UNITED
      STATES
                  SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




x  Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended December 31, 2009




oTransition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from ____________ to ____________




Commission
File No. 0-21537




Pacific
Biomarkers, Inc.


(Exact
name of registrant as specified in its charter)


Delaware
            93-1211114(State
      or other jurisdiction of incorporation
              or
      organization)
            (I.R.S.
      Employer Identification No.)





220
      West Harrison Street
              Seattle,
      Washington
              (Address
      of principal executive offices)
            98119
              (Zip
      Code)(206)
      298-0068
              (Registrant’s
      telephone number, including area
code)





Pacific
Biometrics, Inc.


(Former
name, if changed since last report)





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file for such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x   No
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 or Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes x   No
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o                                                                        Accelerated
filer o


Non-accelerated
filer o                                                                          Smaller
reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o   No
x


As of
February 8, 2010, there were 16,642,418 shares of the registrant’s common stock,
$0.01 par value per share, outstanding.








PACIFIC
BIOMARKERS, INC.





INDEX TO
FORM 10-Q





PagePART
      I - FINANCIAL INFORMATIONITEM
      1 - FINANCIAL STATEMENTSConsolidated
      Balance Sheets as of December 31, 2009 (unaudited) and June 30,
      2009
                4Consolidated
      Statements of Operations for the three- and six-month periods ended
      December 31, 2009 and 2008 (unaudited)
                5Consolidated
      Statements of Cash Flows for the six-month periods ended December 31, 2009
      and 2008 (unaudited)
                6Notes
      to Consolidated Financial Statements (unaudited)
                7ITEM
      2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                16ITEM
      4T - CONTROLS AND PROCEDURES
                23PART
      II - OTHER INFORMATIONITEM
      4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                24ITEM
      5 – OTHER INFORMATION
                24ITEM
      6 – EXHIBITS
                25


2





EXPLANATORY
NOTE





Unless
otherwise indicated or the context otherwise requires, all references in this
Report to “we,” “us,” “our,” and the “Company” are to Pacific Biomarkers, Inc.
and our wholly-owned subsidiaries Pacific Biomarkers, Inc., PBI Technology,
Inc., and BioQuant, Inc.





As
approved at our 2009 annual stockholders’ meeting, we changed our name from
Pacific Biometrics, Inc. to Pacific Biomarkers, Inc. effective December 17,
2009.  In addition, during the first quarter of fiscal 2010, we merged
our wholly-owned subsidiary, Pacific Biomarkers, Inc., into our wholly-owned
subsidiary, Pacific Biometrics, Inc. and changed the name of the surviving
company to Pacific Biomarkers, Inc.





CAUTIONARY
NOTE REGARDING FORWARD LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q may contain a number of forward-looking
statements, including statements regarding:





·
            our
      working capital and cash flows and our estimates as to how long these
      funds will be sufficient to fund our
operations,


·
            our
      business development efforts and our expectations for future work orders
      for laboratory services and revenue
generation,


·
            our
      intentions for the development of new services and products and the
      expansion of the market for our current services and products, including
      our expectations for our clinical biomarker
  services,


·
            our
      goals for implementing aspects of our business plan and strategies,
      and


·
            our
      financing goals and plans





The
forward-looking statements in this Report reflect management’s current views and
expectations with respect to our business, strategies, services, future results
and financial performance. All statements other than statements of historical
fact, including statements addressing projected results of operations or our
future financial position, made in this Quarterly Report on Form 10-Q are
forward looking statements. In particular, the words “expect,” “anticipate,”
“estimate”, “desire”, “goal”, “ believe”, “may”, “will”, “should”, “could”,
“intend”, “objective”, “seek”, “plan”, “strive”, variations of such words, or
similar expressions, or the negatives of these words, are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements. The absence of these words does not mean that any
particular statement is not a forward-looking statement.





These
forward-looking statements are subject to risks and uncertainties. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements
contained in this Report to reflect any change in management’s expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.





For a
discussion of some of the factors that may affect our business, results and
prospects, see the Risk Factors discussed in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2009. These risks and uncertainties include, but
are not limited to, the concentration of our business with large clients, our
ability to develop new technology and introduce new products, competition,
fluctuations in general economic conditions, and changes in policies by
regulatory agencies. Readers are urged to carefully review and consider the
various disclosures made by us in this Report and in our other reports
previously filed with the Securities and Exchange Commission, including our
periodic reports on Forms 10-K, 10-Q and 8-K, and those described from time to
time in our press releases and other communications.


3





PACIFIC
BIOMARKERS, INC.


CONSOLIDATED
BALANCE SHEETS





December
      31,
                                        
                                        
                                        June
      30,2009
                                        
                                        
                                        2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        3,264,024
                                        
                                        
                                        $
                                        1,365,406Short-term
      investments
                                        
                                        
                                        502,237
                                        
                                        
                                        
                                        -Accounts
      receivable, net
                                        
                                        
                                        1,175,432
                                        
                                        
                                        
                                        2,238,912Other
      receivable, net
                                        
                                        
                                        3,500
                                        
                                        
                                        
                                        9,000Inventory
                                        
                                        
                                        172,904
                                        
                                        
                                        
                                        171,885Prepaid
      expenses and other assets
                                        
                                        
                                        159,834
                                        
                                        
                                        
                                        230,974Total
      current assets
                                        
                                        
                                        5,277,931
                                        
                                        
                                        
                                        4,016,177Property
      and equipment, net
                                        
                                        
                                        754,266
                                        
                                        
                                        
                                        813,258Total
      assets
                                        
                                        $
                                        6,032,197
                                        
                                        
                                        $
                                        4,829,435LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        550,217
                                        
                                        
                                        $
                                        678,818Accrued
      liabilities
                                        
                                        
                                        377,440
                                        
                                        
                                        
                                        660,284Advances
      from customers - current portion
                                        
                                        
                                        203,008
                                        
                                        
                                        
                                        155,471Capital
      lease obligation - current portion
                                        
                                        
                                        67,171
                                        
                                        
                                        
                                        62,709Secured
      note - current portion, net discount of $31,802
                                        
                                        
                                        646,148
                                        
                                        
                                        
                                        -Total
      current liabilities
                                        
                                        
                                        1,843,984
                                        
                                        
                                        
                                        1,557,282Advances
      from customers - long - term portion
                                        
                                        
                                        272,032
                                        
                                        
                                        
                                        272,032Capital
      lease obligations - long - term portion
                                        
                                        
                                        121,565
                                        
                                        
                                        
                                        156,309Secured
      note - long - term portion, net discount of $155,833
                                        
                                        
                                        3,166,217
                                        
                                        
                                        
                                        -Total
      liabilities
                                        
                                        
                                        5,403,798
                                        
                                        
                                        
                                        1,985,623Commitments
      and contingencies
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Stockholders'
      equity:Common
      stock, $0.01 par value, 30,000,000 shares authorized, 16,642,418 shares
      issued and outstanding at December 31, 2009, 19,099,539 shares issued and
      outstanding at June 30, 2009
                                        
                                        
                                        166,424
                                        
                                        
                                        
                                        190,995Additional
      paid-in capital
                                        
                                        
                                        27,661,271
                                        
                                        
                                        
                                        29,121,334Accumulated
      deficit
                                        
                                        
                                        (27,199,296
                                        )
                                        
                                        
                                        (26,468,517
                                        )Total
      stockholders' equity
                                        
                                        
                                        628,399
                                        
                                        
                                        
                                        2,843,812Total
      liabilities and stockholders' equity
                                        
                                        $
                                        6,032,197
                                        
                                        
                                        $
                                        4,829,435





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


4





PACIFIC BIOMARKERS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(unaudited)





Three Months Ended
                                                
                                                
                                                Six Months EndedDecember 31,
                                                
                                                
                                                December 31,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2008Revenues
                                                
                                                $
                                                2,113,795
                                                
                                                
                                                $
                                                3,230,913
                                                
                                                
                                                $
                                                4,415,170
                                                
                                                
                                                $
                                                5,035,955Laboratory
      expenses and cost of sales
                                                
                                                
                                                1,380,457
                                                
                                                
                                                
