payments of principal and interest of
$10,000. All principal amounts under the note accelerate and become payable upon
the closing of an equity financing by us raising at least $6 million.

Also in connection with the Asset Purchase Agreement, on August 28, 2002, we
entered into a consulting agreement with each of Paul Kanan and Terry Giles, two
of our current directors.

On August 28, 2002, in connection with the asset purchase transaction, we and
Saigene entered into an amended and restated Management Agreement, providing for
management services by Saigene for the day-to-day operations of our clinical
laboratory. The original management agreement had been entered into in September
1999. Under the terms of the amended and restated Management Agreement, we were
obligated to pay a monthly fee of $90,000 to Saigene in consideration for its
services. The Management Agreement may be terminated by either us or Saigene
upon 30 days prior written notice. Subsequently, the parties amended the
Management Agreement to reduce the management fee to $70,000 per month effective
July 1, 2003, further reduced to $40,000 per month effective February 1, 2004,
and further reduced to $20,000 per month effective June 15, 2004. Subsequently,
in July 2004, we and Saigene agreed to terminate the management agreement
effective August 31, 2004, thereby eliminating the management fee payable to
Saigene after that date.

Also, on August 28, 2002, in connection with the Asset Purchase Agreement,
PBI-WA and Saigene executed an Option Agreement, whereby PBI-WA may purchase
certain additional assets of Saigene in exchange for, at PBI-WA's and our
election, either $5,147,118 in cash or the issuance by us of an additional
1,715,706 shares of common stock and the assumption of additional liabilities
associated with such transferred assets. As of the date hereof, the Option
Agreement continues in full force and effect and has not been exercised by us.

On December 19, 2002, we, PBI-WA and Saigene executed an Investment Agreement,
whereby Saigene agreed to an additional investment in our company, consisting of
(i) a promissory note in the amount of $200,000 due and payable to us on
September 30, 2003 in either cash or surrender of shares of common stock, (ii)
the assumption by Saigene of certain debt obligations that had been assumed by
us in connection with the Asset Purchase Agreement in the aggregate amount of
approximately $370,000, and (iii) the surrender of 10,000 shares of common stock
held by Saigene. Subsequently on September 30, 2003, pursuant to the terms of
the $200,000 promissory note payable to us, Saigene notified us of its election
to surrender shares of common stock as payment on the note, at a deemed value of
$3.00 per share. As a result, Saigene surrendered an aggregate of 72,072 shares
of common stock and paid $2.36 in cash as payment in full of the principal and
accrued interest on the note.

In August 2002, we converted an aggregate of $933,472 of deferred compensation
and notes payable to related parties and current or former senior executives
into warrants and options to purchase an aggregate of 301,541 shares of common
stock. Included within these amounts were (a) $459,736 in deferred compensation
and notes payable

                                      -59-


owing to Paul Kanan, a current director, exchanged for stock options for 153,245
shares of common stock, and (b) $65,765 in deferred compensation owing to Dr.
Elizabeth Leary, our Chief Scientific Officer, converted into stock options for
21,922 shares of common stock.

During the quarter ended September 30, 2003, we also received 72,072 shares of
our common stock as payment on a $200,000 note receivable and accrued interest
from Saigene, and accrued approximately $2,000 in dividends on our Series B
preferred stock. We also reversed approximately $1,000 previously recorded to
our common stock and prepaid financing expense accounts, reflecting the return
and cancellation of 83,333 shares of our common stock that had been held in
escrow under an agreement with our prior landlord. Under the terms of the escrow
agreement, 583,333 shares of our common stock remain in escrow.

Effective July 1, 2004, in connection with termination of the prior management
agreement with Saigene, we purchased certain computer equipment and other
furniture and equipment from Saigene Corporation. The property and equipment was
valued at $73,585 and we paid $15,000 in cash and recorded an account payable to
Saigene of $58,585. We also entered into an office sharing agreement for Saigene
to use some of our office space. For each month of that office-sharing
agreement, the $58,585 payable to Saigene will be reduced at a (non-cash) rate
of $1,540 per month. At December 31, 2004 the balance due to Saigene was
$52,425.

All ongoing and any future related-party transactions have been and will be made
or entered into on terms that are no less favorable to us than those that may be
obtained from an unaffiliated third party. In addition, any future related-party
transactions, including any forgiveness of loans, must be approved by a majority
of the disinterested members of our board of directors.







                                      -60-


                             PRINCIPAL STOCKHOLDERS

We currently have two outstanding classes of voting securities - common stock
and Series A preferred stock (collectively, the "VOTING SECURITIES"). The
following table sets forth as of March 11, 2005, certain information regarding
the beneficial ownership of each class of our outstanding Voting Securities by:
(i) each person who, to our knowledge, beneficially owns more than 5% of the
respective class of Voting Securities; (ii) each of the Named Executive Officers
identified in the Executive Compensation table above; (iii) each of our
directors; and (iv) all of our directors and executive officers as a group. As
of such date, there were issued and outstanding 13,353,550 shares of common
stock and 1,550,000 shares of Series A preferred stock.


                                                               BENEFICIAL OWNERSHIP OF VOTING SECURITIES (2)
                                                 ---------------------------------------------------------------------
                                                            COMMON STOCK                 SERIES A PREFERRED STOCK
                                                 ---------------------------------------------------------------------
             NAME AND ADDRESS (1)                 NO. OF SHARES            PERCENT     NO. OF SHARES      PERCENT
- ------------------------------------------------ ---------------- ------ ------------ ---------------- ---------------
                                                                                            
OFFICERS AND DIRECTORS:
- -----------------------
 Terry M. Giles                                       572,581     (3)         4.2%         950,000         61.3%
 c/o Giles Enterprises
 3438-21 E. Collins Avenue
 Orange, CA  92867

 Ronald R. Helm                                       395,936     (4)         2.9               --         --

 Paul G. Kanan                                        267,590     (5)         2.0               --         --

 Michael L. Hartzmark                                 233,862     (6)         1.7               --         --

 Dr. Elizabeth Leary, Ph.D.                           151,509     (7)         1.1               --         --

 Richard W. Palfreyman                                 70,761     (8)        **                 --         --

 Mario Ehlers, M.D., Ph.D.                             69,002     (9)        **                 --         --

 All current directors and executive officers       1,761,241     (10)       12.3          950,000         61.3
    as a group (seven persons)

 5% OWNERS:
 ----------
 Saigene Corporation                                3,070,058     (11)       23.0               --         --
 220 W Harrison Street
 Seattle, WA  98119

 Unamore Assets, Inc.                                 187,545     (12)        1.4          425,000         27.4
 c/o Courvoisier & Associe's S.A.
 25 Blvd. Helvetique
 1207 Geneva, Switzerland

 Banque Edouard Constant-Geneva                        75,268     (13)       **            175,000         11.3
 c/o Kierner & Cie-Pascal Kiener
 8, av. de Frontenex
 1207 Geneva, Switzerland


**       Less than one percent

(1)  Except as otherwise noted, the address of each of these stockholders is c/o
     Pacific Biometrics, Inc., 220 West Harrison Street, Seattle, WA 98119.
(2)  This table is based upon information supplied by executive officers,
     directors and principal stockholders. Unless otherwise indicated in the
     footnotes to this table and subject to community property laws where

                                      -61-


     applicable, to our knowledge, each of the stockholders named in this table
     has sole voting and investment power with respect to the Voting Securities
     shown as beneficially owned.
(3)  Includes 316,666 shares of common stock issuable upon conversion of the
     950,000 shares of Series A preferred stock held by Mr. Giles (at a
     conversion rate of one share of common stock for every three shares of
     Series A preferred stock). Also includes 25,000 shares of common stock
     subject to outstanding stock options held by Mr. Giles that are exercisable
     within 60 days of March 11, 2005 ("Vested Options").
(4)  Includes 192,936 shares of common stock subject to Vested Options held by
     Mr. Helm.
(5)  Includes 89,345 shares of common stock held by the Kanan Living Trust dated
     May 15, 1990, of which Mr. Kanan is a co-trustee with his wife, and 821
     shares held in Mr. Kanan's account in our 401(k) Plan. Also includes
     178,245 shares of common stock subject to Vested Options held by Mr. Kanan.
(6)  Includes 16,000 shares of common stock subject to Vested Options held by
     Mr. Hartzmark.
(7)  Includes 1,475 shares held in Dr. Leary's account in our 401(k) Plan, over
     which she has voting control but no investment power. Also includes 106,636
     shares of common stock subject to Vested Options held by Dr. Leary.
(8)  Consists of 70,761 shares of common stock subject to Vested Options held by
     Mr. Palfreyman.
(9)  Consists of 69,002 shares of common stock subject to Vested Options held by
     Dr. Ehlers.
(10) Consists of Ronald Helm, Michael Hartzmark, Paul Kanan, Terry Giles,
     Richard Palfreyman, Dr. Elizabeth Leary and Dr. Mario Ehlers. Includes an
     aggregate of 658,580 shares of common stock subject to Vested Options held
     by such persons, and 316,666 shares of common stock issuable upon
     conversion of 950,000 shares of Series A preferred stock held by such
     persons.
(11) Includes an aggregate of 2,437,057 shares of common stock held of record by
     third parties, but over which Saigene has voting power pursuant to
     irrevocable proxies granted by such third parties. Does not include up to
     1,715,706 shares of common stock that may be issued upon exercise by us of
     an option to purchase additional assets of Saigene. See "Certain
     Relationships and Related Transactions" below.
(12) Includes 141,666 shares of common stock issuable upon conversion of the
     425,000 shares of Series A preferred stock held by the stockholder (at a
     1:3 conversion rate).
(13) Includes 58,333 shares of common stock issuable upon conversion of the
     175,000 shares of Series A preferred stock held by the stockholder (at a
     1:3 conversion rate).

                            DESCRIPTION OF SECURITIES

COMMON STOCK

We are authorized to issue 30,000,000 shares of common stock, par value $.01 per
share. As of March 11, 2005, there were 13,353,550 shares of common stock issued
and outstanding, held by approximately 261 holders of record. All outstanding
shares of common stock are, and all shares of common stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.

On January 10, 2003, our board of directors approved a 1:3 (one for three)
reverse stock split on our common stock. The reverse split was subsequently
approved by our stockholders and became effective on March 14, 2003. All shares
and per share calculations set forth in this prospectus reflect the 1:3 reverse
stock split.

The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferential rights with respect to any outstanding preferred stock, holders of
common stock are entitled to receive ratably such dividends as may be declared
by our board of directors out of funds legally available therefore. In the event
of a liquidation, dissolution or winding up of our company, holders of common
stock are entitled to share ratably all assets remaining after payment of
liabilities and the liquidation preference of any outstanding preferred stock.
Holders of common stock have no preemptive rights and have no rights to convert
their common stock into any other securities.

PREFERRED STOCK

Our certificate of incorporation authorizes us to issue up to 5,000,000 shares
of preferred stock, par value $.01 per share. Our board of directors generally
has the authority to establish the designations, rights and preferences of the
preferred stock. Accordingly, the Board of Directors is empowered, without
general stockholder approval, to issue

                                      -62-


preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the common stock.

We currently have two designated classes of preferred stock - Series A
convertible preferred stock and Series B convertible preferred stock.

         SERIES A PREFERRED STOCK

         As of March 11, 2005, there were 1,550,000 shares designated as Series
A preferred stock, all of which shares were issued and outstanding. Each share
of Series A preferred stock is entitled to a liquidation preference of $2.00 per
share. Each share of Series A preferred stock is convertible at the option of
the holder at any time, into one-third of a share of common stock, and is
convertible at our option into one-third of a share of common stock when the
closing price of our common stock is at least $8.00 or more for thirty
consecutive trading days. In August 2002, the holders of Series A preferred
stock approved an amendment to the Certificate of Designation to modify certain
mandatory conversion rights, eliminate dividend rights and eliminate the right
of the holders of the Series A preferred stock to designate a director to our
board of directors. As such, in August 2002, all accrued and unpaid dividends on
the Series A preferred stock at that time (approximately $910,000) were
converted into 150,000 shares of our common stock, and the Series A preferred
stock no longer accrues mandatory dividends. For the year ended June 30, 2004,
we did not declare dividends payable on the Series A preferred stock and we do
not intend to declare dividends for the 2005 fiscal year.

         Unless otherwise required by law, holders of Series A preferred stock
do not have a general right to vote on any matter submitted for stockholder
approval. However, holders of Series A preferred stock have separate class
voting rights with respect to the following limited matters:

     o    any amendment to our certificate of incorporation or bylaws that would
          change the rights or preferences of the Series A preferred stock;
     o    any authorization or issuance by our board of directors us of any
          equity security having a preference or priority as to dividends or
          assets superior to or on parity with the Series A preferred stock; or
     o    any reclassification of the common stock into shares having a
          preference or priority as to dividends or assets superior to or on
          parity with the Series A preferred stock.

         SERIES B PREFERRED STOCK

         As of March 11, 2005, there were 1,666,667 shares designated as Series
B preferred stock, none of which were issued and outstanding. Previously, there
were 36,666.66 shares of Series B preferred stock issued and outstanding held by
three holders. In May 2004, we offered to our three holders of Series B
preferred stock the opportunity to voluntarily convert all of their shares of
Series B preferred stock, and all accrued and unpaid dividends thereon through
May 31, 2004 (approximately $3,295), into shares of common stock. The conversion
ratio was 3 shares of common stock for one share of Series B preferred stock,
plus 1 share of common stock for each $1 in accrued and unpaid dividends. In
June 2004, all three preferred holders accepted our conversion offer and
canceled their shares of Series B preferred stock and accrued and unpaid
dividends, and we issued a total of 104,294 shares of common stock upon such
conversion.

         Our Series B preferred stock previously accrued dividends at a rate of
8% per annum, compounded quarterly. For the fiscal year ended June 30, 2004, we
paid cash dividends on the Series B preferred stock of approximately $4,000, and
approximately $3,295 of accrued and unpaid dividends at May 31, 2004 were
converted into shares of common stock. There are no remaining accrued and unpaid
dividends on the Series B preferred stock.

         We intend to file an amendment to our Certificate of Incorporation to
eliminate this designated class of preferred stock, and all such 1,666,667
shares will be returned to authorized but undesignated shares of preferred
stock.

                                      -63-


The foregoing summaries of the material terms of our common stock and our
preferred stock do not purport to be complete or to contain all the information
that may be important to you and are qualified in their entirety by reference to
our Certificate of Incorporation, as amended, and bylaws, as amended.

CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE
ANTI-TAKEOVER LAW

Certain provisions of our certificate of incorporation and bylaws could make
more difficult the acquisition of our company by means of a tender offer, a
proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of our company to first negotiate with us. We believe that
the benefits of increased protection of our potential ability to negotiate with
the proponent of an unfriendly or unsolicited proposal to acquire or restructure
our company outweighs the disadvantages of discouraging such proposals,
including proposals that are priced above the then current market value of our
common stock, because, among other things, negotiation of such proposals could
result in an improvement of their terms.

         ISSUANCE OF PREFERRED STOCK

         As noted above, our Board of Directors, without general stockholder
approval (other than any required approval of holders of preferred stock), has
the authority under our certificate of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of us or make removal of management more
difficult.

         NO CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS

         Our stockholders are not permitted to cumulate their votes in the
election of directors. As a result, stockholders owning a majority of our common
stock may elect all of the directors.