                                                1,570,235
                                                
                                                
                                                
                                                2,774,157
                                                
                                                
                                                
                                                2,673,604Gross
      profit
                                                
                                                
                                                733,338
                                                
                                                
                                                
                                                1,660,678
                                                
                                                
                                                
                                                1,641,013
                                                
                                                
                                                
                                                2,362,351Operating
      expenses:Selling,
      general and administrative
                                                
                                                
                                                1,040,375
                                                
                                                
                                                
                                                1,106,173
                                                
                                                
                                                
                                                2,161,758
                                                
                                                
                                                
                                                2,021,218Operating
      income (loss)
                                                
                                                
                                                (307,037
                                                )
                                                
                                                
                                                554,505
                                                
                                                
                                                
                                                (520,745
                                                )
                                                
                                                
                                                341,133Other
      income (expense):Interest
      expense
                                                
                                                
                                                (138,851
                                                )
                                                
                                                
                                                (28,628
                                                )
                                                
                                                
                                                (191,951
                                                )
                                                
                                                
                                                (139,686
                                                )Gain
      on adjustment of embedded and freestanding derivatives to fair
      value
                                                
                                                
                                                -
                                                
                                                
                                                
                                                343,121
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                675,691Amortization
      of deferred financing costs - secured convertible debt
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (18,447
                                                )Amortization
      of discount on debt
                                                
                                                
                                                (12,132
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (18,090
                                                )
                                                
                                                
                                                -Other
      income
                                                
                                                
                                                391
                                                
                                                
                                                
                                                107,673
                                                
                                                
                                                
                                                7
                                                
                                                
                                                
                                                112,243Total
      other income (expense)
                                                
                                                
                                                (150,592
                                                )
                                                
                                                
                                                422,166
                                                
                                                
                                                
                                                (210,034
                                                )
                                                
                                                
                                                629,801Net
      income (loss) before tax expense
                                                
                                                
                                                (457,629
                                                )
                                                
                                                
                                                976,671
                                                
                                                
                                                
                                                (730,779
                                                )
                                                
                                                
                                                970,934Tax
      expense
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Net
      income (loss)
                                                
                                                $
                                                (457,629
                                                )
                                                
                                                $
                                                976,671
                                                
                                                
                                                $
                                                (730,779
                                                )
                                                
                                                $
                                                970,934Net
      income (loss) per share
                                                
                                                $
                                                (0.03
                                                )
                                                
                                                $
                                                0.05
                                                
                                                
                                                $
                                                (0.04
                                                )
                                                
                                                $
                                                0.05Weighted
      average common shares outstanding, basic and diluted:
                                                
                                                
                                                16,711,096
                                                
                                                
                                                
                                                19,039,524
                                                
                                                
                                                
                                                18,141,744
                                                
                                                
                                                
                                                18,964,873





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


5





PACIFIC
BIOMARKERS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)





Six Months EndedDecember 31,2009
                                        
                                        
                                        2008Cash
      flows from operating activities:Net
      income (loss)
                                        
                                        $
                                        (730,779
                                        )
                                        
                                        $
                                        970,934Reconciliation
      of net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        151,114
                                        
                                        
                                        
                                        121,940Accretion
      of fair value assigned to conversion feature and warrants
                                        
                                        
                                        -
                                        
                                        
                                        
                                        88,134Amortization
      of deferred financing costs on  secured convertible
      note
                                        
                                        
                                        -
                                        
                                        
                                        
                                        18,447Gain
      from embedded and freestanding derivative liabilities relating to
      secured  convertible note
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (675,691
                                        )Amortization
      of fair value assigned to repurchased shares of common
    stock
                                        
                                        
                                        18,090
                                        
                                        
                                        
                                        -Discount
      accretion and premium amortization of held-to-maturity
      securities
                                        
                                        
                                        4,473
                                        
                                        
                                        
                                        -Warrant
      expense for equipment lease and financing
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,943Compensation
      expense from restricted shares and options
                                        
                                        
                                        49,590
                                        
                                        
                                        
                                        90,485Changes in assets and
      liabilities:Accounts
      receivable
                                        
                                        
                                        1,063,480
                                        
                                        
                                        
                                        123,692Other
      receivable
                                        
                                        
                                        5,500
                                        
                                        
                                        
                                        451,291Inventory
                                        
                                        
                                        (1,019
                                        )
                                        
                                        
                                        (48,593
                                        )Prepaid
      expenses and other assets
                                        
                                        
                                        71,140
                                        
                                        
                                        
                                        (73,901
                                        )Advances
      from customers
                                        
                                        
                                        47,537
                                        
                                        
                                        
                                        80,425Accounts
      payable
                                        
                                        
                                        (128,601
                                        )
                                        
                                        
                                        (104,933
                                        )Accrued
      liabilities
                                        
                                        
                                        (282,844
                                        )
                                        
                                        
                                        (58,305
                                        )Net cash  provided by operating activities
                                        
                                        
                                        267,681
                                        
                                        
                                        
                                        987,868Cash
      flows from investing activities:Purchases
      of capital equipment
                                        
                                        
                                        (92,122
                                        )
                                        
                                        
                                        (14,783
                                        )Purchases
      of investments
                                        
                                        
                                        (506,710
                                        )
                                        
                                        
                                        -Net cash used in investing activities
                                        
                                        
                                        (598,832
                                        )
                                        
                                        
                                        (14,783
                                        )Cash
      flows from financing activities:Payments
      on notes payable
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (869,136
                                        )Proceeds
      from loan
                                        
                                        
                                        4,000,000
                                        
                                        
                                        
                                        -Repurchases
      of common stock
                                        
                                        
                                        (1,674,334
                                        )
                                        
                                        
                                        -Restricted
      stock transferred for employee withholding tax liability
                                        
                                        
                                        (65,614
                                        )Payments
      on capital lease obligations
                                        
                                        
                                        (30,283
                                        )
                                        
                                        
                                        (20,626
                                        )Net cash provided by (used in) financing activities
                                        
                                        
                                        2,229,769
                                        
                                        
                                        
                                        (889,762
                                        )Net
      increase in cash and cash equivalents
                                        
                                        
                                        1,898,618
                                        
                                        
                                        
                                        83,323Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        1,365,406
                                        
                                        
                                        
                                        1,196,310Cash
      and cash equivalents, end of period
                                        
                                        $
                                        3,264,024
                                        
                                        
                                        $
                                        1,279,633Supplemental
      Information:Cash
      paid during the period for interest
                                        
                                        $
                                        136,606
                                        
                                        
                                        $
                                        59,505Non-cash
      investing and financing activities:Capital
      expenditures funded by capital lease borrowings
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        108,316





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


6





PACIFIC
BIOMARKERS, INC.





CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





1. Organization and Basis of Presentation





We
provide specialty reference laboratory services to the pharmaceutical,
biotechnology, and diagnostics industries. Our company was incorporated in
Delaware in May 1996. We conduct our business primarily through our wholly-owned
subsidiary, Pacific Biomarkers, Inc., a Washington corporation. Our two other
wholly-owned subsidiaries are 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 unaudited
interim 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, 2009 are not necessarily indicative of the results
that may be expected for any future period. The accompanying unaudited financial
statements and related condensed notes should be read in conjunction with the
audited financial statements and notes thereto, for our fiscal year ended June
30, 2009, as previously reported in our annual report on Form 10-K.





2. Summary
of Significant Accounting Policies





There
have been no significant changes in our significant accounting policies during
the six-month period ended December 31, 2009 compared to what was previously
disclosed in the our Annual Report on Form 10-K for the fiscal year ended June
30, 2009.





Principles
of Consolidation





These
consolidated financial statements include our consolidated financial position,
results of operations, and cash flows. 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





Trade
accounts receivable are stated at amounts billed to and due from clients, net of
an allowance for doubtful accounts. Credit is extended based on evaluation of a
client’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. We write 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. At December 31, 2009, we deemed no account receivable
uncollectible.





Other
accounts receivable consist of non-trade receivables such as state business and
occupation tax refunds, notes receivable and employee advances. These
receivables are stated at amounts per invoice or agreement and due from other
parties, net of an allowance for doubtful accounts. They are evaluated with the
same methods as utilized for trade accounts receivable. At December 31, 2009 and
June 30, 2009, we had $3,500 and $9,000 in other receivables,
respectively.