These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and in the policies
formulated by the Board and to discourage certain types of transactions that may
involve an actual or threatened change of control of our company. These
provisions are designed to reduce our vulnerability to an unsolicited proposal
for a takeover that does not contemplate the acquisition of all of our
outstanding shares or an unsolicited proposal for the restructuring or sale of
all or part of our company. These provisions, however, could discourage
potential acquisition proposals and could complicate, delay or prevent a change
in control of our company. They may also have the effect of preventing changes
in our management. We believe that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweighs the disadvantages of
discouraging these proposals, including proposals that are priced above the then
current market value of our common stock, because, among other things,
negotiation of these proposals could result in an improvement of their terms.

DELAWARE GENERAL CORPORATION LAW

We are not currently subject to Section 203 of the Delaware General Corporation
Law. If in the future our common stock is quoted on the Nasdaq Stock Market or
listed on a national securities exchange, we may become subject to that
provision. Section 203 generally prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date the stockholder became an interested stockholder,
unless:

     o    prior to such date, the board of directors of the corporation approved
          either the business combination or the transaction that resulted in
          the stockholder becoming an interested stockholder,
     o    upon consummation of the transaction that resulted in the stockholder
          becoming an interested stockholder, the interested stockholder owned
          at least 85% of the voting stock of the corporation outstanding at the
          time the transaction commenced, excluding for purposes of determining
          the number of shares outstanding those shares owned by persons who are
          directors and also officers and by employee stock plans in which
          employee participants do not have the right to determine

                                      -64-


          confidentially whether shares held subject to the plan will be
          tendered in a tender or exchange offer, or
     o    on or subsequent to such date, the business combination is approved by
          the board of directors and authorized at an annual or special meeting
          of stockholders and not by written consent, by the affirmative vote of
          at least 66 2/3% of the outstanding voting stock that is not owned by
          the interested stockholder.

Section 203 defines a business combination to include:

     o    any merger or consolidation involving the corporation and the
          interested stockholder,
     o    any sale, transfer, pledge or other disposition of 10% or more of the
          assets of the corporation involving the interested stockholder,
     o    subject to certain exceptions, any transaction that results in the
          issuance or transfer by the corporation of any stock of the
          corporation to the interested stockholder,
     o    any transaction involving the corporation that has the effect of
          increasing the proportionate share of the stock of any class or series
          of the corporation beneficially owned by the interested stockholder,
          or
     o    the receipt by the interested stockholder of the benefit of any loans,
          advances, guarantees, pledges or other financial benefits provided by
          or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES

Section 145 of the General Corporation Law of the State of Delaware permits a
corporation to indemnify its officers and directors to the extent provided in
that statute. Our certificate of incorporation and bylaws contain provisions
intended to indemnify officers and directors against liability to the fullest
extent permitted by Delaware law.

Under Delaware law, directors and officers may be indemnified against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. In stockholders'
derivative actions, indemnification extends only to expenses (including
attorneys' fees) incurred in connection with defense or settlement of such an
action, except that no indemnification shall be made in the event such person
shall have been adjudged to be liable to the corporation, unless and only to the
extent that a proper court shall have determined that such person is fairly and
reasonably entitled to indemnity for such expenses. Delaware law also permits a
corporation to maintain insurance on behalf of its officers and directors
against liabilities incurred while acting in such capacities.

Our certificate of incorporation and bylaws contain provisions intended to
provide indemnification to our officers and directors. Our certificate provides
that we shall, to the fullest extent permitted by the provisions of Section 145
of the Delaware General Corporation Law, indemnify any and all persons whom we
have power to indemnify from and against any and all expenses, liabilities, or
other matters referred to in or covered by said section. Our bylaws contain a
similar provision requiring indemnity of our officers and directors to the
fullest extent authorized by Delaware law.

Our directors and officers are covered by insurance (with certain exceptions and
limitations) which indemnifies them against losses and liabilities arising from
certain alleged "wrongful acts," including alleged errors or misstatements or
misleading statements, or certain other alleged wrongful acts or omissions
constituting neglect or breach of duty, including liability under the Securities
Act.

                                      -65-


Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing, or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.

                                  LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of common stock
offered hereby are being passed upon for us by Cairncross & Hempelmann, P.S.,
Seattle, Washington. Cairncross & Hempelmann has not represented the selling
security holders in connection with such registration.

                                     EXPERTS

Our financial statements as of June 30, 2004 and 2003, and for the years then
ended appearing in this prospectus have been audited by Grant Thornton LLP,
independent registered public accounting firm, as indicated in their report
thereon appearing elsewhere herein, and are included in reliance upon the
authority of such firm as experts in accounting and auditing.

                       WHERE YOU CAN FIND MORE INFORMATION

We file annual and current reports, proxy statements and other information with
the Securities and Exchange Commission. Copies of our reports, proxy statements
and other information may be inspected and copied at the public reference
facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at the SEC's regional offices at Seven World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of these
materials also can be obtained by mail at prescribed rates from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 or
by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that
contains reports, proxy statements and other information regarding us. The
address of the SEC web site is http://www.sec.gov.

In addition, we maintain a web site that contains information regarding our
company, including copies of reports, proxy statements and other information we
file with the SEC. The address of our web site is www.pacbio.com. Our web site,
and the information contained on that site, or connected to that site, are not
incorporated into and do not constitute a part of this prospectus.

We have filed a registration statement on Form SB-2 with the SEC for the common
stock offered by the selling security holders under this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information that is not contained in this prospectus. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to, or incorporated by
reference into, the registration statement for copies of the actual contract,
agreement or other document.

You should rely only on the information contained in this prospectus. We have
not authorized any other person to provide you with different information. This
prospectus may only be used where it is legal to sell these securities. The
information in this prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this prospectus is
accurate as of any other date.




                                      -66-


                          INDEX TO FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

Consolidated Financial Statements for Three- and Six-Months Ended December 31,
2004 and 2003:

    Consolidated Balance Sheets as of December 31, 2004 (unaudited) and
      June 30, 2004....................................................      F-2

    Consolidated Statements of Operations for the three- and six-month
      periods ended December 31, 2004 and 2003 (unaudited).............      F-3

    Consolidated Statements of Cash Flows for the six-month periods
      ended December 31, 2004 and 2003 (unaudited).....................      F-4

    Notes to Condensed Consolidated Financial Statements (unaudited)...      F-5


Consolidated Financial Statements for Fiscal Years Ended June 30, 2004 and 2003:

    Report of Independent Registered Public Accounting Firm............     F-11

    Consolidated Balance Sheets as of June 30, 2004 and 2003...........     F-12

    Consolidated Statements of Operations for the years ended June 30,
      2004 and 2003....................................................     F-13

    Consolidated Statements of Cash Flows for the years ended June 30,
      2004 and 2003....................................................     F-14

    Consolidated Statement of Stockholders' Equity (Deficit) for the
      years ended June 30, 2004 and 2003...............................     F-15

    Notes to Consolidated Financial Statements.........................     F-16










                                      F-1


                            PACIFIC BIOMETRICS, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                                                                 DECEMBER 31,        JUNE 30,
                                     ASSETS                                                         2004              2004
                                                                                                 (unaudited)        (audited)
                                                                                                 ------------      ------------
                                                                                                             
Current assets:
    Cash and cash equivalents                                                                    $  1,434,661      $  2,941,014
    Accounts receivable, net of allowance for doubtful accounts
         of $22,100 and $22,100, respectively                                                         822,678           367,449
    Prepaid expenses and other assets                                                                 276,830            78,999
    Deferred financing cost on secured convertible note - current portion                              97,833            64,500
                                                                                                 ------------      ------------
          Total current assets                                                                      2,632,002         3,451,962

Property and equipment, net                                                                           435,734           407,548

Other assets:
    Deferred financing cost on secured convertible note - net of current portion                      138,597           123,625
    Restricted cash                                                                                    71,592            71,395
                                                                                                 ------------      ------------
          Total assets
                                                                                                 $  3,277,925      $  4,054,530
                                                                                                 ============      ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                                                             $    315,359      $    479,446
    Accrued liabilities                                                                               791,766           647,986
    Advances from customers                                                                           608,413           210,922
    Capital lease obligation - current portion                                                         49,162            48,253
    Note payable to related parties - current portion                                                      --            22,183
    Secured convertible note - current portion, net of unamortized fair value
       assigned to beneficial conversion feature and warrants of $362,694
       $304,349, respectively
                                                                                                      220,637           278,982
    Other notes payable - current portion                                                             422,601           349,002
                                                                                                 ------------      ------------
          Total current liabilities                                                                 2,407,938         2,036,774

Long-term liabilities:
   Capital lease obligations - net of current portion                                                 135,901           160,487
   Secured convertible note - net of current portion, net of unamortized fair value
      assigned to beneficial conversion feature and warrants of $733,781
      $931,133, respectively
                                                                                                    1,145,788           985,536
   Other notes payable - net of current portion                                                        88,110           336,510
                                                                                                 ------------      ------------
          Total long-term liabilities                                                               1,369,799         1,482,533
                                                                                                 ------------      ------------
          Total liabilities
                                                                                                    3,777,737         3,519,307

Stockholders' equity (deficit):
    Preferred stock, $0.01 par value, 5,000,000 shares authorized
          Series A preferred stock, 1,550,000 shares designated, 1,550,000 shares issued and
           outstanding, liquidation preference of $2.00 per share,                                     15,500            15,500
aggregating $3,100,000
          Series B preferred stock, 1,666,667 shares designated, no shares issued and
           outstanding                                                                                   --                --
    Common stock, $0.01 par value, 30,000,000 shares authorized
          issued and outstanding 13,213,550 shares at December 31, 2004 and 13,048,820
           at June 30, 2004                                                                           303,861           302,214
    Additional paid-in capital                                                                     23,493,752        23,338,016
    Accumulated deficit                                                                           (24,311,502)      (23,119,084)
    Treasury stock                                                                                     (1,423)           (1,423)
                                                                                                 ------------      ------------
          Total stockholders' equity (deficit)                                                       (499,812)          535,223
                                                                                                 ------------      ------------

          Total liabilities and stockholders' equity (deficit)
                                                                                                 $  3,277,925      $  4,054,530
                                                                                                 ============      ============

         The accompanying condensed notes are an integral part of these consolidated financial statements.

                                      F-2


                            PACIFIC BIOMETRICS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                       Three Months Ended                 Six Months Ended
                                                           December 31,                      December 31,
                                                 ------------------------------     -----------------------------
                                                     2004              2003             2004             2003
                                                 ------------      ------------     ------------     ------------

                                                                                         
Revenues                                         $  1,008,755      $    542,076     $  1,443,496     $  2,842,298

 Laboratory expenses and cost of sales                586,227           449,592          995,753        1,743,695
                                                 ------------      ------------     ------------     ------------
          Gross Profit                                422,528            92,484          447,743        1,098,603

Operating expenses:
    Research and product development                   37,095            39,114           43,399           77,353
    Selling, general and administrative               612,287           734,633        1,327,318        1,596,838
                                                 ------------      ------------     ------------     ------------

Operating loss                                       (226,854)         (681,263)        (922,974)        (575,588)
                                                 ------------      ------------     ------------     ------------

Other income (expense):
  Interest expense                                   (141,744)          (29,847)        (277,154)         (60,948)
  Interest income                                         449               209              540           16,509
  Other income                                            297             7,170              532            5,337
  Loss on settlement of note receivable
   from related party                                    --                --               --            (72,072)
                                                 ------------      ------------     ------------     ------------
                                                     (135,958)          (29,341)        (269,444)        (115,979)

Loss before tax expense                              (362,812)         (710,604)      (1,192,418)        (691,567)
                                                 ------------      ------------     ------------     ------------

Tax expense                                              --                --               --               --
                                                 ------------      ------------     ------------     ------------

Net loss                                         $   (362,812)     $   (710,604)    $ (1,192,418)    $   (691,567)
                                                 ============      ============     ============     ============

Preferred stock dividend                                 --              (2,020)            --             (4,054)
                                                 ------------      ------------     ------------     ------------

Net loss applicable to common stockholders       $   (362,812)     $   (712,624)    $ (1,192,418)    $   (695,621)
                                                 ============      ============     ============     ============

Net loss per share:
  Basic loss per share                           $      (0.03)     $      (0.08)    $      (0.10)    $      (0.08)
                                                 ============      ============     ============     ============
  Diluted loss per share                         $      (0.03)     $      (0.08)    $      (0.10)    $      (0.08)
                                                 ============      ============     ============     ============

Weighted average common shares outstanding:
  Basic
                                                   12,630,217        8,706,089        12,547,852        8,628,941
                                                 ============      ============     ============     ============
  Diluted                                          12,630,217         8,706,089       12,547,852        8,628,941
                                                 ============      ============     ============     ============


      The accompanying condensed notes are an integral part of these consolidated financial statements.

                                      F-3


                            PACIFIC BIOMETRICS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

                                                                                     Six months ended
                                                                                        December 31,
                                                                               ------------------------------
                                                                                   2004              2003
                                                                               ------------      ------------
                                                                                           
Cash flows from operating activities:
    Net loss                                                                   $ (1,192,418)     $   (691,567)

    Reconciliation of net loss to net cash provided by (used in) operating
    activities:
      Depreciation and amortization                                                  76,764            56,577
      Amortization of fair value assigned to beneficial conversion feature
      and warrants                                                                  139,007              --
      Amortization of deferred financing costs on secured convertible note          (48,305)             --
      Interest income on note receivable from related party settled by                 --
      common stock                                                                  (16,218)
      Board compensation settled by stock options                                      --              24,840
      Loss on settlement of note receivable from related party                         --              72,072
      Compensation expense (income) from fair value adjustment to options               283           (46,049)
      Changes in assets and liabilities:
         Accounts receivable, net                                                  (455,229)           49,385
         Inventories                                                                   --             158,104
         Prepaid expenses and other assets                                          (77,831)          (72,786)
         Advances from customers                                                    397,491          (232,664)
         Accounts payable                                                          (164,087)           77,233
         Accrued liabilities                                                        143,780            92,971
         Deferred compensation                                                         --              13,774
         Stock options granted at less than fair market value                          --               2,583
                                                                               ------------      ------------
          Net cash provided by (used in) operating activities                    (1,180,545)         (511,745)
                                                                               ------------      ------------

Cash flows from investing activities:
    Purchases of capital equipment                                                 (104,950)          (26,717)
                                                                               ------------      ------------
          Net cash used in investing activities                                    (104,950)          (26,717)
                                                                               ------------      ------------

Cash flows from financing activities:
    Payments on notes payable                                                      (174,801)          (80,286)
    Payments on notes payable to related parties                                    (22,183)          (55,660)
    Transfer to restricted cash                                                        (197)             (161)
    Net proceeds from loan and security agreement                                      --             250,000
    Payments on capital lease obligations                                           (23,677)          (29,480)
    Payment of cash dividends                                                          --              (5,684)
    Net proceeds from exercise of stock options                                        --                 400
    Net proceeds from private placement of common stock                                --             687,933
                                                                               ------------      ------------
          Net cash provided by (used in) financing activities                      (220,858)          767,062
                                                                               ------------      ------------

Net increase (decrease) in cash and cash equivalents                             (1,506,353)          228,600
Cash and cash equivalents, beginning of period                                    2,941,014           440,326
                                                                               ------------      ------------

Cash and cash equivalents, end of period                                       $  1,434,661      $    668,926
                                                                               ============      ============

Cash paid during the period for interest                                       $     73,007      $     39,861
                                                                               ============      ============

Cash paid during the period for income taxes                                   $       --        $       --
                                                                               ============      ============
Non-Cash Activities
          Common stock issued upon conversion of principal on Laurus
         convertible note                                                      $     35,000      $       --
          Common stock issued as compensation of R&D costs related to Utek
         Agreement                                                             $    120,000      $       --
          Preferred stock dividends accrued                                    $       --        $      4,054
          Shares released from escrow under restructure agreement with
         prior landlord                                                        $       --        $        833
          Warrants issued in consideration of issuance costs for private
         placement                                                             $       --        $     78,073


The accompanying condensed notes are an integral part of these consolidated
financial statements.






                            PACIFIC BIOMETRICS, INC.

        CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc., a Delaware corporation ("PBI" or the "Company"),
provides specialty reference laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business primarily through its wholly owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation ("PBI-WA"). The Company's two
other wholly owned subsidiaries are PBI Technology, Inc., a Washington
corporation ("PBI Tech"), and BioQuant, Inc., a Michigan corporation. All
material intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.

Unaudited interim financial statements include all adjustments such as normal
recurring accruals that are, in the opinion of management, necessary for a fair
statement of results of interim periods. Operating results for the three- and
six-month periods ended December 31, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2005. The
accompanying unaudited financial statements and related condensed notes should
be read in conjunction with the audited financial statements and the Form 10-KSB
of Pacific Biometrics, Inc. and notes thereto, for its fiscal year ended June
30, 2004.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4" ("SFAS No. 151"). This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," by clarifying that abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage)
should be recognized as current-period charges and by requiring the allocation
of fixed production overheads to inventory based on the normal capacity of the
production facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management believes the
adoption of this Statement will have no impact on the Company's financial
condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, "Accounting for Real Estate Time-Sharing
Transactions - an amendment of FASB Statements No. 66 and 67" ("SFAS No. 152"),
which amends FASB statement No. 66, "Accounting for Sales of Real Estate", to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position 04-2,
"Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-2"). This
statement also amends FASB Statement No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects", to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Management believes the adoption of this Statement will have no impact on
the Company's financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.153, "Exchanges of Nonmonetary Assets - an
Amendment of APB Opinion No. 29", ("SFAS No. 153"). This statement eliminates
the exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions that do not have
commercial substance, defined as transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. This statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Management believes the adoption of this Statement will have no impact on
the Company's financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payments" ("SFAS No. 123 (R)"). This Statement

                                      F-5


replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation", and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS
No. 123 (R) establishes standards for the accounting for share-based payment
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This statement covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based award, share appreciation rights and employee share purchase
plans. SFAS No. 123 (R) requires a public entity to measure the cost of employee
services received in exchange for an award of equity instruments based on the
fair value of the award on the grand date (with limited exceptions). That cost
will be recognized in the entity's financial statements over the period during
which the employee is required to provide services in exchange for the award.
Management has not currently evaluated the impact of adoption on its overall
results of operations or financial position.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan. For the three- and
six-month periods ended December 31, 2004 no stock options were granted under
the employee compensation plan. The Company applies APB Opinion 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," and related interpretations in accounting for
its plan. The Company has adopted the disclosure-only provisions of SFAS No.
123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." Had compensation cost been
determined based on the fair value of stock options granted in a manner
consistent with the method promulgated by SFAS No. 123, the Company's net loss
and loss per share would have been changed to the pro forma amounts below for
the three- and six-month periods ended December 31:


                                                          Three months                         Six months
                                                       ended December 31,                  ended December 31,
                                                     2004              2003              2004              2003
                                                 ------------      ------------      ------------      ------------
                                                                                           
Net loss as reported                             $   (362,812)     $   (710,604)     $ (1,192,418)     $   (691,567)
Add: Total stock-based employee compensation
     awards, net of related tax benefits                 --              64,679              --              64,679
                                                 ------------      ------------      ------------      ------------
     Pro forma net loss                          $   (362,812)     $   (775,283)     $ (1,192,418)     $   (756,246)
                                                 ============      ============      ============      ============
Net loss per share:
     Basic - as reported                         $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                 ============      ============      ============      ============
     Diluted - as reported                       $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                 ============      ============      ============      ============
     Basic - pro forma                           $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                 ============      ============      ============      ============
     Diluted - pro forma                         $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                 ============      ============      ============      ============


VARIABLE ACCOUNTING

On May 3, 2002, the Board of Directors voted to reduce the exercise price of all
then outstanding options to $0.06 per share. No initial expense was recognized
on this repricing, as the new exercise price equaled the market value of the
Company's stock on that date. As of December 31, 2004 and 2003, respectively,
7,902 and 41,140 of these options remained outstanding. For the three-month
periods ended December 31, 2004 and 2003, in accordance with accounting for
options under variable pricing rules, the Company recognized approximately
$(2,529) and $54,977, respectively, in compensation income (expense). For the
six-month periods ended December 31, 2004 and 2003, in accordance with
accounting for options under variable pricing rules, the Company recognized
approximately $(283) and $46,049, respectively, in compensation income
(expense). The Company will recognize compensation expense in the future for all
outstanding repriced stock options if the market value of its common stock
increases, and will recognize compensation income if the market value of its
common stock decreases.

BENEFICIAL CONVERSION FEATURE

In accordance with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, using the relative
fair value method of Accounting Principles Board Opinion 14 ("APB 14"), the
Company recorded a beneficial conversion feature (BCF) related to the issuance
of convertible debt that has conversion features at fixed rates that were
in-the-money when issued and recorded the value allocated to warrants issued
with those instruments. The BCF for the convertible instrument and value
allocated to warrants are

                                      F-6


measured and recognized by allocating a portion of the proceeds to additional
paid-in capital with an offset to the discount on the convertible instrument.

For convertible debt and related warrants, the recorded discount is amortized as
interest expense using the effective interest method over the life of the debt.
For the three- and six-month periods ended December 31, 2004, the Company
amortized $72,325 and $139,007, respectively associated with the secured
convertible note, leaving an unamortized balance of $1,096,475 at December 31,
2004. There was no comparable amortization charge during the comparable three-
and six-month periods ended December 31, 2003.

UTEK AGREEMENT

Effective September 30, 2004, the Company entered into a one-year agreement with
Utek Technologies ("Utek") to find for the Company potential licensing, royalty
or asset sale opportunities for some or all of the technology assets held in the
Company's subsidiary, PBI Tech. The Company agreed to issue to Utek a minimum of
129,730 unregistered shares of common stock as compensation, with 1/12th of the
shares (10,810 shares) vesting each month during the term of the agreement. In
the event the aggregate value of the shares upon vesting is less than $120,000,
the Company is obligated to issue additional shares upon completion of the
agreement. In the event of termination before the completion of the agreement,
all unvested shares of common stock shall be returned to the Company. In
accordance with Financial Accounting Standards Board Emerging Issues Task Force
Issue (EITF) No. 96-18, the Company recorded a prepaid expense of $120,000
related to the issuance of 129,730 shares of unregistered common stock over the
term of the agreement. During the quarter ended December 31, 2004, the Company
amortized $30,000 of this prepayment and applied this expense to its research
and development expenses.

LOSS PER SHARE

Basic loss per share is based upon the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding stock
options that have vested or will vest within 60 days of December 31, 2004 and
warrants using the "treasury stock" method and the effect of preferred stock on
an as-converted basis. Diluted loss per share is computed on the basis of the
weighted average number of common shares outstanding and does not include the
effect of dilution from outstanding stock options that have vested or will vest
within 60 days of December 31, 2004 and warrants using the "treasury stock"
method and the effect of preferred stock on an as-converted basis. All per share
calculations exclude treasury shares and shares held in trust as security for a
note payable. Net earnings (loss) applicable to common stockholders includes
cumulative dividends on the Series B Preferred Stock of $0 for both the three-
and six-month periods ended December 31, 2004 and $2,020 and $4,054 for the
three- and six-month periods ended December 31, 2003, respectively. The shares
of Series B Preferred Stock have all been converted into common stock, and are
no longer outstanding and subject to dividends subsequent to May 31, 2004.

Components of basic and diluted loss per share were as follows for the three-
and six-month periods ended December 31:


                                                        Three months ended                    Six months ended
                                                           December 31,                         December 31,
                                                  ------------------------------      ------------------------------
                                                      2004              2003              2004              2003
                                                  ------------      ------------      ------------      ------------
                                                                                            
Net loss (A)                                      $   (362,812)     $   (710,604)     $ (1,192,418)     $   (691,567)

Preferred stock dividend                                  --              (2,020)             --              (4,054)
                                                  ------------      ------------      ------------      ------------


Net loss applicable to common
      stockholders (B)                            $   (362,812)     $   (712,624)     $ (1,192,418)     $   (695,621)
                                                  ============      ============      ============      ============

Weighted average number of outstanding shares
      of common stock (C)                           12,630,217         8,706,089        12,547,852         8,628,941
                                                  ============      ============      ============      ============

Weighted average number of outstanding shares
      of common stock and common stock
      equivalents (D)                               12,630,217         8,706,089        12,547,852         8,628,941
                                                  ============      ============      ============      ============

Loss per share:
      Basic (B/C)                                 $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                  ============      ============      ============      ============
      Diluted (A/D)                               $      (0.03)     $      (0.08)     $      (0.10)     $      (0.08)
                                                  ============      ============      ============      ============

                                      F-7


Due to the Company's net losses for the three- and six-month periods ended
December 31, 2004 and 2003, common stock equivalents related to the Company's a)
in-the-money, vested options, b) in-the-money warrants, and c) convertible
preferred stock were not used in the computation of diluted loss per share
because the effect would be anti-dilutive. As of December 31, 2004, the
Company's common stock equivalents included: a) in-the-money, vested options to
purchase 727,454 shares of common stock; b) in-the-money warrants to purchase
590,727 shares of common stock; and c) 1,550,000 shares of Series A Preferred
Stock convertible into 516,667 shares of common stock. Effective May 31, 2004,
the holders of the Series B Preferred Stock exchanged all their Series B
Preferred Stock plus accrued dividends for 104,294 shares of common stock. Prior
to that date, the Series B Preferred Stock was convertible into 33,666 shares of
common stock. As of December 31, 2003, the Company's common stock equivalents
included: a) in-the-money, vested options to purchase 294,818 shares of common
stock; b) in-the-money warrants to purchase 524,439 shares of common stock; c)
1,550,000 shares of Series A Preferred Stock convertible into 516,667 shares of
common stock and d) 33,666.66 shares of Series B Preferred Stock convertible
into 33,666 shares of common stock.

DEFERRED FINANCE COSTS

In conjunction with the Company's $2.5 million secured convertible note
financing that closed on May 28, 2004 with Laurus Master Fund, Ltd., a New York
City based investment fund ("Laurus"), the Company paid various fees and
expenses totaling $293,500, which are being amortized to general and
administrative expenses at the rate of $8,153 per month over the 36-month life
of the note beginning in June 1, 2004. As of December 31, 2004, there was an
unamortized balance of $236,431.

3.    GOING CONCERN AND MANAGEMENT'S PLANS

The Company had net losses for the three- and six-month periods ended December
31, 2004 and for the fiscal year ended June 30, 2004. Although the Company had
net earnings in fiscal 2003, it experienced a net loss from operations. The
Company has historically experienced recurring losses from operations and has
had cash flow shortages. While the Company currently has a positive working
capital position of $224,065, at December 31, 2004, it had significant amounts
of debt, including a secured convertible note and notes payable of $1,877,136
and other liabilities of $1,900,601, and stockholders' deficit of $499,812. If
the beneficial conversion feature of the secured convertible note of $1,096,475
were included, total liabilities at December 31, 2004 would equal $4,874,212 and
stockholders' deficit would be $1,596,287. Historically, the Company has had
deficiencies in working capital and stockholders' equity and has had significant
amounts of current and past due debt and payables. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term.

4.    CONCENTRATION OF CREDIT RISK

One customer, Pfizer, Inc., individually accounted for approximately 36% and 76%
of the Company's total revenues for the fiscal years ended June 30, 2004 and
2003. For the three- and six-month periods ended December 31, 2004 Pfizer
accounted for 37% and 31% of the Company's total revenues. This compares to
Pfizer's percentages of total revenues for the three- and six-month periods
ended December 31, 2003 of 7% and 8%, respectively. For the three- and six-month
periods ended December 31, 2004, combined revenues from the Company's five
largest customers were approximately 79% and 65%, respectively. This compares to
68% and 86% of total revenues for the Company's top five customers for the
three- and six-month periods ended December 31, 2003. As a comparison, revenues
from the Company's five largest customers represented approximately 86% and 88%
of total revenues for the fiscal years ended June 30, 2004 and 2003,
respectively.

The Company maintains its cash in two commercial accounts at major financial
institutions. Although the financial institutions are considered creditworthy
and have not experienced any losses on their deposits, at December 31, 2004, the
Company's cash balance exceeded Federal Deposit Insurance Corporation (FDIC)
limits by $1,234,661.

                                      F-8


5.    RELATED PARTY TRANSACTIONS

Effective July 1, 2004, the Company purchased certain computer equipment and
other furniture and equipment from Saigene Corporation, a related party. The
property and equipment was valued at $73,585 and the Company paid $15,000 in
cash and recorded an account payable to Saigene of $58,585. The Company also
entered into an office sharing agreement for Saigene to use some of the
Company's office space. For each month of that office-sharing agreement, the
$58,585 payable to Saigene will be reduced at a (non-cash) rate of $1,540 per
month. At December 31, 2004 the balance due to Saigene was $52,425.

6.    SUBSEQUENT EVENTS

LAURUS WAIVER -- MAY 2004 $2.5 MILLION SECURED CONVERTIBLE NOTE

On December 1, 2004, the Company owed its first repayment of principal to Laurus
on the May 2004 $2.5 million secured convertible note (the "2004 Note"), in the
amount of $83,333. Prior to December 1, 2004, the Company initiated discussions
with Laurus for a six-month deferral on all principal payments and the Company
did not make the principal payments on either December 1, 2004 or January 1,
2005. On January 31, 2005 Laurus formally agreed to the six-month deferral and
also waived all events of default, including the failure by the Company to make
its scheduled amortization payments in December and January. Laurus and the
Company agreed that the Company would not be required to pay the principal
portion of any monthly amount due for the six-month period from December 2004
through May 2005, and instead such deferred principal amounts will be due on May
1, 2007, the maturity date of the 2004 Note. There was no change in the interest
rate charged by Laurus on the unpaid principal.

In consideration for the principal payment deferral and the waiver, the Company
issued an additional common stock purchase warrant to Laurus to purchase up to
200,000 shares of the common stock of the Company at an exercise price of $1.48.
The warrant expires on January 31, 2009.

LAURUS DEBT INVESTMENT-- JANUARY 2005 $1.5 MILLION SECURED CONVERTIBLE NOTE

Effective January 31, 2005, the Company entered into a new debt financing
arrangement with Laurus. The terms of this January 2005 $1.5 million secured
convertible note are similar to the terms of the 2004 Note. The new financing
consisted of a $1.5 million secured convertible note with a term of three years
(the "2005 Note"). In connection with the financing, the Company also issued to
Laurus a warrant to purchase up to 326,087 shares of common stock at an exercise
price of $1.37 per share exercisable at any time prior to January 31, 2010.