7





Inventory





Inventory
is stated the lower of cost or market. Cost is determined on a first in, first
out (FIFO) basis. Our inventory consists of reagent chemicals used in our
laboratory testing.





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 guidance of the Financial Accounting Standards Board, all of
our 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. As of December 31, 2009 and 2008, no impairment was deemed
necessary.





Client
Advances





We
receive advances from certain clients to perform consulting, laboratory
services, and clinical studies. We apply these advances as payments to invoices
as work is completed until the amounts advanced are exhausted. Advances are also
applied to invoices for setup and administrative fees, billed upon contract
approval. These setup and administrative fees are deferred as unearned income
when billed and amortized over the life of the project.





Treasury
Stock





Shares of
common stock repurchased by us are recorded at cost and are included as a
separate component of stockholders’ equity. We repurchased 2,391,906 shares of
our common stock having a fair value of $1,468,609 for the six-month period
ended December 31, 2009. In addition, 91,132 employee-owned shares were
surrendered to satisfy the withholding taxes due upon vesting of restricted
stock. The value of the surrendered stock was $65,615. In December 2009 we
retired all our treasury stock and this stock is no longer considered
treasury stock, but returned to authorized and unissued stock. At December 31,
2009 and June 30, 2009, the total value of our treasury stock was
zero.





Income
Taxes





We
recognize 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. We provide a valuation allowance for deferred tax
assets due to the uncertainty of realization.




Revenue
Recognition





We
recognize revenue in the period when the related services are performed and
collectability is reasonably assured.  Currently, we derive
substantially all of our 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 and/or a contract
amendment. Renegotiated amounts are not included in net revenues until earned,
and realization is assured. Advance payments on service contracts are treated as
a deposit and applied to periodic billing during the contract period. Setup and
administrative fees are billed upon contract approval. Revenues from setup and
administrative fees are amortized over the life of the contract. Historically,
costs are not deferred in anticipation of work on contracts after they are
awarded, but instead are expensed as incurred. All out-of-pocket costs are
included in expenses.


8





Net
Income (Loss) per Share





Basic
income (loss) per share is based upon the weighted average number of our
outstanding common shares. Diluted income (loss) 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. All per share calculations exclude treasury shares. There were no
treasury shares at December 31, 2009.





The net
income (loss) per common share for the three- and six-month periods ended
December 31, 2009 and 2008 is based on the weighted average number of shares of
common stock outstanding during the periods. Potentially dilutive securities
include 1,480,056 options and 3,898,027 warrants; however, such securities have
not been included in the calculation of the net loss per share as their effect
would be antidilutive.





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





Three months Ended
                  
                  
                  Six months EndedDecember 31,
                  
                  
                  December 31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Numerator
      - basic and diluted net income (loss)
                  
                  $
                  (457,629
                  )
                  
                  $
                  976,671
                  
                  
                  $
                  (730,779
                  )
                  
                  $
                  970,934Denominator
      - basic or diluted weighted average common shares
    outstanding
                  
                  
                  16,711,096
                  
                  
                  
                  19,039,524
                  
                  
                  
                  18,141,744
                  
                  
                  
                  18,964,873Net
      income (loss) per share - basic and diluted
                  
                  $
                  (0.03
                  )
                  
                  $
                  0.05
                  
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.05





During
the six-month period ended December 31, 2009, we repurchased 2,391,906 shares
and acquired 91,132 employee-owned shares, increasing our treasury stock to
2,483,038 shares. There were no treasury shares at Decmeber 31, 2009. As
most of the shares were repurchased during the quarter endedSeptember
2009, the number of weighted average common shares outstanding for the three
months ended December 31, 2009 is significantly lower than the number of
weighted average common shares outstanding for the six months ended December 31,
2009. For future periods of fiscal 2010, the per share calculation will be
affected by the decrease in outstanding shares compared to the same periods of
fiscal 2009.





Comprehensive
Income





We have
adopted current accounting standards for reporting comprehensive income and its
components in the financial statements.  Comprehensive income consists
of net income and other gains and losses affecting stockholders’ equity that,
under generally accepted accounting principles, are excluded from net income.
For the three- and six-month periods ended December 31, 2009, our comprehensive
loss equaled our net loss. Accordingly, a statement of comprehensive loss is not
presented. For the three- and six-month periods ended December 31, 2008, our
comprehensive income equaled our net income.





Use
of Estimates





In
preparing financial statements in conformity with 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.





Accounting
Changes and Recent Accounting Pronouncements





Initial Application of
Accounting Standards





As of
December 31, 2009, we adopted the following accounting standards, none of which
had a material impact on our financial position, results of operations or cash
flows:


9





In
October 2009, the FASB issued two new accounting standards updates
that:





Revise
accounting and reporting requirements for arrangements with multiple
deliverables. This update allows the use of an estimated selling price to
determine the selling price of a deliverable in cases where neither
vendor-specific objective evidence nor third-party evidence is available, which
is expected to increase the ability for entities to separate deliverables in
multiple-deliverable arrangements and, accordingly, to decrease the amount of
revenue deferred in these cases. Additionally, this update requires the total
selling price of a multiple-deliverable arrangement to be allocated at the
inception of the arrangement to all deliverables based on relative selling
prices.





Clarify
which revenue allocation and measurement guidance should be used for
arrangements that contain both tangible products and software, in cases where
the software is more than incidental to the tangible product as a whole. More
specifically, if the software sold with or embedded within the tangible product
is essential to the functionality of the tangible product, then this software,
as well as undelivered related software elements are excluded from the scope of
existing software revenue guidance, which is expected to decrease the amount of
revenue deferred in these cases.





These
updates are to be applied prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010,
which for us is our fiscal 2011, and must be adopted at the same time. Early
adoption is permitted, and if these updates are adopted early in other than the
first quarter of our fiscal year, then they must be applied retrospectively to
the beginning of that fiscal year. We are currently evaluating the impact the
adoption of these updates will have on our financial position, results of
operations and cash flows.





In
October 2009, the FASB issued Accounting Standards Update No. 2009-13 (FASB ASU
09-13), “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (a consensus of the FASB Emerging Issues Task Force).” FASB ASU
09-13 updates the existing multiple-element arrangement guidance currently in
FASB Topic 605-25 (Revenue Recognition – Multiple-Element Arrangements). This
new guidance eliminates the requirement that all undelivered elements have
objective evidence of fair value before a company can recognize the portion of
the overall arrangement fee that is attributable to the items that have already
been delivered. Further, companies will be required to allocate revenue in
arrangements involving multiple deliverables based on the estimated selling
price of each deliverable, even though such deliverables are not sold separately
by either company itself or other vendors. This new guidance also significantly
expands the disclosures required for multiple-element revenue arrangements. The
revised guidance will be effective for the first annual period beginning on or
after June 15, 2010. We may elect to adopt the provisions prospectively to new
or materially modified arrangements beginning on the effective date or
retrospectively for all periods presented. We are currently evaluating the
impact FASB ASU 09-13 will have on our consolidated financial
statements.





Accounting Standards Issued
But Not Yet Effective





In
January 2010, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Fair Value Measurements and Disclosures (Topic 820),
Improving Disclosures about Fair Value Measurements. The Update would affect all
entities that are required to make disclosures about recurring and nonrecurring
fair value measurements. The Board concluded that users will benefit from
improved disclosures in this Update and that the benefits of the increased
transparency in financial reporting will outweigh the costs of complying with
the new requirements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 30, 2010, and for interim periods within those fiscal years. We are
currently evaluating the impact this update will have on our consolidated
financial statements.