Under the terms of the 2005 Note, the Company will start making monthly payments
of accrued interest only beginning on March 1, 2005. In addition, the note
provides for monthly payments of principal in the amount of $50,000, plus
accrued interest, commencing August 1, 2005. The note bears interest at an
initial rate equal to the prime rate plus two percent (2%). For any cash
payments made on the note (e.g., any amounts due that are not converted into
common stock), the Company is required to pay an amount equal to 102% of the
principal amount due.

Laurus has the option to convert any or all of the outstanding principal and
accrued interest on the note into shares of the Company's common stock at an
initial conversion price of $1.17 per share. The note conversion price
(initially $1.17 per share) is subject to certain anti-dilution adjustments,
including full ratchet anti-dilution if the Company issues convertible or equity
securities at a price per share less than the conversion price. In addition, for
each monthly payment under the note, Laurus will be obligated to convert a
portion of the monthly payment into common stock at the applicable conversion
price, when certain conditions are present.

As security for the obligation to Laurus, the Company and each of its
subsidiaries granted Laurus a blanket security interest in all of the Company's
assets, and the Company entered into a stock pledge with Laurus for the capital
stock in all the Company's subsidiaries. In conjunction with the financing, the
Company paid fees and expenses of approximately $114,000, which will be
amortized to general and administrative expenses at the rate of approximately
$3,167 per month over the 36-month life of the 2005 Note, beginning February
2005. In addition, the Company issued to its broker a five-year warrant,
exercisable as and to the extent that amounts owing under the 2005 Note are
converted into common stock, for up to 105,263 shares of common stock at an
exercise price of $1.37 per share.

                                      F-9


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington

We have audited the accompanying consolidated balance sheets of Pacific
Biometrics, Inc. as of June 30, 2004 and 2003 and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) for the
years then ended. These consolidated 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 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 audits provide 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 Pacific
Biometrics, Inc. as of June 30, 2004 and 2003, and the consolidated results of
its operations and its consolidated cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced significant losses from
operations and has experienced cash flow shortages. Additionally, the Company
has reported deficiencies in working capital and stockholders' equity. These
matters, among others, as discussed in Note 3 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Seattle, Washington
September 10, 2004


                                      F-10


                                   PACIFIC BIOMETRICS, INC.
                                  CONSOLIDATED BALANCE SHEETS
                                        AS OF JUNE 30,

                                                                                      2004              2003
                                                                                  ------------      ------------
                                                                                              
                            ASSETS
Current assets:
    Cash and cash equivalents                                                     $  2,941,014      $    440,326
    Accounts receivable, net of allowance for doubtful
          accounts of $22,100 and $23,965, respectively                                367,449           466,608
    Note receivable from related party                                                    --             200,000
    Inventories                                                                           --             158,104
    Prepaid expenses and other assets                                                   78,999            73,176
    Deferred financing cost on secured convertible note - current portion               64,500              --

                                                                                  ------------      ------------
          Total current assets                                                       3,451,962         1,338,214

Property and equipment, net                                                            407,548           433,060

Other assets:
    Deferred financing cost on secured convertible note - long-term portion            123,625              --

    Restricted cash                                                                     71,395            71,074
    Technology assets                                                                     --             476,874
                                                                                  ------------      ------------
          Total assets                                                            $  4,054,530      $  2,319,222
                                                                                  ============      ============

         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
    Accounts payable                                                              $    479,446      $    792,420
    Accrued liabilities                                                                647,986           563,778
    Dividends payable                                                                     --               1,558
    Advances from customers                                                            210,922           310,948
    Capital lease obligations - current portion                                         48,253            58,239
    Note payable to related party - current portion                                     22,183           123,576
    Secured convertible note - current portion, net of unamortized fair value
          assigned to beneficial conversion feature and warrants of $304,349           278,982              --

    Other notes payable - current portion                                              349,002           172,392
                                                                                  ------------      ------------
          Total current liabilities                                                  2,036,774         2,022,911

Capital lease obligations - long term portion                                          160,487           208,717
Note payable to related party - long term portion                                         --              11,775
Secured convertible note - long term portion, net of unamortized fair value
      assigned to beneficial conversion feature and warrants of $931,133               985,536              --

Other notes payable - long term portion                                                336,510           470,696
                                                                                  ------------      ------------
          Total liabilities                                                          3,519,307         2,714,099
                                                                                  ------------      ------------

Commitments and contingencies                                                             --                --

Stockholders' equity (deficit):
    Preferred stock, Series A $0.01 par value, 5,000,000 shares
          authorized, 1,550,000 shares issued and outstanding, liquidation              15,500            15,500
          preference of $2.00 per share, aggregating $3,100,000
    Preferred stock, Series B $0.01 par value, 5,000,000 shares
          authorized, 0 and 33,666.66 shares issued and outstanding
          at June 30, 2004 and 2003, respectively, liquidation preference
          of $3.00 per share, aggregating $101,000 at June 30, 2003                       --                 337
    Common stock, $0.01 par value, 30,000,000 shares authorized,
          13,048,820 shares issued and outstanding at June 30, 2004
          and 9,218,458 issued and outstanding at June 30, 2003                        302,214           263,189
    Additional paid-in capital                                                      23,338,016        20,421,642
    Accumulated deficit                                                            (23,119,084)      (21,094,843)
    Treasury stock                                                                      (1,423)             (702)
                                                                                  ------------      ------------
          Total stockholders' equity (deficit)                                         535,223          (394,877)
                                                                                  ------------      ------------

          Total liabilities and stockholders' equity (deficit)                    $  4,054,530      $  2,319,222
                                                                                  ============      ============

      The accompanying notes are an integral part of these consolidated financial statements.

                                      F-11


                              PACIFIC BIOMETRICS, INC.
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                YEARS ENDED JUNE 30,


                                                                   2004              2003
                                                               ------------      ------------

                                                                           
Revenues                                                       $  4,801,248      $  5,764,932
                                                               ------------      ------------

Laboratory expense and cost of goods sold                         2,762,849         2,801,188
                                                               ------------      ------------

          Gross Margin                                            2,038,399         2,963,744
                                                               ------------      ------------

Operating expenses:
    Research and product development                                128,677           213,635
    Impairment of technology assets                                 476,874              --
    Selling, general and administrative                           3,150,101         3,837,273
                                                               ------------      ------------

Operating loss                                                   (1,717,253)       (1,087,164)
                                                               ------------      ------------

Other income (expense):
  Interest expense                                                 (155,497)         (118,399)
  Interest income                                                    16,670               760
  Other income                                                       44,437           248,723
  Loss on settlement of note receivable from related party          (72,072)             --

  Gain on troubled debt restructuring                                  --             169,384
  Reversal of technology license payable                               --           2,244,040
                                                               ------------      ------------
                                                                   (166,462)        2,544,508
                                                               ------------      ------------

Net earnings (loss) before tax expense                           (1,883,715)        1,457,344
                                                               ------------      ------------

Tax expense                                                            --                --
                                                               ------------      ------------

Net earnings (loss)                                            $ (1,883,715)     $  1,457,344
                                                               ============      ============

Preferred stock dividend                                             (7,421)           (1,558)
                                                               ------------      ------------

Net earnings (loss) applicable to common stockholders          $ (1,891,136)     $  1,455,786
                                                               ============      ============

Net earnings (loss) per share:
  Basic earnings (loss) per share                              $      (0.19)     $       0.20
                                                               ============      ============
  Diluted earnings (loss) per share                            $      (0.19)     $       0.17
                                                               ============      ============

Weighted average common shares outstanding:
  Basic                                                          10,149,127         7,315,103
                                                               ============      ============
  Diluted                                                        10,149,127         8,333,313
                                                               ============      ============

   The accompanying notes are an integral part of these consolidated financial statements.

                                      F-12


                            PACIFIC BIOMETRICS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              YEARS ENDED JUNE 30,

                                                                                                     2004              2003
                                                                                                 ------------      ------------
                                                                                                             
Cash flows from operating activities:
    Net earnings (loss)                                                                          $ (1,883,715)     $  1,457,344

    Adjustment to reconcile net earnings to net cash provided by operating activities:
       Depreciation and amortization                                                                  121,846            89,640
       Interest income on note receivable from related party settled by common stock                  (16,218)             --
       Amortization of fair value assigned to beneficial conversion feature and warrants               21,746              --
       Loss on settlement of note receivable from related party                                        72,072              --
       Gain recognized on troubled debt restructuring                                                    --            (169,384)
       Reversal of technology license payable                                                            --          (2,244,040)
       Gain on restructuring of capital leases                                                           --             (22,018)
       Compensation (income) expense from fair value adjustment to options                            (35,294)          181,169
       Stock options granted at less than fair market value                                             2,584              --
       Impairment of technology assets                                                                476,874              --
       Changes in assets and liabilities:
          Accounts receivable, net                                                                     99,160           523,702
          Inventories                                                                                 158,104          (158,104)
          Prepaid expenses and other assets                                                            (6,657)           24,806
          Advances from customers                                                                    (100,026)          107,530
          Accounts payable                                                                           (312,974)          358,621
          Accrued liabilities                                                                         109,049           287,987
                                                                                                 ------------      ------------
            Net cash provided by (used in) operating activities                                    (1,293,449)          437,253
                                                                                                 ------------      ------------

Cash flows from investing activities:
    Purchases of capital equipment                                                                    (90,959)          (72,092)
                                                                                                 ------------      ------------
            Net cash used in investing activities                                                     (90,959)          (72,092)
                                                                                                 ------------      ------------

Cash flows from financing activities:
    Payments on notes payable                                                                        (207,576)         (175,265)
    Payments on notes payable to related parties                                                     (113,168)          (88,346)
    Transfer to restricted cash                                                                          (321)             (728)
    Net proceeds from Series B preferred stock                                                           --              72,920
    Net proceeds loan and security agreement                                                          250,000              --
    Payments on capital lease obligation                                                              (58,216)           (8,602)
    Payment of cash dividends                                                                          (5,685)             --
    Stock split - fractional share payout                                                                --                  (6)
    Proceeds from exercise of stock options and warrants                                                2,963             4,241
    Net proceeds from private placement of common stock                                             1,710,599              --
    Proceeds from secured convertible note payable, net of financing cost                           2,306,500              --
                                                                                                 ------------      ------------
            Net cash provided by (used in) financing activities                                     3,885,096          (195,786)
                                                                                                 ------------      ------------

Net increase in cash and cash equivalents                                                           2,500,688           169,375
Cash and cash equivalents, beginning of year
                                                                                                      440,326           270,951
                                                                                                 ------------      ------------

Cash and cash equivalents, end of year                                                           $  2,941,014      $    440,326
                                                                                                 ============      ============

Cash paid during the year for interest                                                           $    143,611      $     35,634
                                                                                                 ============      ============

Non-Cash Activities:
      Assets purchased under capital lease                                                       $       --        $    253,500
      Donated equipment                                                                          $       --        $     70,766
      Note payable issued in exchange for capital lease obligation                               $       --        $    245,000
      Common stock issued in exchange for accrued preferred dividends                            $       --        $    909,828
      Warrants and options issued in exchange for deferred compensation and notes payable        $       --        $    933,472
      Notes payable issued in exchange for accounts payable                                      $       --        $     75,169
      Purchase of technology assets and equipment in exchange for common stock (See Note 14)     $       --        $    490,698
      Preferred stock dividends                                                                  $      7,421      $      1,558
      Common stock issued and held in trust as security for note payable                         $       --        $      6,667
      Stock issued in conjunction with restructure agreement with prior landlord                 $       --        $     16,001
      Value of common stock received in settlement of note receivable from related party         $    144,144      $       --
      Shares released from escrow under restructure agreement with prior landlord                $        833      $       --
      Warrants issued in consideration of issuance costs for private placement                   $    191,477      $       --
      Common stock issued in exchange for Series B preferred stock and accrued dividends         $      3,294      $       --
      Value allocated to beneficial conversion feature and warrants issued in conjunction
         with secured convertible note                                                           $  1,257,228      $       --


                      The accompanying notes are an integral part of these consolidated financial statements.

                                      F-13


                            PACIFIC BIOMETRICS, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   YEARS ENDED JUNE 30, 2004 AND JUNE 30, 2003

                                                                   Series A           Series B
                                                                  Preferred           Preferred
                                                                    Stock               Stock            Common Stock
                                                             -------------------   ----------------    ------------------------
                                                               Shares    Amount    Shares    Amount       Shares        Amount
                                                             ---------   -------   -------    -----    -----------    ---------
                                                                                                    
Balance, July 1, 2002                                        1,550,000   $15,500      --       --        1,270,057    $  38,102

Net earnings                                                      --        --        --       --             --           --
Issuance of common stock for purchase of assets                   --        --        --       --        7,000,000      210,000
Common stock contributed towards development of
 purchased assets                                                 --        --        --       --          (10,000)        --
Issuance of common stock in exchange for accrued preferred
    Dividends                                                     --        --        --       --          150,000        4,500
Issuance of common stock warrants in exchange for
deferred  compensation and notes payable                          --        --        --       --             --           --
Fair value adjustment to options                                  --        --        --       --             --           --
Common stock issued in conjunction with troubled debt
     Restructure                                                  --        --        --       --           50,000        1,500
Exercise of stock options                                         --        --        --       --           75,141        2,255
Donated equipment                                                 --        --        --       --             --           --
1 for 3 reverse stock split of common stock and
payment  of fractional shares                                     --        --        --       --              (73)          (2)
Proceeds from Series B preferred stock, net of
issuance costs of $28,417                                         --        --      33,666      337           --           --
Common stock issued and held in trust as security for
     note payable                                                 --        --        --       --          666,666        6,667
Common stock issued in conjunction with prior
landlord restructure agreement                                    --        --        --       --           16,667          167
Preferred stock dividends                                         --        --        --       --             --           --
                                                             ---------   -------   -------    -----    -----------    ---------
Balance June 30, 2003                                        1,550,000   $15,500    33,666    $ 337      9,218,458    $ 263,189

Net loss                                                          --        --        --       --             --           --
Fair value adjustment to options                                  --        --        --       --             --           --
Cancellation of common stock released from
escrow, previously held in trust as security for
note payable                                                      --        --        --       --          (83,333)        (833)
Common stock received from related party in
settlement of note receivable                                     --        --        --       --          (72,072)        --
Exercise of stock options                                         --        --        --       --           31,664          317
Exercise of stock warrants                                        --        --        --       --            3,809           38
Stock options granted at less than fair market
value                                                             --        --        --       --             --           --
Board compensation paid by stock options                          --        --        --       --             --           --
Proceeds from common stock, net of issuance costs
      of $21,101 and broker commissions of $192,300               --        --        --       --        3,846,000         --
Preferred stock dividends                                         --        --        --       --             --           --
Issuance of common stock and $0.84 in cash in
exchange for Series B preferred stock and accrued
dividends payable                                                 --        --     (33,666)    (337)       104,294        1,043
Fair value of warrants issued to lender in
conjunction with secured convertible note payable                 --        --        --       --             --           --
Fair value of beneficial conversion feature on
secured convertible note payable                                  --        --        --       --             --           --
                                                             ---------   -------   -------    -----    -----------    ---------
Balance June 30, 2004                                        1,550,000   $15,500      --      $--       13,048,820    $ 302,214
                                                             =========   =======   =======    =====    ===========    =========

                                                                                                              Total
                                                                             Additional                    Stockholders'
                                                             Treasury         Paid-in       Accumulated       Equity
                                                               Stock          Capital         Deficit        (Deficit)
                                                             -----------    ------------    ------------    -----------
Balance, July 1, 2002                                               --      $ 17,939,666    $(22,552,187)   $(4,558,919)