In
January 2010,  the Financial Accounting Standards Board (“FASB”)
issued an accounting standard update to address implementation issues related to
the changes in ownership provisions in the Consolidation—Overall Subtopic
(Subtopic 810-10) of the FASB
Accounting Standards CodificationTM, originally issued as FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements.Subtopic 810-10
establishes the accounting and reporting guidance for noncontrolling interests
and changes in ownership interests of a subsidiary. An entity is required to
deconsolidate a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an
entity recognizes a gain or loss on the transaction and measures any retained
investment in the subsidiary at fair value. The gain or loss includes any gain
or loss associated with the difference between the fair value of the retained
investment in the subsidiary and its carrying amount at the date the subsidiary
is deconsolidated. In contrast, an entity is required to account for a decrease
in its ownership interest of a subsidiary that does not result in a change of
control of the subsidiary as an equity transaction.


10





While
Subtopic 810-10 provides general guidance on accounting for the decreases in
ownership of a subsidiary, including a deconsolidation, some constituents raised
concerns that the guidance appears to conflict with the gain or loss treatment
or derecognition criteria of other U.S. generally accepted accounting principles
(GAAP), such as the guidance for sales of real estate, transfers of financial
assets, conveyances of oil and gas mineral rights, and transactions with equity
method investees.





Some
constituents also questioned whether the Board intended for the decrease in
ownership provisions of Subtopic 810-10 to apply to all entities because a
subsidiary is defined as an entity, including an unincorporated entity such as a
partnership or trust, in which another entity, known as its parent, holds a
controlling financial interest. Those constituents were concerned that such an
interpretation could result in the accounting for a transaction being driven by
its form rather than its substance. For example, different accounting might be
applied to a transaction involving the same underlying assets depending on
whether those assets were transferred in asset or entity form.” The amendments
in this update are effective beginning in the period that an entity adopts
Statement 160 (now included in Subtopic 810-10).  If an entity has
previously adopted Statement 160 as of the date of the amendments in this update
are included in the Accounting Standards Codification, the amendments in this
update are effective beginning in the interim or annual reporting period ending
on or after December 31, 2009. The amendments in this update should be applied
retrospectively to the first period that an entity adopted 160. We are currently
evaluating the impact this update will have on our consolidated financial
statements.





In
December 2009, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update for improvements to financial reporting by
enterprises involved with Variable Interest Entities. The subsections clarify
the application of the General Subsections to certain legal entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the legal entity to
finance its activities without additional subordinated financial support [FIN
46(R), paragraph 1, sequence 55.1] or, as a group, the holders of the equity
investment at risk lack any one of the following three characteristics: [FIN
46(R), paragraph 1, sequence 55.2]





a. The power, through voting rights or
similar rights, to direct the activities of a legal entity that most
significantly impact the entity’s economic performance [FIN 46(R), paragraph 1,
sequence 55.2.1]





b. The obligation to absorb the
expected losses of the legal entity [FIN 46(R), paragraph 1, sequence
55.2.2]





c. The right to receive the expected
residual returns of the legal entity. [FIN 46(R), paragraph 1, sequence
55.2.3]





The
amendments in this update to the Accounting Standards Codification are the
result of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R).
The adoption of this update to improving the financial reporting by enterprises
involved with Variable Interest Entities, as codified in ASC 810, did not have
any impact on the Company’s financial statements.





In
December 2009, the Financial Accounting Standards Board (“FASB”) issued an
accounting standard update, Transfers and Servicing (Topic 860) Accounting for
Transfers of Financial Assets. The amendments in this update to the Accounting
Standards Codification are the result of FASB Statement No. 166, Accounting for Transfers of
Financial Assets. The adoption of this update did not have any impact on
the Company’s financial statements.


Other
recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants ("AICPA"), and the SEC did not or are not believed
by management to have a material impact on the Company's present condensed
consolidated financial statements.


11





3.  Concentration
of Credit Risk





Our
largest client in the quarter ended December 31, 2009 accounted for
approximately 22% of our total revenues, while our largest client in the quarter
ended December 31, 2008 accounted for approximately 30% of our total revenues.
As of December 31, 2009 and 2008, approximately 31% and 51% of our accounts
receivable balance was from the two largest clients at that time. These were
different clients in each fiscal period. Component clients included in the
largest client calculation may vary from period to period.





The
majority of our clients are pharmaceutical companies, many of which are on the
list of Fortune 1000 companies. For our revenue calculations, we aggregate
revenues we receive from several divisions within a pharmaceutical company
client as one single client.  For the quarter ended December 31, 2009,
63% of our revenue was derived from Fortune 1000 clients compared to 49% for the
quarter ended December 31, 2008. We believe that our exposure to concentration
of credit risk is very low considering the financial strength of our
clients.





We
maintain cash in three insured commercial accounts and one uninsured investment
account at major financial institutions. Although the financial institutions are
considered creditworthy and have not experienced any losses on client deposits,
our cash balance exceeded Federal Deposit Insurance Corporation (FDIC) limits
by $2,764,024 at December 31, 2009 and by $779,633 at December 31, 2008.
Management will continue to monitor the creditworthiness of the financial
institutions holding our deposits. FDIC limits were increased from $100,000 per
insured account to $250,000 per insured account effective October 10, 2008. The
new FDIC limits expire on December 31, 2013.





4.  Fair
Value Measurements





We follow
ASC Topic 820 and 825, (SFAS 157, Fair Value Measurements) which clarify a
number of considerations with respect to fair value measurement objectives for
financial reporting and expand disclosures about the use of fair value
measurements. The guidance regarding fair value measurements is intended to
increase consistency and comparability among fair value estimates used in
financial reporting. The disclosure requirements are intended to provide users
of financial statements with the ability to assess the reliability of an
entity's fair value measurements.





Definition of Fair
Value





Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date and, therefore, represents an exit price, not an entry price.
We hold or have held fixed maturities, equity securities, derivatives, and
embedded derivatives, which are carried at fair value.





The
degree of judgment utilized in measuring the fair value of financial instruments
is largely dependent on the level to which pricing is based on observable
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our view of market assumptions in the absence
of observable market information. Financial instruments with readily available
active quoted prices would be considered to have fair values based on the
highest level of observable inputs, and little judgment would be utilized in
measuring fair value. Financial instruments that rarely trade would be
considered to have fair value based on a lower level of observable
inputs, and more judgment would be utilized in measuring fair
value.





Debt
Financing





On
September 1, 2009, we obtained $4,000,000 in debt financing from a member of our
Board of Directors, Mr. Terry Giles. Pursuant to the terms of the loan
agreement, we were required to use a portion of the loan proceeds to repurchase
2,391,906 shares of common stock from Mr. Giles and certain other parties
designated by Mr. Giles at a price of $0.70 per share or an aggregate price of
$1,674,334. Concurrent with the financing transaction, Mr. Giles resigned from
the Board of Directors.  We issued a secured note payable bearing
interest at 12% per annum, due on August 31, 2013. The net loan proceeds will be
used for working capital and general corporate purposes.  We received
net loan proceeds of $2,325,666, after payment for stock repurchase of 2,391,906
shares of common stock at a price of $0.70 per share for $1,674,334. We apply
ASC Topic 820 and 825 (SFAS 157, Fair Value Measurements) to assess the fair
value of the repurchased shares of common stock (which were illiquid for a
period of time).


12





The
2,391,906 shares that were repurchased were treated as treasury stock and we
recorded them on our balance sheet as treasury stock a fair value of $1,468,609
which was determined using a bid-ask regression model which uses Level 2 inputs
for the determination of fair value, which did take into account quoted market
price of the common stock. We recorded $205,725 on our balance sheet as a
discount on the secured note, representing the difference between the fair value
of the common stock repurchased and the repurchase price. The discount on the
Note is being amortized as interest expense using the effective interest method
over the 48-month term of the Note. At December 31, 2009, the unamortized
discount on the Note was approximately $188,000.





Interest
on the Note is payable monthly, with the first 8 months being interest only
($40,000 per month) beginning September 30, 2009, and thereafter 40 monthly
payments of principal and interest ($121,822 each). The Note will mature on
August 31, 2013. The Note is redeemable at the option of the Company, in whole
or in part, plus accrued and unpaid interest, if any, to the date of
redemption.