Net earnings                                                        --              --         1,457,344      1,457,344
Issuance of common stock for purchase of assets                     --           281,400            --          491,400
Common stock contributed towards development of
 purchased assets                                                   (702)           --              --             (702)
Issuance of common stock in exchange for accrued preferred
    Dividends                                                       --           905,328            --          909,828
Issuance of common stock warrants in exchange for
deferred  compensation and notes payable                            --           933,472            --          933,472
Fair value adjustment to options                                    --           181,169            --          181,169
Common stock issued in conjunction with troubled debt
     Restructure                                                    --            21,000            --           22,500
Exercise of stock options                                           --             1,986            --            4,241
Donated equipment                                                   --            70,766            --           70,766
1 for 3 reverse stock split of common stock and
payment  of fractional shares                                       --                (4)           --               (6)
Proceeds from Series B preferred stock, net of
issuance costs of $28,417                                           --            72,583            --           72,920
Common stock issued and held in trust as security for
     note payable                                                   --              --              --            6,667
Common stock issued in conjunction with prior
landlord restructure agreement                                      --            15,834            --           16,001
Preferred stock dividends                                           --            (1,558)           --           (1,558)
                                                             -----------    ------------    ------------    -----------
Balance June 30, 2003                                        $      (702)   $ 20,421,642    $(21,094,843)   $  (394,877)

Net loss                                                            --              --        (1,883,715)    (1,883,715)
Fair value adjustment to options                                    --           (35,294)           --          (35,294)
Cancellation of common stock released from
escrow, previously held in trust as security for
note payable                                                        --              --              --             (833)
Common stock received from related party in
settlement of note receivable                                       (721)         (2,897)       (140,526)      (144,144)
Exercise of stock options                                           --             1,583            --            1,900
Exercise of stock warrants                                          --             1,025            --            1,063
Stock options granted at less than fair market
value                                                               --             2,583            --            2,583
Board compensation paid by stock options                            --            24,840            --           24,840
Proceeds from common stock, net of issuance costs
      of $21,101 and broker commissions of $192,300            1,672,139            --         1,710,599
Preferred stock dividends                                           --            (7,421)           --           (7,421)
Issuance of common stock and $0.84 in cash in
exchange for Series B preferred stock and accrued
dividends payable                                                   --             2,588            --            3,294
Fair value of warrants issued to lender in
conjunction with secured convertible note payable                   --           573,266            --          573,266
Fair value of beneficial conversion feature on
secured convertible note payable                                    --           683,962            --          683,962
                                                             -----------    ------------    ------------    -----------
Balance June 30, 2004                                        $    (1,423)   $ 23,338,016    $(23,119,084)   $   535,223
                                                             ===========    ============    ============    ===========

                  The accompanying notes are an integral part of these consolidated financial statements.

                                      F-14


                            PACIFIC BIOMETRICS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc., a Delaware corporation ("PBI" or the "Company"),
provides specialty reference laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business primarily through its wholly owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation ("PBI-WA"). The Company's
other wholly owned subsidiaries include PBI Technology, Inc., a Washington
corporation, and BioQuant, Inc., a Michigan corporation.

On August 28, 2002, the Company, and its wholly-owned subsidiary, PBI-WA,
consummated an asset purchase transaction pursuant to an Asset Purchase
Agreement, dated as of June 27, 2002, as amended (collectively, the "Asset
Purchase Agreement"), with Saigene Corporation, a Delaware corporation
("Saigene"), providing for the purchase by PBI-WA of certain technology,
intellectual property and equipment in connection with certain DNA amplification
and cell viability and related technologies and processes. Pursuant to the Asset
Purchase Agreement, as consideration for the purchased assets, the Company
issued to Saigene 6,541,430 shares, and to certain of Saigene's designees an
additional 458,570 shares, of the Company's common stock, par value $.01 per
share (the "Common Stock"). See Note 14 - Related Party Transactions for further
details.

The Company had previously been engaged in the development and commercialization
of non-invasive diagnostics to improve the detection and management of chronic
diseases. Due to a lack of significant resources, the Company has suspended such
activities for the foreseeable future. The Company has developed two patented
platform technologies that permit the use of sweat and saliva as diagnostic
fluids. Except for the revenues from laboratory services, nominal revenues have
been generated from the Company's products. In prior years, the Company was
considered to be a development stage enterprise, but since the laboratory
services now constitute the majority of the Company's commercial efforts, the
Company is no longer considered to be in the development stage.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include consolidated financial position,
results of operations, and statement of stockholders' equity and cash flows of
Pacific Biometrics, Inc. and its wholly-owned subsidiaries Pacific Biometrics,
Inc., a Washington corporation ("PBI-WA"), PBI Technology, Inc., a Washington
corporation, and BioQuant, Inc., a Michigan corporation. All material
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements..

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.

ACCOUNTS RECEIVABLE

Accounts receivable are stated at amounts due from and billed to customers net
of an allowance for doubtful accounts. Credit is extended based on evaluation of
a customer's financial condition, and collateral is not required. In determining
the adequacy of the allowance, management identifies specific receivables for
which collection is not certain and estimates the potentially uncollectible
amount based on the most recently available information. The Company writes off
accounts receivable when they are determined to be uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. For the years ended June 30, 2004 and 2003, respectively, the
Company wrote off $1,865 and $1,578 of accounts receivable deemed uncollectible.

INVENTORIES

Inventories consist of supplies purchased in advance of being used for the
related laboratory services they support. The laboratory services, and the
related supplies used in performing those services, are recognized as revenue

                                      F-15


and expense, respectively, in the period that the laboratory services are
performed. Inventories are stated at lower of cost or market; cost is determined
using the first-in, first-out method.

RESTRICTED CASH

During 1997, in connection with the signing of an operating lease for laboratory
and office facilities in Seattle, Washington, the Company was required to set
aside $100,000 as a security deposit, throughout the term of the lease. This
amount has been reduced to $71,395 as of June 30, 2004 and is recorded as
restricted cash on the accompanying consolidated balance sheet.

LONG -LIVED ASSETS

Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the useful lives of the related assets, which range
from three to five years. Leasehold improvements are amortized over the shorter
of the estimated useful life of the improvements or the remaining term of the
lease. The cost and related accumulated depreciation of property or equipment
sold or otherwise disposed of are removed from the accounts and the resulting
gains or losses are included in the statement of operations.

In accordance with the Financial Accounting Standards Board's Statements of
Financial Accounting Standards Statement No. 144 - "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), all of the Company's
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount may not be recovered. If the sum of
the expected future cash flows is less than the carrying amount of the asset, a
loss is recognized.

TECHNOLOGY ASSETS

PBI Technology, Inc., a wholly owned subsidiary of the Company, has been
established to hold certain technologies and intellectual property, including
isothermal DNA amplification method (LIDA), Cell Viability technology, and
Saliva Sac(R).

In connection with the Asset Purchase Agreement, (see Note 14), the Company
acquired from Saigene a DNA technology platform called LIDA (Logarithmic
Isothermal DNA Amplification). LIDA is a chemistry designed to rapidly replicate
DNA. The Company also acquired from Saigene another technology relating to Cell
Viability, a chemistry platform that can distinguish a live cell from a dead
cell. Applications for this Cell Viability technology could include antibiotic
susceptibility testing, sterility testing and environmental monitoring in the
water and beverage industries.

The Company's technology assets currently still require additional development
prior to commercialization and their future value as well as the timing of their
ongoing development is dependent upon additional capital being available to fund
continuing research and development. (See Note 3.)

The SalivaSac(R) is a proprietary patented product of the Company that collects
and processes saliva for medical diagnostic purposes.

As of June 30, 2004, the Company's periodic assessment of the impairment issues
on the technology assets led the Company to conclude that the assets should be
written off. The Company considered its ability to recover the asset from
undiscounted cash flows of the related operations in light of reductions in both
its general as well as research and development workforce in the second and
third fiscal quarters (which was then considered to be temporary, but which has
since become more extended), an inability to secure a licensing or other
partnership arrangement to date for the intangible assets, combined with the
inability to obtain financing specifically for further development of the
intangible assets to date. While the Company obtained equity and debt funding
for its general operations in May 2004 and its private placement in March 2004,
and while the Company intends to continue to pursue development efforts,
partnership, licensing or other means to realize the value of the intangible
assets, management believes that current conditions have changed such that the
value of these assets should now be considered less likely to be recovered in
the near term, and should be written off in accordance with SFAS 144.
Accordingly, the Company wrote off the entire balance of $476,874 of technology
assets to operations as Impairment of technology assets as of June 30, 2004.

                                      F-16


BENEFICIAL CONVERSION FEATURE

In accordance with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, using the relative
fair value method of Accounting Principles Board Opinion 14 ("APB 14"), the
Company recorded a beneficial conversion feature (BCF) related to the issuance
of convertible debt that has conversion features at fixed rates that are
in-the-money when issued and recorded the value allocated to warrants issued
with those instruments. The BCF for the convertible instrument and value
allocated to warrants are measured and recognized by allocating a portion of the
proceeds to additional paid-in capital with an offset to discount on the
convertible instrument.

For convertible debt and related warrants, the recorded discount is amortized as
interest expense using the effective interest method over the life of the debt.

CUSTOMER ADVANCES

The Company receives advances from certain customers to perform consulting,
laboratory services, and clinical studies. These advances are deferred and
recognized as revenue in the period the related services are performed.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax laws and rates that are expected to be in effect when the
differences are expected to be recovered. The Company provides a valuation
allowance for deferred tax assets due to the uncertainty of realization.

FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents approximate fair value due to
the short-term maturities of these instruments. The carrying value of the
Company's secured convertible note is recorded net of the unamortized fair value
assigned to beneficial conversion feature and warrants, representing its
estimated fair value. (See Note 8.) The carrying value of the Company's other
debt approximates their estimated fair values because the rates of interest on
the debt approximate current interest rates for similar obligations with like
maturities.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 11. The Company applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations in accounting for its plan. The
Company has adopted the disclosure-only provisions of SFAS No. 123 - "ACCOUNTING
FOR STOCK-BASED COMPENSATION". In August 2002, in conjunction with deferred
compensation agreements with senior executives, the Company granted 183,917
stock options and 117,624 warrants to purchase common stock at $0.51 per share
which expire in August 2012. (See Note 14 - Related Party Transactions -
Deferred Compensation Agreements with Senior Executives.) These stock options
and warrants were granted in exchange for amounts otherwise due the senior
executives. During the years ended June 30, 2004 and 2003, respectively, the
Company granted 996,400 and 0 incentive-based stock options under incentive
compensation plans. Had compensation cost been determined based on the fair
value of stock options granted in a manner consistent with the method
promulgated by SFAS No. 123, the Company's net earnings and earnings per share
would have been changed to the pro forma amounts below:

                                      F-17



                                                                   Years Ended June 30,
                                                               ----------------------------
                                                                   2004            2003
                                                               ------------    ------------
                                                                         
Net earnings (loss), as reported                               $ (1,883,715)   $  1,457,344

Adjust:  Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects                                              260,304          93,798
                                                               ------------    ------------

Pro forma net earnings (loss)                                  $ (2,144,019)   $  1,363,546
                                                               ============    ============

Net earnings (loss) per share:

  Basic - as reported                                          $      (0.19)   $       0.20
                                                               ============    ============
  Diluted - as reported                                        $      (0.19)   $       0.17
                                                               ============    ============
  Basic - pro forma                                            $      (0.21)   $       0.19
                                                               ============    ============
  Diluted - pro forma                                          $      (0.21)   $       0.16
                                                               ============    ============


To estimate compensation expense, the Company uses the Black-Scholes
option-pricing model and assumptions deemed reasonable by management. The
following assumptions were used to compute the fair value of option grants for
the year ended June 30:

                                               2004              2003
                                             --------          --------
                   Expected volatility       186%              304%
                   Expected dividend yield   0%                0%
                   Risk-free interest rate   3.83%             3.83%
                   Expected life             10 years          10 years

STOCK SPLIT

On January 10, 2003, the Company's Board of Directors approved a one-for-three
reverse stock split of the Company's common stock. The reverse split was
subsequently approved by the stockholders of the Company and became effective on
March 14, 2003. All shares and per share calculations set forth herein reflect
the one-for-three reverse stock split.

REVENUE RECOGNITION

The Company recognizes revenue in the period that the related services are
performed and collectibility is reasonably assured. Currently, the Company
derives substantially all of its revenues from laboratory services. Service
contracts generally take the form of fixed-price contracts. Under fixed-price
contracts, revenue is recognized as services are performed, with performance
generally assessed using output measures, such as units-of-work performed to
date as compared to the total units-of-work contracted. Changes in the scope of
work generally result in a renegotiation of contract pricing terms. Renegotiated
amounts are not included in net revenues until earned, and realization is
assured. Advance payments on service contracts are deferred and recognized as
revenue in the period the related services are performed. Estimates of costs to
complete are made, as appropriate, to provide for losses expected on contracts.
Costs are not deferred in anticipation of contracts being awarded, but instead
are expensed as incurred. All out-of-pocket costs are included in total revenues
and expenses.

RESEARCH AND DEVELOPMENT EXPENSES

Expenditures for research and development are expensed as incurred.

EARNINGS PER SHARE

Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options and warrants using the "treasury stock" method and the
effect of preferred stock on an as-converted basis. All per share calculations
exclude treasury shares, and shares held in trust as security for a note
payable. Net earnings applicable to common stockholders includes cumulative
dividends on the convertible

                                      F-18


preferred stock of $7,421 for the year ended June 30, 2004 (through conversion
of the Series B preferred stock into common stock, effective May 31, 2004) and
$1,558 for the year ended June 30, 2003.

The components of basic and diluted earnings per share were as follows for the
years ended June 30:


                                                                        2004            2003
                                                                    ------------    ------------
                                                                              
Net earnings (loss) (A)                                             $ (1,883,715)   $  1,457,344

Preferred stock dividend                                                  (7,421)         (1,558)
                                                                    ------------    ------------

Net earnings (loss) applicable to common shareholders (B)           $ (1,891,136)   $  1,455,786
                                                                    ============    ============

Weighted average number of outstanding shares of common stock (C)     10,149,127       7,315,103
                                                                    ============    ============
Diluted, weighted average number of outstanding shares of
 common stock and common stock equivalents (D)                        10,149,127       8,333,313
                                                                    ============    ============
Earnings (loss) per share:
     Basic (B/C)                                                    $      (0.19)   $       0.20
                                                                    ============    ============
     Diluted (A/D)                                                  $      (0.19)   $       0.17
                                                                    ============    ============


As of June 30, 2004, options to purchase 1,281,396 shares of common stock and
warrants to purchase 1,457,729 shares of common stock were outstanding, but were
not included in the computation of diluted earnings (loss) per share because the
effect would be anti-dilutive. In addition, 1,550,000 shares of Series A
Preferred Stock convertible into 516,667 shares of common stock, were also not
included in the computation of diluted earnings (loss) per share because the
effect would be anti-dilutive. In June 2004, the holders of the Series B
Preferred Stock exchanged their Series B Preferred Stock and accrued dividends
into 104,294 shares of common stock, effective May 31, 2004. Prior to that date,
the Series B Preferred Stock was convertible into 33,666 shares of common stock.
Accordingly, as of June 30, 2004, there were no outstanding shares of Series B
Preferred Stock, and no further shares of common stock into which it would be
convertible.

As of June 30, 2003, options to purchase 281,111 shares of common stock and
warrants to purchase 339,472 shares of common stock were outstanding, of which
209,947 and 257,929, respectively, were included in the computation of diluted
earnings per share after giving effect to the treasury stock method. In
addition, 1,550,000 shares of Series A Preferred Stock and 33,666.66 shares of
Series B Preferred Stock convertible into 516,667 and 33,666 shares of common
stock, respectively, were included in the computation of diluted earnings per
share.

USE OF ESTIMATES

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, 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. Actual results could differ from those
estimates.

RISKS AND UNCERTAINTIES

The Company's securities were delisted from the Nasdaq Stock Market in 1999. The
stock currently is quoted on the OTC Bulletin Board in the over-the-counter
market under the symbol "PBME".

NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 150 (SFAS No. 150), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability (or an asset in some circumstances),
many of which were previously classified as equity. On October 29, 2003, the
FASB voted to defer the provisions of paragraphs 9 and 10 of SFAS No. 150 as
they apply to mandatorily redeemable noncontrolling interests. We adopted the
non-deferred provisions of SFAS No. 150 effective July 1, 2003 which had no
material impact on our financial

                                     F-19


position or results of operations. We do not anticipate that the adoption of
these provisions will have a material impact on our financial position or
results of operations.

3.     MANAGEMENT'S PLANS

The Company had a net loss in 2004. Although the Company had net earnings in
2003, it experienced a net loss from operations. The Company has historically
experienced recurring losses from operations and has had cash flow shortages.
While the Company currently has a positive working capital position, it has
significant amounts of notes payable and other liabilities, and minimal
stockholders' equity. Historically, the Company has had deficiencies in working
capital and stockholders' equity and has had significant amounts of current and
past due debt. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term. These steps include expansion of
business development efforts, and raising $2.5 million in gross proceeds from a
secured debt financing effective May 2004 and approximately $1.9 million in
gross proceeds from a private placement of common stock that closed in March
2004. Prior, the Company also renegotiated contractual commitments with
Transamerica Business Corporation and entered into a Loan and Security Agreement
whereby the Company borrowed $250,000 through November 2003 (See Note 16).

Even after the aforementioned steps, the Company still has significant debts and
claims that need to be settled. The Company will continue to review its
operating and financial requirements and attempt to settle outstanding debts
with cash generated from its operations, with stock, and/or with technology
assets. There can be no assurance that the Company will be successful in these
negotiations and may have to seek protection from creditors under the bankruptcy
laws.

These financial statements have been prepared on a going concern basis and no
potential adjustments that may be required as a result of a potential inability
to continue as a going concern have been recorded.

4.     CONCENTRATION OF CREDIT RISK

One customer, Pfizer, Inc., individually accounted for approximately 36% and 76%
of the Company's total revenues in fiscal 2004 and 2003, respectively, and
another customer, Procter & Gamble Pharmaceuticals, Inc., accounted for
approximately 40% and 2%, respectively. Revenues from the Company's five largest
customers represented approximately 86% and 88% of total revenues in fiscal 2004
and fiscal 2003, respectively. As of June 30, 2004 and 2003, respectively,
approximately 39% and 80% of the Company's accounts receivable balance was from
the two customers that collectively represented approximately 76% and 78% of the
Company's total revenues during fiscal 2004 and fiscal 2003.

5.     PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30:


                                                                 2004         2003
                                                              ----------   ----------
                                                                     
       Laboratory equipment ...............................   $  714,027   $  648,407
       Computer equipment .................................      169,938      156,609
       Office furniture and equipment .....................       63,539       63,539
       Leasehold improvements .............................       73,541       61,531
                                                              ----------   ----------
       Total property and equipment .......................    1,021,045      930,086
       Less: accumulated depreciation and amortization ....      613,497      497,026
                                                              ----------   ----------
       Net property and equipment .........................   $  407,548   $  433,060
                                                              ==========   ==========


At June 30, 2004 and 2003, respectively, these amounts included assets under
capital leases of $358,856 and $358,856, and related accumulated amortization of
$179,727 and $119,030.

In December 2002, the Company wrote-off approximately $497,000 of
fully-depreciated equipment.

                                      F-20


6.     ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accrued liabilities consist of the following at June 30:

                                                                         2004       2003
                                                                       --------   --------
                                                                            
       Accrued payroll and related payroll taxes                       $ 86,974   $137,490
       Accrued consulting expense (See Note 14)                          95,000    100,000
       Accrued vacation                                                  78,884     74,650
       Accrued commissions                                               91,902     55,313
       Accrued board of directors fees                                   92,785     50,000
       Accrued professional services                                     83,877     47,500
       Accrued supply expense reimbursement under Saigene Management
            Agreement (See Note 14)                                      17,996     30,941
       Accrued fees due to PBRF (See Note 14)                             7,835      9,602
       Other                                                             92,733     58,282
                                                                       --------   --------
                                                                       $647,986   $563,778
                                                                       ========   ========


During fiscal 2003, the Company reassessed certain then existing liabilities
which had been recorded in prior years. As a result of this review, for amounts
that were believed to no longer be valid liabilities, the Company wrote off
certain old accounts payable and accruals of approximately $206,000 and an old
lease obligation of approximately $22,000. The write off of the accounts payable
and lease obligation resulted in, and was recorded as, approximately $228,000 of
other income in the year ended June 30, 2003.

7.  CAPITAL LEASE OBLIGATIONS

The Company leases laboratory and other equipment under capital lease
arrangements. The obligations under capital leases have interest rates ranging
from approximately 7.5% to 11% and mature at various dates through 2008. Annual
future minimum lease payments for years subsequent to June 30, 2003 are as
follows:

       2005                                                     $   62,253
       2006                                                         62,253
       2007                                                         62,253
       2008                                                         47,509
       2009                                                          7,112
                                                                ----------
       Total minimum payments                                      241,380
       Less: amount representing interest                          (32,640)
                                                                ----------
       Obligations under capital leases                            208,740
       Less: current portion                                        48,253
                                                                ----------
       Long term portion                                        $  160,487
                                                                ==========

In December 2002, the Company restructured a capital lease obligation of
approximately $470,000 with Transamerica Business Credit Corporation
("Transamerica"), exchanging it for 50,000 shares of restricted common stock and
a promissory note for $245,000. Title to the previously leased assets, subject
to security interest retained by Transamerica, was conveyed to the Company as
part of the restructuring. Saigene and the Company are co-makers on the
promissory note. A gain of $169,384 was recognized on this debt restructure
during fiscal 2003.

8.     NOTES PAYABLE

LAURUS DEBT INVESTMENT

Effective May 28, 2004, the Company entered into a financing arrangement with
Laurus Master Fund, Ltd., a New York City based investment fund ("Laurus"). The
financing consisted of a $2.5 million secured convertible note with a term of
three years. In connection with the financing, the Company also issued Laurus a
warrant to purchase up to 681,818 shares of common stock at an exercise price of
$1.25, exercisable at any time prior to May 28, 2011. The note bears interest at
an initial rate equal to the prime rate (which was four percent (4%) as of June
30, 2004) plus two percent (2%) for a total of six percent (6%), subject to
reduction on a month to month basis if certain specified conditions are met.

Under the terms of the note, the Company is obligated to make monthly payments
of accrued interest beginning July 1, 2004 and, commencing December 1, 2004,
monthly payments of principal in the amount of $83,333.33.

                                      F-21


For any cash payments made on the note, the Company is required to pay an amount
equal to 102% of the principal amount due. In addition, the Company can prepay
the note at any time upon payment of an amount equal to 130% of the
then-outstanding principal balance, plus accrued and unpaid interest.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the note into shares of common
stock at an initial conversion price of $1.06 per share. In addition, for each
monthly payment under the note, Laurus will be obligated to convert a portion of
the monthly payment into common stock at the applicable conversion price, if
certain specified conditions are met.

The initial note conversion price ($1.06 per share) is subject to certain
anti-dilution adjustments, including full ratchet anti-dilution if the Company
issues convertible or equity securities at a price per share less than the
conversion price.

As security for the obligations to Laurus, the Company and each of its
subsidiaries granted a blanket security interest in all of their respective
assets to Laurus, and the Company entered into a stock pledge with Laurus for
the capital stock in each of its subsidiaries. If an event of default occurs, as
specified in the agreement, 130% of the unpaid principal balance on the note,
plus accrued interest, shall become immediately due and Laurus shall be entitled
to payment of a default interest rate of 1.5% per month on all amounts due under
the note. In addition, Laurus will be entitled to specified remedies, including
remedies under the Uniform Commercial Code.

The Company is obligated to register with the SEC for resale the shares of
common stock that are issuable upon conversion of the note and upon exercise of
the warrant. Under the registration rights agreement, the Company is obligated
to (a) file a registration statement with the SEC on or before July 3, 2004
(which the Company did on June 29, 2004), and (b) use best efforts to have the
registration statement declared effective not later than October 1, 2004. The
Company will be required to maintain the effectiveness of the registration
statement for up to three years from the closing date. If the Company fails to
comply with the registration obligations, Laurus will be entitled to certain
specified remedies, including monetary liquidated damages. In particular, for
each 30 days (or such pro rated number of days) that the Company is out of
compliance with the registration obligations, the Company will be subject to a
liquidated damage assessment of 2% of the outstanding principal amount of the
note.

In conjunction with the financing, the Company paid fees of $87,500 to the
manager of Laurus, $29,500 for Laurus' legal and due diligence expenses and
$1,500 to the escrow agent. In addition, the Company paid placement agent fees
of $75,000 to its broker, Source Capital Group, Inc. The Company recorded the
aggregate of these fees of $193,500 as deferred financing costs, which is being
amortized to general and administrative expenses over the life of the note. At
June 30, 2004, the unamortized balance of the deferred financing costs was
$188,125. The Company also recorded discounts to the secured convertible note of
$683,962 and $573,266, respectively, representing the value of the beneficial
conversion feature and value allocated to the 681,818 warrants. At June 30,
2004, of the total $1,257,228 initially recorded discounts, $21,746 had been
amortized as interest expense, and $1,235,482 remained unamortized and will be
amortized over the remaining life of the secured convertible note or upon
earlier conversion, using the effective interest method. The balance due under
the secured convertible note is shown net of the remaining unamortized discount
on the accompanying balance sheet. The Company estimated the valuation of the
beneficial conversion feature and the warrant for 681,818 shares in accordance
with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, using the Black-Scholes pricing model and other assumptions deemed
reasonable by management.

For any amounts of outstanding principal and accrued and unpaid interest owing
on the note that are converted into shares of the Company's common stock, the
Company is also obligated to pay its broker additional placement agent fees of
4% of the amount converted, for maximum additional fees of up to $100,000. In
addition, upon conversion of any amounts owing under the note, the Company is
obligated to issue warrants for up to a maximum of 181,818 shares of common
stock to its broker, in the amount of 8% of amounts converted, at an exercise
price of $1.25 per share, exercisable for five years. Accordingly, as of May 28,
2004, the Company granted its broker such a warrant for 181,818 shares of common
stock, to be exercisable only as and to the extent that principal and accrued
interest under the note is converted into common stock. The warrant shall become
vested and exercisable in the amount of 8% of the dollar amount of any principal
and interest under the note that is converted into common stock, divided by
$1.10.

                                      F-22


LOAN AND SECURITY AGREEMENT WITH FRANKLIN FUNDING

On August 5, 2003, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") under which the Company borrowed $250,000 during the first and
second quarters of fiscal 2004. Amounts borrowed under the Loan Agreement bear
interest at 17.64% and are amortized over 36 months, with monthly payments
beginning September 2003 and a final balloon payment due at maturity on August
5, 2006, and are secured by specific equipment. In the event of default, among
other remedies, the lender may declare the entire amount under the Loan
Agreement to be immediately due and payable, and may take possession of the
equipment provided as security. Pursuant to the terms of the Loan Agreement, the
Company granted to the lender warrants to purchase 25,000 shares of common stock
(at the rate of 5,000 per $50,000 borrowed, with exercise prices as of the date
of borrowing), consisting of warrants for 5,000 shares at $1.10 per share, 5,000
shares at $1.00 per share, 10,000 shares at $0.95 per share, and 5,000 shares at
$0.85 per share.

NOTE PAYABLE TO RELATED PARTY

The Company had the following note payable to a related party as of June 30:

                                                                                            2004           2003
                                                                                        ------------   ------------
                                                                                                 
       Promissory note to Saigene, original principle of $223,697, dated August
           28, 2002, 8% interest, monthly payments of $10,000 including interest
           until paid in full                                                           $     22,183   $    135,351
                                                                                        ------------   ------------
       Less: Current Portion                                                                  22,183        123,576
                                                                                        ------------   ------------
                                                                                        $       --     $     11,775
                                                                                        ============   ============
OTHER NOTES PAYABLE

The Company had the following other notes payable as of June 30:
                                                                                            2004           2003
                                                                                        ------------   ------------
       Secured Convertible Note Payable:
       ---------------------------------
       Secured convertible note to Laurus, secured by all assets, interest at
           prime plus 2% (subject to reduction upon specified conditions), monthly
           payments of $83,333 plus interest beginning December 1,2004,
           due May 1, 2007                                                              $  2,500,000   $       --

       Less: Unamortized fair value assigned to beneficial conversion feature and
           warrants                                                                       (1,235,482)          --
                                                                                           1,264,518           --
                                                                                        ------------   ------------

       Less: Current Portion                                                                (278,982)          --
                                                                                        ------------   ------------
                                                                                        $    985,536   $       --
                                                                                        ============   ============
       Other Notes Payable:
       --------------------
       Loan and security agreement, secured by specific equipment, 17.64% interest,
           monthly payments of $8,709, balloon payment of $30,000 due August 2006       $    201,925   $       --

       Promissory note to prior landlord, secured by common stock held in escrow, 10%
           interest, quarterly payments of $25,000, due July 31, 2005 (See Note 13)          240,624        311,404

       Promissory note to creditor, 9% interest, monthly payments of $4,000, balloon
           payment of $7,912 due December 2004                                                27,416         71,484

       Notepayable to Transamerica, secured by security interest in previously
           leased assets, 8% interest October 1, 2003 to February 28, 2004,
           14.123% beginning March 1, 2004, monthly payments including interest of
           $2,000 through
           February 28, 2004 and $14,500 thereafter, due October 1, 2005                     202,547        241,265

       Demand notes payable, 18% interest, current monthly payments of interest only          13,000         18,935
                                                                                        ------------   ------------
                                                                                             685,512        643,088

       Less: Current Portion                                                                 349,002        172,392
                                                                                        ------------   ------------
                                                                                        $    336,510   $    470,696
                                                                                        ============   ============


                                      F-23


Aggregate maturities of notes payable (at face value, gross of the unamortized
fair value assigned to beneficial conversion feature and warrants related to the
secured convertible note financing with Laurus) are approximately as follows for
the years ending June 30:

                  2005                   $    954,516
                  2006                      1,298,362
                  2007                        954,817
                  Thereafter                        -
                                         ------------
                                         $  3,207,695
                                         ============

9.     PREFERRED AND COMMON STOCK

SERIES A PREFERRED STOCK

The Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock") is convertible into shares of the Company's Common Stock at the option
of the holders at any time on a three-for-one basis, subject to adjustment for
stock splits, dividends and the like. Initially, the Series A Preferred Stock
provided for a cumulative cash dividend payable quarterly in arrears at an
annual rate of 8%; however, the Series A Preferred Stock no longer carries a
mandatory dividend. On August 28, 2002, in connection with the Asset Purchase
Agreement (see Note 15 - Related Party Transactions), the holders of Series A
Preferred Stock consented to an amendment of the Certificate of Designation with
respect to the rights and preferences of the Series A Preferred Stock, which
included elimination of future dividends and converted approximately $910,000 in
accrued dividends thereon into an aggregate of 150,000 shares of Common Stock.
The Company has the right to force conversion of the Series A Preferred Stock in
the event the price per share of the Common Stock is $6.00 or more for 20
consecutive trading days. The Series A Preferred Stock has a liquidation
preference of $2.00 per share along with full participation as a common
stockholder on an as-converted basis. The Company has agreed to use commercially
reasonable efforts to effect the registration of the Common Stock into which the
Series A Preferred Stock is convertible.