December
      31, 2009Amortized
                                                                    
                                                                    
                                                                    Loan
                                                                    
                                                                    
                                                                    EstimatedCost
                                                                    
                                                                    
                                                                    Discount
                                                                    
                                                                    
                                                                    Fair
      ValueCommon
      stock repurchased
                                                                    $
                                                                    1,674,334
                                                                    
                                                                    $
                                                                    (205,725)
                                                                    
                                                                    $
                                                                    1,468,609





5.  Stock
Based Compensation





We
granted to certain officers and employees 100,000 restricted shares and 200,000
stock options under our stock incentive plan during the three-month period ended
December 31, 2009, compared to 179,392 restricted shares and 192,000 stock
options in the comparable period last fiscal year. For the comparable six-month
periods, we granted 205,500 restricted shares and 351,700 stock options in the
six months ended December 31, 2009, compared to 179,392 restricted shares and
192,000 stock options in the six months ended December 31, 2008.





Stock
Options





We use
the Black-Scholes option-pricing model to estimate the calculated value of our
share-based payments. Stock options are valued as of the date of grant. The
volatility assumption used in the Black-Scholes formula is based on the
volatility of our common stock. We used the following assumptions to compute the
fair value of option grants for the six-month periods ended December
31:





2009
                            
                            
                            2008Expected
      volatility
                            
                            132-148%
                            
                            
                            109%Expected
      dividend yield
                            
                            0.00%
                            
                            
                            0.00%Risk-free
      interest rate
                            
                            3.21-3.85%
                            
                            
                            3.85%Expected
      life
                            
                            10
      years
                            
                            
                            10
      years





The
weighted average fair value on the date of the option grant was $74,788 for the
options granted in July 2009 and $174,000 for the options granted in October
2009. The total weighted average fair value for the six months ended December
31, 2009 was $248,788. The total unrecognized share-based compensation costs
related to non-vested stock options outstanding at December 31, 2009 was
$253,459 and is expected to be recognized over a weighted average period of
approximately 2.3 years.





A summary
of option activity from July 1, 2009 through December 31, 2009 is presented
below:


13





Number of
                          Options
                        
                        
                        Weighted
                          Average Exercise
                          Price per shareOptions
      outstanding at July 1, 2009
                        
                        
                        1,549,815
                        
                        
                        $
                        0.76Granted
                        
                        
                        351,700
                        
                        
                        
                        0.76Forfeited
                        
                        
                        -
                        
                        
                        
                        -Exercised
                        
                        
                        -
                        
                        
                        
                        -Options
      outstanding at December 31, 2009
                        
                        
                        1,901,515
                        
                        
                        
                        0.76Exercisable
      outstanding at December 31, 2009
                        
                        
                        1,480,056
                        
                        
                        $
                        0.78





Restricted
Stock





We
granted Restricted Stock, which we refer to as RS, to certain officers and
employees under our stock incentive plan. All RSs vest on the three-year
anniversary of the date of grant. The fair value of our RS is based on the
grant-date fair market value of the common stock, which equals the grant date
market price. As of December 31, 2009, we had $133,417 of unrecognized
compensation cost related to nonvested RS awards and it is expected to be
recognized over a weighted average period of approximately 2.63
years.





A summary
of RS activity from July 1, 2009 through December 31, 2009 is presented
below:





Number of RS
                    awards
                  
                  
                  Weighted
                    Average Grant
                    Date Fair Value
                    per shareRS
      nonvested at July 1, 2009
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  205,500
                  
                  
                  
                  0.74Vested
                  
                  
                  25,917
                  
                  
                  
                  0.69Forfeited
                  
                  
                  -
                  
                  
                  
                  -RS
      nonvested at December 31, 2009
                  
                  
                  179,583
                  
                  
                  $
                  0.74





Compensation
expense for share-based awards was $49,590 and $90,485 for the six months ended
December 31, 2009 and 2008, respectively. Amounts were included in our
consolidated statements of operations as follows:





Three months ended
                          
                          
                          Six months endedDecember 31,
                            2009
                          
                          
                          December 31,
                            2008
                          
                          
                          December 31,
                            2009
                          
                          
                          December 31,
                            2008Cost
      of sales
                          
                          $
                          (2,087
                          )
                          
                          $
                          5,200
                          
                          
                          $
                          3,527
                          
                          
                          $
                          7,431Selling
      and administrative expenses
                          
                          
                          (21,097
                          )
                          
                          
                          79,084
                          
                          
                          
                          46,063
                          
                          
                          
                          83,054Total
      compensation expense
                          
                          $
                          (23,184
                          )
                          
                          
                          84,284
                          
                          
                          $
                          49,590
                          
                          
                          $
                          90,485





The
credit amounts in the three months ended December 31, 2009 column are due to an
adjustment of the RS amortization for the July 01, 2009 grant.





6.  Short-term
Investments





We
classify our fixed maturity securities into one of three categories: (i)
"actively managed" (which we carry at estimated fair value with any unrealized
gain or loss, net of tax and related adjustments, recorded as a component
of


stockholders’
equity); (ii) "trading" (which we carry at estimated fair value with changes in
such value recognized as trading income); or (iii) "held to maturity" (which we
carry at amortized cost). We had $502,237 of fixed maturity


securities
classified as held to maturity during the period presented in these financial
statements.


14





7.  Preferred
Stock





Our Board
of Directors approved cancellation of Certificates of Designation for Series A
and Series B Preferred Stock effective December 14, 2009 as we had no shares of
Series A Preferred or Series B Preferred outstanding for several
years.  The Preferred Stock section of the balance sheet has been
cleared at December 31, 2009.





8.  Subsequent
Events





On
January 15, 2010, we awarded a total of 87,500 shares of restricted stock
pursuant to our 2005 Stock Incentive Plan to non-management directors on our
Board of Directors. The restricted shares fully vest on the third anniversary of
the grant date and are subject to forfeiture under certain conditions if
director appointment is terminated prior to the vesting date. The terms of the
awards are materially consistent with the form of restricted stock purchase
agreement under our 2005 Stock Incentive Plan.


15


ITEM
2.             MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.





Investors
should read the following discussion and analysis in conjunction with our
consolidated financial statements and related notes in this Form 10-Q and our
audited financial statements and related notes for the year ended June 30, 2009,
included in our Annual Report on Form 10-K.





Overview





We
provide specialty laboratory services to support pharmaceutical and laboratory
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug and diagnostic product 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 as well as osteo and
rheumatoid arthritis). Coupled with our specialty testing, we have central
laboratory capability and provide full-service central laboratory support for
multi-center clinical trials. We also provide clinical biomarker services to our
pharmaceutical and biotechnology clients, including assay development services
for novel biomarkers and custom assay services for immunogenicity testing and
multiplex testing.





Management
has reviewed recent developments in the drug development market. These changes
–
specifically, continued consolidation, cost reductions and the use of adaptive
clinical trials have impacted current and have the potential to significantly
impact future revenues. We have observed a number of current studies being
postponed, suspended or terminated. We believe that there will be continued
uncertainty about the significance of these developments, potential effects on
our future business and revenue, driven by the drug development activities by
pharmaceutical, biotechnology and diagnostic companies.  The move to
adaptive clinical trials has reduced the total dollar value of our backlog of
signed contracts by aggregating shorter term and lower dollar
contracts.  Reduction in revenue is a trend reported by most of the
major Contract Research Organizations (CRO’s) since the economic downturn began
in 2008. This trend is the primary reason for the reduction in our second
quarter revenue. Nevertheless, we believe that we are well positioned in the lab
services and biomarker development market to take advantage of new compounds
coming into the drug development pipeline that may mitigate these
changes.  Indeed, we are involved with many top pharmaceutical
companies in providing testing services and biomarker development for their new
drugs due to a by-product of these changes:  increased out-sourcing of
assay development and testing services.





Our
company is a Delaware corporation, incorporated in May 1996, and we conduct our
operations primarily through our wholly-owned subsidiary, Pacific Biomarkers,
Inc., a Washington corporation. As approved at our 2009 annual stockholders’
meeting, we changed our name from Pacific Biometrics, Inc. to Pacific
Biomarkers, Inc. effective December 17, 2009.





Critical
Accounting Policies and Estimates





There
have been no material changes to our critical accounting policies and estimates
since the end of our 2009 fiscal year. For detailed information on our critical
accounting policies and estimates, see our financial statements and notes
thereto included in this Report and our Annual Report on Form 10-Kfor the fiscal year
ended June 30, 2009.





The
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 U.S. GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates
including, among others, those affecting revenue, 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 Report. We do not
undertake any obligation to update or revise this discussion to reflect any
future events or circumstances.


16





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 our Consolidated Financial Statements included in this
Report and Note 2 to our Consolidated Financial Statements included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2009.





Revenue
Recognition





Under
fixed-price contracts, we recognize revenue as services are performed, with
performance generally assessed using output measures, such as units-of-work
performed to date compared to the total units-of-work contracted. Our client
contracts may be delayed or cancelled at any time. Uncertainty surrounding
continuation of existing revenues during any period is high. We believe that
recognizing revenue as services are performed is the most appropriate method for
our business as it directly reflects services performed in the laboratory. We
would expect material differences in reporting of our revenues to occur if we
changed our assumptions for revenue recognition from services performed to other
methods such as percent complete or completed contract methods. While both other
methods are allowed under GAAP, they would introduce more variables and
estimates into our revenue recognition process. The percent complete method
introduces estimated costs early in the process that may drive revenues higher
in early periods, and in the event that the study is terminated early,
previously recognized revenue would be reversed, net of a cancellation fee, if
applicable. The completed contract method may recognize revenues in future
contract periods, such as the first quarter after a fiscal year close and
subsequent to completion of the services rendered.





Fair
Value Measurements  - Debt Financing





We follow
ASC Topic 820 and 825, (SFAS 157, Fair Value Measurements) in determining the
fair value in our recent repurchase of shares of common stock. SFAS 157
clarifies a number of considerations with respect to fair value measurement
objectives for financial reporting and expands disclosures about the use of fair
value measurements. The degree of judgment utilized in measuring the fair value
of financial instruments is largely dependent on the level to which pricing is
based on observable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our view of market
assumptions in the absence of observable market information. See Note 4 to our
Consolidated Financial Statements. In valuing the repurchased shares from our $4
million debt financing in September 2009, we chose a bid-ask regression model as
the most appropriate method to determine the fair value of these shares. We
would expect material differences in reporting of the fair value of these
shares, had we chosen other methods in determining the fair value. The discount
to the Note derived from the fair value of the shares and interest expense
derived from the discount may have been a higher or lower amount. For example, a
regression model based on restricted share regression analysis would produce a
higher discount amount. Alternatively, had we chosen the market closing price
for fair value, the discount would have been zero. However, due to the thin
trading characteristics of our stock within the OTCBB market, the number of
shares repurchased, other observable and unobservable inputs, it was our
judgment that the method utilized in estimating the fair value of these shares
was appropriate for this transaction.





Stock-Based
Compensation Expense





Effective
January 1, 2006, we adopted the provisions of ASC Topic 718 (SFAS No. 123(R),
Share-Based Payment), using the modified prospective transition method. This
requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-priced model. The value of the portion of the
award that is ultimately expected to vest is recognized as an expense over the
requisite service periods in our consolidated income statements. Determining the
fair value of equity-based awards at the grant date requires judgment. In
addition, judgment is also required in estimating the amount of equity-based
awards that are expected to be forfeited.  If actual results differ
significantly from these estimates, equity-based compensation expense and our
results of operations could be materially impacted.


17





Results
of Operations for Three- and Six-Month Periods Ended December 31, 2009 and
2008





Revenue:




Three months Ended
                                  December 31,
                                
                                
                                $
                                
                                
                                %
                                
                                
                                Six months Ended
                                  December 31,
                                
                                
                                $
                                
                                
                                %Dollars in thousands, roundedto nearest thousand
                                
                                2009
                                
                                
                                2008
                                
                                
                                Change
                                
                                
                                Change
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                Change
                                
                                
                                ChangeRevenue
                                
                                $
                                2,114
                                
                                
                                $
                                3,231
                                
                                
                                
                                (1,117
                                )
                                
                                
                                (35
                                )
                                
                                $
                                4,415
                                
                                
                                $
                                5,036
                                
                                
                                
                                (621
                                )
                                
                                (12
                                )





We
generate the majority of our revenue from clinical pharmaceutical trials testing
(“traditional biomarker services”) and novel biomarker services.  We
also provide diagnostic services, which historically have represented less than
1% of our total revenue.





Our
revenue decreased approximately 35% to $2,114,000 from $3,231,000 between the
comparable quarters ended December 31, 2009 and 2008. For the quarter ended
December 31, 2009, our revenue was negatively impacted by delays and
cancellations of testing in the diabetes and rheumatoid arthritis therapeutic
areas. This was partially offset by an increase in novel biomarker services. In
contrast, during the quarter ended December 31, 2008, our revenue was positively
impacted by approximately $400,000 received in December for a study that
required immediate processing and reporting. Our revenue fluctuates due to the
variability in the volume of testing services we perform, and by the timing
between our work on testing and open work orders, and prior work orders having
been completed or terminated.





For the
six-month periods ended December 31, 2009 and 2008, our revenue decreased
approximately 12% to $4,415,000 from $5,036,000 between the comparable
periods.  While the first quarter this year was well above the
comparable quarter during fiscal 2009, we did not see a large contract appear
late in the quarter such as we did in December 2008, instead we saw a number of
studies being postponed, suspended or terminated





We
perform services for pharmaceutical and biotech companies, which include our
traditional biomarker services (consisting of direct trials testing and referral
trials testing for other large clinical laboratories that refer specialty
laboratory testing to us) and our novel biomarker development services. The
following table provides a breakdown of the percentage of our total revenue
generated from these service areas for the comparable quarters and six- month
periods ended December 31, 2009 and 2008:





Traditional Biomarker Services
                            
                            
                            Novel
                              BiomarkerDirect Trials
                              Testing
                            
                            
                            Referral Trials
                              Testing
                            
                            
                            Development
                              ServicesThree months
      EndedDecember
      31, 2009
                            
                            
                            51
                            %
                            
                            
                            34
                            %
                            
                            
                            15
                            %December
      31, 2008
                            
                            
                            45
                            %
                            
                            
                            47
                            %
                            
                            
                            8
                            %Six
      months EndedDecember
      31, 2009
                            
                            
                            49
                            %
                            
                            
                            37
                            %
                            
                            
                            14
                            %December
      31, 2008
                            
                            
                            49
                            %
                            
                            
                            44
                            %
                            
                            
                            7
                            %


18









We
believe that the overall significant decrease in revenue for the quarter ended
December 31, 2009 reflects changes in the drug development marketplace,
including cancellations and delays. We have continued to increase our
investments in business development initiatives over several fiscal years and
will continue this strategy, particularly directed towards direct trials testing
and novel biomarker services. We have seen growth in our biomarker services and
we expect to see our biomarker services represent a larger portion of our
revenue during fiscal 2010. As discussed in our Annual Report on Form 10-K for
the 2009 fiscal year, we are continuing to monitor and evaluate the shift in the
industry to “adaptive clinical trials” and how this change is impacting us now
as well as going forward.





Our
revenues tend to fluctuate from quarter to quarter, and sometimes these
fluctuations are significant. These fluctuations are typically explained by the
timing of entering into new contracts for clinical studies and our work on
testing and open work orders, and the completion of prior work orders or early
cancellation of studies by our clients. The studies that we bid on are uncertain
until we have a signed contract. Once our work on a study commences, the client
may cancel the study at any time during the testing phase. Clients may
terminate, delay, or change the scope of a project for a variety of reasons
including unexpected or undesirable clinical results or a decision to forego a
particular study. Accordingly, our revenues may be significantly affected by the
success or failure of the testing phase and other factors outside of our
control, including a large number of pharmaceutical companies’ cost reduction
announcements and continuing consolidation in the pharmaceutical
market.