SERIES B PREFERRED STOCK

In March through July 2003, the Company sold 33,666.66 shares of Series B, 8%
convertible, cumulative redeemable $0.01 par value preferred stock at $3.00 per
share (the "Series B Preferred Stock" or "Series B") for total net proceeds of
$72,920. The Series B Preferred Stock was convertible at the holders' discretion
on a one for one basis into Common Stock, and at the Company's discretion
beginning March 11, 2004 if the Company's Common Stock were to trade for at
least $5.00 per share for at least 10 trading days. In conjunction with the
Series B offering, the placement agent received a $20,000 non-refundable advance
against a non-accountable expense allowance of 2% of Series B Preferred Stock
sold and a sales commission of 8% totaling $8,080. Pursuant to the terms of the
offering, the placement agent received 3,366 warrants to purchase common stock
at $3.00 per share, expiring January 31, 2005.

In May 2004, the Company offered to the holders of Series B preferred stock the
opportunity to voluntarily convert all of their shares of Series B preferred
stock, and all accrued and unpaid dividends thereon through May 31, 2004
(approximately $3,295), into shares of common stock. The conversion ratio was 3
shares of common stock for one share of Series B preferred stock, plus 1 share
of common stock for each $1 in accrued and unpaid dividends. In June 2004, the
holders of the Series B preferred stock accepted the Company's conversion offer
and canceled their Series B preferred stock and accrued and unpaid dividends in
exchange for 104,294 shares of common stock, and approximately $1 in cash for
payment of fractional shares. As of June 30, 2004, there were no shares of
Series B preferred stock issued and outstanding.

COMMON STOCK

In November 2003, the Company initiated a best efforts private placement of
unregistered common stock through registered broker-dealers. Through the closing
of the private placement in March 2004, the Company sold 3,846,000 shares of
unregistered common stock and received gross proceeds of $1,923,000. In
accordance with the terms of the private placement, the broker dealers receive a
commission of 10% of the gross proceeds. Also, for every 10 shares of
unregistered common stock sold, the broker dealers received a warrant covering
one share of unregistered common stock at $0.60 per share expiring on December
31, 2006. Accordingly, the Company recorded broker

                                      F-24


dealer commissions of $192,300 and issued warrants covering 384,600 shares of
unregistered common stock exercisable at $0.60 per share, and incurred $20,101
of legal expenses related to the private placement, which have been netted
against gross proceeds of the private placement.

10 .   INCOME TAXES

The income tax expense reconciled to the tax expense computed at the statutory
rate were approximately as follows during the years ended June 30:


                                                                       2004          2003
                                                                    ----------    ----------
                                                                            
       Tax expense (benefit) computed at federal statutory rate     $ (640,000)   $  495,000
       Permanent differences                                             2,000         2,000
       Valuation allowance (tax benefit of recognizing prior year      638,000      (497,000)
           net operating loss carryforward)
                                                                    ----------    ----------
                                                                    $     --      $     --
                                                                    ==========    ==========


Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are approximately as follows at June 30:


                                                         2004            2003
                                                     ------------    ------------
                                                               
       Net deferred tax asset:
           Net operating loss carryforward           $  4,624,000    $  4,183,000
           Research and experimentation credit            324,000         324,000
           Impairment of technology assets                162,000            --
           Effect of stock option variable pricing         50,000          62,000
           Accrued liabilities                             55,000          44,000
           Allowance for bad debts                          8,000           8,000
           Depreciation and amortization                   67,000          31,000
                                                     ------------    ------------
                                                        5,290,000       4,652,000
       Less valuation allowance                        (5,290,000)     (4,652,000)
                                                     ------------    ------------

                                                     $       --      $       --
                                                     ============    ============


The net operating loss carryforward and valuation allowance for the year ended
June 30, 2003 have been changed to properly reflect the effect of book to tax
differences, primarily related to the reversal of technology license payable in
fiscal 2003. Accordingly, as of June 30, 2003, both the net operating loss
carryforward and valuation allowance were each increased by approximately
$872,000 to approximately $4,183,000 and $4,652,000, respectively. The
aforementioned change had no effect on the consolidated financial statements as
of, and for the years ended June 30, 2004 and 2003.

At June 30, 2004, operating loss carryforwards of approximately $14 million
expiring through 2024 are available to offset future taxable income. For
financial reporting purposes, a valuation allowance of approximately $5,290,000
has been recognized to offset the deferred tax asset due to the uncertainty of
future utilization of net operating loss carryforwards and realization of other
deferred tax assets. For the year ended June 30, 2004, the valuation allowance
was increased by approximately $638,000.

Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
greater than 50% change in ownership). As a result of these provisions,
utilization of the NOL and credit carryforwards may be limited.

                                      F-25


11.    STOCK OPTION PLAN

1996 STOCK INCENTIVE PLAN

In July 1996, the Company adopted a Stock Incentive Plan (the "Plan") with
333,333 shares of common stock reserved for issuance under this Plan. In
November 1997, the stockholders approved that the number of shares reserved for
issuance would be increased to 666,667. On September 17, 2003, the Company's
Board of Directors approved an amendment to the Plan to increase the number of
shares of common stock authorized for issuance under the Plan to 1,800,000
shares (the "Amendment"), subject to stockholder approval. On September 25,
2003, the holder of a majority of the voting rights represented by the Company's
outstanding common stock executed a written consent approving the Amendment.

Options granted under the Plan may be either incentive stock options within the
meaning of Section 422(b) of the Internal Revenue Code, or nonqualified options.
The Company may also award stock appreciation rights, restricted stock,
performance shares, loans or tax offset payments. The option price of each
incentive stock option granted shall not be less than the fair value of the
underlying common stock, and will expire no later than ten years following the
date of grant. With respect to nonqualified options, the exercise price and term
will be determined at the discretion of the Board. However, the exercise price
will not be less than 85% of the fair value of the underlying stock, and the
term will not exceed a period of ten years. The options generally vest over a
range of immediately to five years. As of June 30, 2004, 486,940 shares of
common stock remained available for future grant under the Plan.

In November 2003, the Compensation Committee of the Board of Directors
recommended and the Board of Directors ratified a compensation program for
outside Directors of the Company (the "Director Compensation Program") covering
the period from August 2002 to September 30, 2003. In conjunction with the
Director Compensation Program, on November 12, 2003, the Board of Directors
granted to each of the Company's three outside directors stock options for
10,000 shares of common stock at an exercise price of $0.8075 per share, and one
Director elected to receive payment of 30,761 shares of common stock at $0.8075
per share in lieu of cash. As of November 12, 2003, the closing market value of
the Company's common stock was $0.85 per share, while the strike price of the
options granted of $0.8075 was determined in consideration of the market value
of the common stock over the prior service period. The Company recorded $2,582
of expense related to the granting of the 60,761 options at $0.0425 per share
below market value.

On May 3, 2002, the Board of Directors voted to reduce the exercise price of all
then outstanding options to $0.06 per share. No initial expense was recognized
on this repricing, as the new exercise price equaled the market value of the
Company's stock on that date. For the periods ended June 30, 2004 and 2003, in
accordance with accounting for options under variable pricing rules, the Company
recognized approximately $35,000 and $(181,000), respectively, in compensation
income (expense) representing the decrease (increase) in the market price of the
Company's common shares to $1.03 and $1.40 per share. The Company will recognize
compensation expense in the future for all outstanding repriced stock options if
the market value of the common stock increases, and will recognize income if the
market value decreases.

The following is a summary of the activity in the Plan for the years ended June
30, 2004 and 2003:


                                                                Shares Under Option

                                                 Number       Weighted Average    Weighted Average
                                                   Of        Exercise Price per     Fair Value of
                                                 Shares            share           Options Granted
                                              ----------------------------------------------------
                                                                            
       Options outstanding at June 30, 2002      203,529        $      0.06
                                              ----------------------------------------------------
            Granted                              183,917               0.51           $   0.51
            Exercised                            (75,139)              0.06
            Terminated                           (31,196)              0.06
                                              ----------------------------------------------------
       Options outstanding at June 30, 2003      281,111               0.35

            Granted                            1,086,340               0.81           $   0.81
            Exercised                            (31,664)              0.06
            Terminated                           (54,391)              0.06
                                              ----------------------------------------------------
       Options outstanding at June 30, 2004    1,281,396        $      0.77
                                              ====================================================

                                      F-26


The weighted average contractual life remaining of options outstanding at June
30, 2004 is approximately 9.3 years. In August 2003, in conjunction with
deferred compensation agreements with senior executives, the Company granted
183,917 stock options and 117,624 warrants to purchase common stock at $0.51 per
share which expire in August 2012.

As of June 30, 2004, outstanding options had exercise periods which expired over
the following time periods:

                                             Weighted Average
                                              Remaining Life
         Exercise Price   Number Outstanding    (in years)    Number Exercisable
         --------------   ------------------    ----------    ------------------
         $0.06               11,139                1.1                11,139
         $0.51              183,917                8.4               183,917
         $0.8075             60,761                9.6                60,761
         $0.81            1,010,579                9.8               318,622
         $0.90                6,000                9.6                 6,000
         $1.01                3,000                9.8                 3,000
         $1.75                6,000                9.6                 6,000
                         ----------                                ---------
                          1,281,396                9.5               589,439
                         ==========                                =========

12.    STOCK PURCHASE WARRANTS

During 1997, the Company issued 17,143 warrants to an institutional lender in
conjunction with a capital equipment leasing facility. Each warrant entitled the
holder to purchase one share of the Company's common stock at an exercise price
of $7.89. In December of 1998 the Company reduced the exercise price to $1.50 as
part of a debt forbearance agreement. In August 1999, the Company reduced the
exercise price of these warrants to $0.27 per share. In February 2000, the
Company further reduced the exercise price of 13,333 of these warrants to
$0.1875 per share. The warrants expire on December 31, 2007. No discount was
recorded for the value of the warrants because the amount was not material.

In January 1999, the principals of the landlord of the Company's previously
occupied Lake Forest facility advanced the Company $15,000 and received 15,000
warrants related to the advance. Each warrant entitled the holder to purchase
one share of the Company's common stock at an exercise price of $1.005. The
warrants expired on March 13, 2004. A discount of approximately $23,400 was
recorded for the value of the warrants.

In March 1999, a bank lender was issued 31,008 warrants in conjunction with a
previous credit agreement. Each warrant entitled the holder to purchase one
share of the Company's common stock at an exercise price of $0.8062. In
conjunction with anti-dilution provisions of the warrants (as triggered by the
November 1999 repricing of warrants to an institutional lender discussed below),
these warrants were replaced with like warrants to purchase 139,536 shares of
common stock at $0.1875 per share. The warrants expired on March 13, 2004. A
discount of $26,047 was recorded for the value of the warrants.

In August 1999, the Company issued 50,169 warrants to an institutional lender as
part of a debt forbearance agreement. Each warrant entitles the holder to
purchase one share of the Company's common stock at an exercise price of $0.27.
Also, as noted above, in August of 1999 the Company reduced the exercise price
to $0.27 on 13,333 of the 17,142 previously issued warrants as part of the debt
forbearance agreement. The warrants expire on December 31, 2007. No discount was
recorded for the value of the warrants because the amount was not material.

In November 1999, the Company reduced the exercise price from $0.27 to $0.1875
on the 50,169 warrants and 13,333 of the 17,142 warrants referred to above. The
reduced price was in excess of the fair value of the Company's per share stock
price at that time.

In August 2002, in connection with the Asset Purchase Agreement, the Company
converted deferred compensation notes, deferred compensation liabilities and
other accrued compensation due to senior executives and other current and former
employees into 117,624 warrants and 183,917 options to purchase shares of Common
Stock (see Note 14


                                      F-27


- - Related Party Transactions - Deferred Compensation Agreements with Senior
Executives). Each warrant and option entitled the holder to purchase one share
of the Company's common stock at an exercise price of $0.51. The warrants
expired on March 13, 2004.

In July 31, 2003, in connection with the sale and issuance of our Series B
preferred stock (see Note 9 - Preferred and Common Stock - Series B Preferred
Stock) the Company granted our placement agent warrants to purchase 3,366 shares
of common stock at an exercise price of $3.00 per share, expiring January 31,
2005. No discount was recorded for the value of the warrants because the amount
was not material.

In August 2003, in connection with a Loan and Security Agreement, the Company
granted warrants to Franklin Funding to purchase 25,000 shares of common stock,
consisting of warrants for 5,000 shares at $1.10 per share, 5,000 shares at
$1.00 per share, 10,000 shares at $0.95 per share, and 5,000 shares at $0.85 per
share (see Note 8 - Notes Payable - Loan and Security Agreement). No discount
was recorded for the value of the warrants because the estimated fair value
would not have been material to the financial statements taken as a whole. The
warrants expire at the rate of 5,000 shares on each of August 13, August 18,
September 2, November 1 and November 14, 2013.

In March 2004, in connection with a private placement of common stock, the
Company granted warrants to the placement agents covering 384,600 shares of
unregistered common stock at $0.60 per share (see Note 9 - Preferred and Common
Stock - Common Stock). The warrants expire on December 31, 2006.

In June 2004, in connection with a $2.5 million secured convertible note, the
Company granted the lender a warrant to purchase up to 681,818 shares of common
stock at an exercise price of $1.25 per share, exercisable at any time prior to
May 28, 2011. In addition, we issued to our broker a five-year warrant,
exercisable as and to the extent that any amounts owing under the convertible
note are converted into common stock, for up to 181,818 shares of common stock
at an exercise price of $1.25 per share (see Note 8 - Notes Payable - Laurus
Debt Investment).

The following is a summary of outstanding warrants as of June 30, 2004 and 2003:


                                                                Weighted Average
                                          Exercise Price         Exercise Price
                                            per Share              per Share                 Number
                                            ---------              ---------                 ------
                                                                                     
Warrants outstanding at June 30, 2003    $0.1875 - $1.005             $0.34                     339,472
                                         ----------------             -----             ---------------

Warrants outstanding at June 30, 2004    $0.1875 - $3.00              $0.97                   1,457,728
                                         ---------------              -----             ---------------


Included in the 1,457,728 outstanding warrants at June 30, 2004 are warrants to
purchase 181,818 shares of common stock which have been issued, but are not
currently exercisable as described above.

13.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into non-cancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense was $256,997 and $253,292 for the years ended June 30, 2004 and 2003,
respectively.