Laboratory
Expense and Cost of Goods Sold:





Three
      months Ended
                        
                        
                        
                        
                        
                        
                        
                        
                        Six
      months EndedDecember
      31,
                        
                        
                        $
                        
                        
                        %
                        
                        
                        December
      31,
                        
                        
                        $
                        
                        
                        %Dollars
      in thousands,rounded
                          to
      nearest thousand
                        
                        2009
                        
                        
                        2008
                        
                        
                        Change
                        
                        
                        Change
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        Change
                        
                        
                        ChangeLaboratory
      Expenses and Cost of Goods Sold
                        
                        $
                        1,380
                        
                        
                        $
                        1,570
                        
                        
                        
                        (190
                        )
                        
                        
                        (12
                        )
                        
                        $
                        2,774
                        
                        
                        $
                        2,674
                        
                        
                        
                        100
                        
                        
                        
                        4Percentage
      of Revenue
                        
                        
                        65
                        %
                        
                        
                        49
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        63
                        %
                        
                        
                        53
                        %





Laboratory
expense and cost of goods sold consist primarily of salaries and related
benefits to employees performing analysis of clinical trial samples and the cost
of chemical reagents and supplies for analysis ofclinical trialsamples, and secondarily, of
payments to subcontractors for laboratory services, rent, insurance, business
and occupation taxes.





For the
comparable quarters ended December 31, 2009 and 2008, laboratory expense and
cost of goods sold decreased by approximately $190,000, or 12%, to $1,380,000,
down from $1,570,000. Laboratory expense and cost of goods sold as a percentage
of revenue was approximately 65% for the quarter ended December 31, 2009 and 49%
for 2008, reflective of our decrease in revenue. The dollar decrease in
laboratory expense and cost of goods sold was due to a decrease in variable
costs of laboratory reagents. However, we had increases in salaries and related
benefits, other variable costs and fixed costs, including increased rent for an
increase in laboratory space for biomarker development.





For the
six-month periods ended December 31, 2009 and 2008, laboratory expense and cost
of goods sold increased by approximately $100,000 or 4%, to $2,774,000, up from
$2,674,000. Laboratory expense and cost of goods sold as a percentage of revenue
was approximately 63% for the six-months ended December 31, 2009 and 53% for
2008. While we had a decrease in variable costs of laboratory reagents for the
six-month ended December 31, 2009, our salaries and related benefits, other
variable costs and fixed costs increased due to increased staffing and
laboratory expansion for biomarker development work. Although biomarker revenues
increased during the period, overall revenues were down 35% compared to the same
period last year.





Generally,
laboratory expense and cost of goods sold include expense items that relate to
the mix of services we provide in any given period, the overall volume of tests
performed, the use of new and highly complex assays and the volume of
subcontracted laboratory services. The following tables illustrate changes in
laboratory expense and cost of goods sold in fixed and variable expense
categories for the comparable three- and six-month periods:


19





Three
      months EndedDecember 31,
                              
                              
                              $
                              
                              
                              %Dollars in thousands,
                                roundedto nearest thousand
                              
                              2009
                              
                              
                              % of
                                revenue
                              
                              
                              2008
                              
                              
                              % of
                                revenue
                              
                              
                              Change
                              
                              
                              ChangeFixed
      Cost DetailRent,
      Utilities, Certain Taxes
                              
                              $
                              172
                              
                              
                              
                              8
                              %
                              
                              $
                              120
                              
                              
                              
                              4
                              %
                              
                              $
                              52
                              
                              
                              
                              43
                              %Variable
      Cost DetailWages,
      Taxes, Benefits
                              
                              
                              655
                              
                              
                              
                              31
                              %
                              
                              
                              592
                              
                              
                              
                              18
                              %
                              
                              
                              63
                              
                              
                              
                              11
                              %Reagent
      Chemicals
                              
                              
                              399
                              
                              
                              
                              19
                              %
                              
                              
                              707
                              
                              
                              
                              22
                              %
                              
                              
                              (308
                              )
                              
                              
                              (44
                              )%Other
      Variable Costs
                              
                              
                              154
                              
                              
                              
                              7
                              %
                              
                              
                              151
                              
                              
                              
                              5
                              %
                              
                              
                              3
                              
                              
                              
                              2
                              %Total
                              
                              
                              1,208
                              
                              
                              
                              57
                              %
                              
                              
                              1,450
                              
                              
                              
                              45
                              %
                              
                              
                              (242
                              )
                              
                              
                              (17
                              )%Total
      Cost of Goods Sold
                              
                              $
                              1,380
                              
                              
                              
                              65
                              %
                              
                              $
                              1,570
                              
                              
                              
                              49
                              %
                              
                              $
                              (190
                              )
                              
                              
                              (12
                              )%





Six
      months EndedDecember
      31,
                        
                        
                        $
                        
                        
                        %Dollars
      in thousands,
                          rounded
      to nearest thousand
                        
                        2009
                        
                        
                        %
      of
                          revenue
                        
                        
                        2008
                        
                        
                        %
      of
                          revenue
                        
                        
                        Change
                        
                        
                        ChangeFixed
      Cost DetailRent,
      Utilities, Certain Taxes
                        
                        $
                        336
                        
                        
                        
                        8
                        %
                        
                        $
                        247
                        
                        
                        
                        5
                        %
                        
                        $
                        89
                        
                        
                        
                        36
                        %Variable
      Cost DetailWages,
      Taxes, Benefits
                        
                        
                        1,282
                        
                        
                        
                        29
                        %
                        
                        
                        1,100
                        
                        
                        
                        22
                        %
                        
                        
                        182
                        
                        
                        
                        17
                        %Reagent
      Chemicals
                        
                        
                        861
                        
                        
                        
                        20
                        %
                        
                        
                        1,063
                        
                        
                        
                        21
                        %
                        
                        
                        (202
                        )
                        
                        
                        (19
                        )%Other
      Variable Costs
                        
                        
                        295
                        
                        
                        
                        6
                        %
                        
                        
                        264
                        
                        
                        
                        5
                        %
                        
                        
                        31
                        
                        
                        
                        12
                        %Total
                        
                        
                        2,438
                        
                        
                        
                        55
                        %
                        
                        
                        2,427
                        
                        
                        
                        48
                        %
                        
                        
                        11
                        
                        
                        
                        0
                        %Total
      Cost of Goods Sold
                        
                        $
                        2,774
                        
                        
                        
                        63
                        %
                        
                        $
                        2,674
                        
                        
                        
                        53
                        %
                        
                        $
                        100
                        
                        
                        
                        4
                        %





The
largest component of laboratory expense for the quarter and six-month period
ended December 31, 2009 was salaries and related benefits. Laboratory salaries
and related benefits increased in the quarter and six-month period ended
December 31, 2009 compared to the comparable periods in fiscal 2009 as a result
of an increase in staff from 46 FTE to 50 FTE to accommodate increases in the
complexity of tests performed and biomarker development. Laboratory salaries and
related benefits increased 11% to approximately $655,000 from $592,000 for the
quarters ended December 31, 2009 and 2008. These expenses represented
approximately 31% and 18%, respectively, as a percentage of revenue for the
comparable periods. For the six-month periods ended December 31, 2009 and 2008,
our laboratory salaries and related benefits increased 17% to approximately
$1,282,000 from $1,100,000. These expenses represented approximately 29% and
22%, respectively, as a percentage of revenue for the comparable
periods.





The other
major component of laboratory expense for the quarter and six-month period ended
December 31, 2009 was the cost of laboratory reagents and supplies for analysis
of clinical trial samples. Over the last three fiscal years, reagent chemicals
used in our laboratory testing have averaged approximately 20% in cost as a
percentage of revenue, but may vary considerably depending on the type of lab
testing we perform, and constitute a significant expense item for our business.
Laboratory reagent expense decreased in the quarter and six-month period ended
December 31, 2009 compared to the comparable periods in fiscal 2009 as a result
of a decrease in the number of tests performed. During the comparable quarters
ended December 31, 2009 and 2008, laboratory reagents and supplies decreased by
44% to approximately $399,000 from $707,000. This reduction is also driven down
somewhat by the biomarker development business as it requires less laboratory
reagents and supplies to operate. The cost of laboratory reagents and supplies
as a percentage of revenue was approximately 19% and 22% for the comparable
quarters ended December 31, 2009 and 2008. This is a favorable result as we
experienced significant reagent cost increases during the third and fourth
quarters of the prior fiscal year (fiscal 2009). For the six-month periods ended
December 31, 2009 and 2008, laboratory reagents and supplies decreased by 19% to
approximately $861,000 from $1,063,000. The cost of laboratory reagents and
supplies as a percentage of revenue was approximately 20% and 21% for the
comparable six-month periods ended December 31, 2009 and 2008.