Future minimum lease payments are as follows:

                 Year Ended June 30,
                 -------------------
                     2005                           240,575
                     2006                           225,264
                     2007                           231,192
                     2008                            78,052
                                                   --------
                                                   $775,083
                                                   ========

                                      F-28


PROMISSORY NOTE TO PRIOR LANDLORD

In May 2003, the Company's prior landlord, the Company, and Saigene entered into
a settlement agreement confirming amounts due the prior landlord (including
attorneys' fees of $20,541) of $320,315 as of May 31, 2003, and granting the
landlord 16,667 shares of Common Stock. Under the terms of the settlement
agreement, the Company and Saigene jointly and severally entered into a
promissory note dated May 31, 2003 to the landlord for $320,315, providing for
an initial payment of $10,000 by June 30, 2003, and quarterly payments of
$25,000 thereafter until the promissory note is paid in full. The promissory
note bears interest at 10% and provides that all amounts due under the
promissory note shall be paid no later than the first to occur of: an equity
funding by either Saigene or the Company of at least $4 million; sale of the
Company's laboratory; sale of PBI-WA; or, July 31, 2005. In conjunction with the
promissory note and settlement agreement, and to secure performance thereunder,
the Company also entered into an escrow agreement, providing for 666,666 shares
of the Company's common stock to be held in escrow for the benefit of the
landlord. The shares held in escrow will be released to the Company for
cancellation at the rate of 83,333 for each calendar quarter that the landlord
receives at least $50,000 in payment under the terms of the promissory note.
Upon payment of the promissory note in full, all remaining shares will be
returned to the Company. As of June 30, 2004, the balance of the promissory note
was $240,624 and the Company had made payments sufficient to release 83,333 of
escrow shares to the Company, which shares have been cancelled and are no longer
outstanding.

REVERSAL OF TECHNOLOGY LICENSE PAYABLE IN FISCAL 2003

In December 1997, the Company entered into an exclusive license agreement and
supply agreement with Sudormed, Inc. The technology licensed from Sudormed was
the basis for the Company's development of its sweat and saliva products. Due to
a lack of funding and the Company's failure to obtain FDA approval for the
products, all development efforts relating to the products were suspended in
August 1998. The license agreement required the Company to make a $1.6 million
license payment in December 1998, which was subsequently extended to March 1999.
In May 1999, Sudormed terminated the license agreement and the supply agreement
due to the Company's failure to make the $1.6 million license payment.

The Minnesota Mining and Manufacturing Company ("3M") manufactured certain of
the products that Sudormed supplied to the Company pursuant to the supply
agreement. As described above, Sudormed terminated both the license agreement
and the supply agreement in May 1999 due to the Company's failure to make
required payments. 3M subsequently foreclosed upon certain assets of Sudormed
and became a party in possession of secured property of Sudormed. In May 2000,
3M notified the Company that, in its capacity as a secured party in possession
of the Sudormed assets, it demanded payment in full of the $1.6 million plus
accrued interest and fees due under the Sudormed license agreement. The Company
disputes 3M's demand, and will vigorously defend any action that 3M may bring.
The Company has not had any correspondence or communication with 3M since 2000,
and to management's knowledge no action has been filed.

During fiscal 2003, the Company reassessed its potential liability to 3M.
Management believes based on advice from legal counsel that any claims by 3M
under the license agreement are now barred by the applicable statute of
limitations (having expired in the third and fourth quarters of fiscal 2003),
and accordingly that the likelihood of liability to 3M is remote. The Company
previously reserved on its balance sheet a contingent liability in the amount of
$2,240,040, representing the full potential amount owing under the technology
license plus accrued interest and fees. At June 30, 2003, the Company reversed
the reserve and removed the contingent liability from the balance sheet.

14.    RELATED PARTY TRANSACTIONS

ASSET PURCHASE TRANSACTION

On June 27, 2002, the Company, and its wholly-owned subsidiary, PBI-WA, entered
into an Asset Purchase Agreement, as amended by Amendment Number One to Asset
Purchase Agreement, dated as of August 28, 2002 (collectively, the "Asset
Purchase Agreement") with Saigene Corporation, a Delaware corporation
("Saigene"), providing for the purchase by PBI-WA of certain technology,
intellectual property and equipment assets in connection with certain DNA
amplification and cell viability and related technologies and processes. On
August 28, 2002, pursuant to the Asset Purchase Agreement, as consideration for
the purchased assets, the Company issued to

                                      F-30


Saigene 6,541,430 shares, and to certain of Saigene's designees an additional
458,570 shares, of the Company's common stock, par value $.01 per share. Of the
shares issued to Saigene, 333,333 shares were held in escrow in the event that
the Company was required to satisfy certain anti-dilution protections granted to
one of Saigene's designees (the "Anti-Dilution shares"), and 333,333 shares were
held in escrow in the event that the Company incurred any liabilities with
respect to any of Saigene's creditors that had not consented to the purchase
transaction (the "Saigene Creditor shares"). In accordance with the terms of the
respective escrow agreements, the Anti-Dilution shares were released back to
Saigene as of August 28, 2003, as the anti-dilution provisions were not
triggered, and the Saigene Creditor shares were released back to Saigene as of
August 28, 2004, without any such creditor liabilities having been incurred by
the Company. Additionally, PBI-WA issued two promissory notes in favor of
Saigene (and guaranteed by the Company) in the principal amounts of $223,697 and
$219,109, respectively. The first note, which has a remaining principal balance
of $22,183 at June 30, 2004, is payable at the rate of $10,000 per month and
bears interest at the rate of 8% per annum until fully paid; provided, however,
that in the event the Company obtains equity financing in the minimum amount of
$6 million, then this note will become immediately due and payable. The second
note matured in 12 months and bore interest at the annual rate of 12% per annum,
however, this second note, along with $9,721 of accrued interest, was
subsequently forgiven by Saigene as part of a December 2002 contribution toward
the development and commercialization of certain technologies discussed below.
Upon consummation of the transactions contemplated in the Asset Purchase
Agreement, Saigene owned approximately 77% of the Common Stock of the Company.

In connection with the asset purchase transaction, PBI-WA and Saigene executed
an Option Agreement whereby PBI-WA may purchase certain additional assets of
Saigene (the "Option Assets") in exchange for, at PBI-WA's election, either
$5,147,118 in cash or the issuance by the Company of an additional 1,715,706
shares of Common Stock and the assumption of certain additional liabilities
associated with such transferred assets. The Company's option under the Option
Agreement expires on August 28, 2003, extended by one day for each day that
Saigene allows certain encumbrances to remain on the Option Assets subsequent to
October 31, 2002. As of September 2004, the encumbrances were still on the
Option Assets.

Further, in connection with the consummation of the transactions contemplated by
the Asset Purchase Agreement, (1) the parties executed an amendment to the
Management Agreement dated September 15, 1999 (the "Management Agreement"),
whereby Saigene will continue to operate the PBI-WA laboratory in exchange for
monthly payments by the Company to Saigene equal to $90,000, which arrangement
may be terminated by either the Company or Saigene upon 30 days prior written
notice, and which arrangement was amended as of June 18, 2003 to reduce the
management fee to $70,000 per month effective July 1, 2003, amended February 1,
2004 to reduce the management fee to $40,000 per month effective February 1,
2004, amended as of May 11, 2004 to reduce the management fee to $20,000 per
month effective June 15, 2004, and amended subsequent to yearend (as of July 22,
2004) to terminate the management agreement effective August 31, 2004; (2) the
Purchase Agreement dated June 22, 2000, relating to the purchase by Saigene of
the laboratory operations of PBI-WA was terminated; (3) the holders of the
Company's Series A Convertible Preferred Stock, par value $0.01 per share,
consented to an amendment of the Certificate of Designation with respect to the
rights and preferences of the Preferred Stock and converted all accrued
dividends thereon into an aggregate of 150,000 shares of Common Stock; (4) the
Company entered into consulting arrangements with Paul Kanan and Terry Giles;
(5) the Company converted $933,472 of deferred compensation and notes payable to
warrants and options to purchase an aggregate of 301,541 shares of Common Stock;
and (6) each of Saigene, Paul Kanan, Terry Giles and Burkhalter, Michaels,
Kessler & George, LLP, agreed, for a period of one year, not to sell any Company
securities, except at a price per share equal to or greater than $3.00, in a
private transaction, in a transaction solely for estate planning, or, in the
event the Company completes a private financing, at a per share price equal to
or greater than the per share price set forth in such private financing.

On December 19, 2002, toward the development and commercialization of certain
technologies acquired by the Company from Saigene in connection with the Asset
Purchase Agreement, Saigene entered into an agreement with the Company in which
Saigene: (i) executed a promissory note in the principal amount of $200,000 in
favor of the Company payable on or before September 30, 2003, at Saigene's
election, either in cash or by the tender of shares of common stock of the
Company currently held in Saigene's name at an attributed value equal to the
greater of $3.00 per share or the average trading price of our common stock over
a five day period (which promissory note and accrued interest was repaid in
September 2003 by tender of 72,072 shares of the Company's common stock and $2
in cash), (ii) forgave a creditor obligation assumed by the Company from Saigene
pursuant to the Asset Purchase Agreement in the aggregate amount of
approximately $229,000, (iii) settled a credit obligation in the aggregate

                                      F-30


amount of approximately $150,000, and (iv) surrendered to the Company for
cancellation 10,000 shares of Company common stock that had been held in
Saigene's name. As a result of the December 19, 2002 agreement, an adjustment to
decrease the value of the acquired technology assets in the approximate amount
of $430,000 was recorded.

On September 30, 2003, the Company's $200,000 note receivable from Saigene,
along with accrued interest of $16,218, was settled by tender of 72,072 shares
of the Company's common stock and $2 in cash. The Company recorded a $72,072
loss on settlement of the note plus accrued interest, representing the
difference between the carrying value as based on the attributed $3.00 per share
value of the stock at the December 19, 2002 date of the note, and the $2.00 per
share trading price of the stock at September 30, 2003. In accordance with the
par value method, additional paid-in capital was reduced by $2,897, the original
amount recorded for the shares, and treasury stock was valued at the par value
of $.01 per share or $721 for the 72,072 shares. The excess amount of $140,526
was recorded against accumulated deficit as required by the par value method.

CONSULTING AGREEMENTS

On August 28, 2002, in connection with the Asset Purchase Agreement, the Company
entered into a consulting agreement with Terry M. Giles, a former director of
the Company and greater than 5% stockholder. Pursuant to the consulting
agreement, the Company agreed to engage Mr. Giles as a consultant and to pay Mr.
Giles compensation of $10,000 per month until the conversion of Mr. Giles shares
of Series A Preferred Stock into Common Stock, and until such shares are either
(a) registered pursuant to an effective registration statement, or (b) deemed
tradable pursuant to Rule 144. Pursuant to the consulting agreement, the first
year's payments (totaling $120,000) will be accrued, and paid over the following
four years (i.e., an additional $2,500 per month over 48 months beginning
September 2003), with any accrued amounts due being payable upon termination of
the consulting agreement, if terminated earlier than 60 months. As of June 30,
2004, accrued expenses and accounts payable included $132,154 related to this
consulting agreement.

On August 28, 2002, in connection with the Asset Purchase Agreement, the Company
entered into a consulting agreement with Paul G. Kanan, a director and former
officer of the Company. Pursuant to the consulting agreement, the Company agreed
to engage Mr. Kanan as a consultant for a period of 12 months beginning
September 1, 2002, and to pay Mr. Kanan $3,000 per month. The consulting
arrangement was extended on a month-to-month basis for up to 12 additional
months until such time as the shares of Common Stock held by Mr. Kanan have been
registered for resale pursuant to an effective registration statement filed with
the SEC. The consulting agreement was not extended beyond the additional 12
months, and expired on August 31, 2004. As of June 30, 2004, $27,000 was
included in accounts payable as owing to Mr. Kanan under this consulting
arrangement.

CO-MAKER NOTES PAYABLE

In September 2001 and November 2001, respectively, the Company was named as a
co-maker with Saigene on promissory notes for $150,000 and $100,000. In December
2002, in conjunction the Investment Agreement between Saigene and the Company,
Saigene assumed all liabilities of the Company under these notes. These notes
payable are not recorded on the Company's financial statements as of June 30,
2004, however, the Company may have a contingent liability on these notes should
Saigene not make required payments thereunder. (See Note 14 - Related Party
Transactions - ASSET PURCHASE TRANSACTION)

DEFERRED COMPENSATION AGREEMENTS WITH SENIOR EXECUTIVES

The Company had entered into deferred compensation agreements with four of its
senior executives. The agreements provided that a specified portion of their
salaries (from prior to fiscal 2002) be deferred until they elected to receive
the deferred amount. During prior years, certain deferred compensation amounts
had been converted to promissory notes bearing annual interest at 7% and payable
on demand. These notes were included with Notes Payable to Related Parties in
prior years on the accompanying consolidated balance sheet and, with accrued
interest totaled $552,171 as of June 30, 2002. The Company made no interest
payments on these amounts since September of 1998. Additional deferred
compensation, not converted to notes, of $295,368 to senior executives and other
current and former employees was also due as of June 30, 2002. On August 28,
2002, in connection with the Asset Purchase Agreement, the Company converted all
deferred compensation notes, deferred compensation liabilities, and $85,933 of
other accrued compensation into warrants and options to purchase an

                                      F-31


aggregate of 301,541 shares of Common Stock. (see Note 14 - Related Party
Transactions - Asset Purchase Transaction).

PACIFIC BIOMETRICS RESEARCH FOUNDATION

The Company is affiliated with Pacific Biometrics Research Foundation ("PBRF"),
one of five laboratories in the CDC (Centers for Disease Control) /NHLBI
sponsored Cholesterol Reference Method Laboratory Network. PBRF is organized as
a non-profit organization corporation under Section 501(c)(3) of the Internal
Revenue Code. The Company provides laboratory testing services, invoicing and
collection services in connection with PBRF's service offerings. In
consideration for this arrangement, the Company receives 85% of the revenues
generated through the testing services offered by PBRF. For the fiscal years
ended June 30, 2004 and 2003, the Company recorded approximately $37,000 and
$60,000, respectively, in revenues related to services provided for PBRF. As of
June 30, 2004 and 2003, the Company had approximately $9,600 and $40,000,
respectively, in accounts receivable from PBRF.

15.  RETIREMENT PLAN

The Company has a 401(k) Plan, which had fallen out of compliance with the
Internal Revenue Service (the "IRS") due to prior year filing delinquencies.
During fiscal 2004, the Company engaged a consultant to assist in regaining
compliance through the IRS Delinquent Filer Voluntary Compliance Program (the
"DFVCP") and filed the returns which had been delinquent. The Company believes
that it is now in compliance with the IRS reporting regulations, and, under the
DFVCP, will incur no additional material expenses associated with late filings.
The Company made no matching contributions to the 401(k) Plan during fiscal 2004
or 2003.























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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS TO WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS.

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                                TABLE OF CONTENTS
                                               Page

Prospectus Summary.............................   2
Risk Factors...................................   3
Cautionary Notice Regarding Forward-Looking
     Statements................................  13
Use of Proceeds................................  14
Selling Security Holders.......................  15
Plan of Distribution...........................  17
Market for Common Equity and
     Related Stockholder Matters...............  18
Management's Discussion and Analysis
     of Financial Condition and
     Results of Operations.....................  23
Business.......................................  38
Management.....................................  51
Executive Compensation.........................  57
Certain Relationships and Related Transactions.  59
Principal Stockholders.........................  61
Description of Securities......................  62
Legal Matters..................................  66
Experts........................................  66
Where You Can Find More Information............  66
Index to Financial Statements.................. F-1
                                ----------------

UNTIL MAY 11, 2005, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.







                                2,563,873 SHARES


                            PACIFIC BIOMETRICS, INC.


                                  COMMON STOCK












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                                   PROSPECTUS

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                                  APRIL 1, 2005