20





Other
variable costs increased 3% for the comparable quarters ended December 31, 2009
and 2008, to $154,000 from $151,000. Other variable costs increased 12% for the
comparable six-month periods ended December 31, 2009 and 2008, to $295,000 from
$264,000. The increase was primarily due to increases in laboratory repair and
maintenance expense and outside service costs.





Fixed
costs for the quarter ended December 31, 2009 increased 43% compared to the
quarter ended December 31, 2008, to approximately $172,000 from $120,000. Fixed
costs for the six-month period ended December 31, 2009 increased 36% compared to
the six-month period ended December 31, 2008, to approximately $336,000 from
$247,000. This increase was mainly due to increases in laboratory depreciation
and rentfor our new
biomarker services facility.





Selling,
General and Administrative Expense:





Three
      months Ended
                    
                    
                    
                    
                    
                    
                    
                    
                    Six
      months EndedDecember 31,
                    
                    
                    $
                    
                    
                    %
                    
                    
                    December 31,
                    
                    
                    $
                    
                    
                    %Dollars in thousands, rounded
                      to nearest thousand
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    Change
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    ChangeSelling,
      General and Administrative Expense
                    
                    $
                    1,040
                    
                    
                    $
                    1,106
                    
                    
                    
                    (66
                    )
                    
                    
                    (6
                    )
                    
                    $
                    2,162
                    
                    
                    $
                    2,021
                    
                    
                    
                    141
                    
                    
                    
                    7Percentage
      of Revenue
                    
                    
                    49
                    %
                    
                    
                    34
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    49
                    %
                    
                    
                    40
                    %





Our
selling, general and administrative expense consists primarily of compensation
for our executive officers, board members and other selling, general and
administrative personnel (including those in business development, laboratory
administration, and our science and technology department), and secondarily of
share-based compensation, business development expenses, legal, accounting and
public company expenses.





For the
comparable quarters ended December 31, 2009 and 2008, our selling, general and
administrative expense decreased 6% to approximately $1,040,000, down from
$1,106,000. As a percentage of revenue, selling, general and administrative
expense was 49% and 34%, respectively, for the quarters ended December 31, 2009
and 2008. The increase in selling, general and administrative expense as a
percentage of revenue was the result of the significant decrease in our revenues
between the comparable periods, while our SG&A expense remained relatively
constant.





For the
six-month periods ended December 31, 2009 and 2008, our selling, general and
administrative expense increased 7% to approximately $2,162,000, up from
$2,021,000. As a percentage of revenue, selling, general and administrative
expense was 49% and 40%. The dollar increase in our selling, general and
administrative expenses for the comparable six-month periods is due in large
part to increases in salaries and related benefits.Other increases
occurred in legal and other public company expense. Our salary and benefit
expenses increased due to one addition to the administration staff and two new
hires in our Science and Technology team to support our clinical biomarkers
area.Our
legal and other public company expense increased due to increased legal fees,
including expenses for our debt financing, and increases in our insurance
premiums. These increases were offset somewhat by decreases in bonus expense,
accounting expense, advertising and marketing expense and consulting expense.


21


Other
Income (Expense):





Three
      months Ended
                    
                    
                    
                    
                    
                    
                    
                    
                    Six
      months EndedDecember 31,
                    
                    
                    $
                    
                    
                    %
                    
                    
                    December 31,
                    
                    
                    $
                    
                    
                    %Dollars
      in thousands, rounded
                      to nearest thousand
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    Change
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Change
                    
                    
                    ChangeOther
      Income (Expense)
                    
                    $
                    (151
                    )
                    
                    $
                    422
                    
                    
                    
                    (573
                    )
                    
                    
                    (136
                    )
                    
                    $
                    (210
                    )
                    
                    $
                    630
                    
                    
                    $
                    (840
                    )
                    
                    
                    (133
                    )Percentage
      of Revenue
                    
                    
                    (7
                    )%
                    
                    
                    13
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5
                    )%
                    
                    
                    13
                    %





We had
other expense of approximately $151,000 for the three-month period ended
December 31, 2009, compared to other income of approximately $422,000 for the
three-month period ended December 31, 2008. The main component of other income
(expense) for the three-month period ended December 31, 2009 was interest
expense of approximately $138,000 compared to approximately $29,000 interest
expense in the comparable fiscal period last year. For the three-month period
ended December 31, 2009, interest expense included $120,000 of interest related
to our debt financing , and we also recorded $12,132 of expense related to the
amortization of the discount on the debt. We had no comparable amortization
expense for the comparable fiscal period last year.





Total
other expense for the six-month period ended December 31, 2009 was approximately
$210,000, compared to other income of approximately $630,000 for the six month
period ended December 31, 2008. The main component of other income (expense) for
the six month period ended December 31, 2009 was interest expense of
approximately $192,000 compared to approximately $140,000 interest expense in
the comparable fiscal period last year. For the six-month period ended December
31, 2009, interest expense included $160,000 of interest related to our debt
financing, and we also recorded $18,090 of expense related to the amortization
of the discount on the debt. We had no comparable amortization expense for the
comparable fiscal period last year.





A
significant change between the comparable three- and six-month periods is
attributable to the net gain we recognized in fiscal 2009 due to the accounting
treatment on the Laurus convertible notes, which were paid in full as of
December 31, 2008. For the three- and six-month periods ended December 31, 2008,
we incurred net gain of $343,000 and $676,000, respectively, attributable to the
Laurus convertible notes and zero and $18,000, respectively, for amortization of
deferred financing costs. We had no comparable gain or amortization costs in
current fiscal year.





Net
Income (Loss):





Three
      months Ended
                        
                        
                        
                        
                        
                        
                        
                        
                        Six
      months EndedDecember
      31,
                        
                        
                        $
                        
                        
                        %
                        
                        
                        December
      31,
                        
                        
                        $
                        
                        
                        %Dollars
      in thousands, rounded
                          to
      nearest thousand
                        
                        2009
                        
                        
                        2008
                        
                        
                        Change
                        
                        
                        Change
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        Change
                        
                        
                        ChangeNet
      Income (Loss)
                        
                        $
                        (458
                        )
                        
                        $
                        977
                        
                        
                        $
                        (1,435
                        )
                        
                        
                        (147
                        )
                        
                        $
                        (731
                        )
                        
                        $
                        971
                        
                        
                        $
                        (1,702
                        )
                        
                        
                        (175
                        )Percentage
      of Revenue
                        
                        
                        (22
                        )%
                        
                        
                        30
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (17
                        )%
                        
                        
                        19
                        %





We had a
net loss of approximately $(458,000) for the quarter ended December 31, 2009
compared to net income of approximately $977,000 for the quarter ended December
31, 2008. We had a net loss of approximately $(731,000) for the six-month period
ended December 31, 2009, compared to net income of approximately $971,000 for
six-month period ended December 31, 2008. This decrease to net loss, from net
income, is equally attributable to our reduced operating income from lower
revenue and the accounting treatment for the Laurus convertible notes (as
described above in “Other Income (Expense)”, whereas we had no similar non-cash
gain in the first two quarters of fiscal 2010. Other changes affecting our net
loss are described above under “Laboratory Expense and Cost of Goods Sold” and
“Selling, General and Administrative Expense.”


22


Liquidity
and Capital Resources:





At
December 31, 2009, our cash and cash equivalents were approximately $3,264,000,
compared to approximately $1,365,000 at June 30, 2009. We also had approximately
$502,000 invested in short-term marketable securities. At December 31, 2009 we
had approximately $1,175,000 in accounts receivable, compared to approximately
$2,239,000 as of June 30, 2009, reflecting timing of revenues billed and
collected. Our accounts receivable generally reflect our billings, and may
include one or several individually large customer receivables from time to
time. We generally have a high collectibility rate on our accounts receivable,
and our allowance for doubtful trade accounts is approximately $34,000, which we
believe is reasonable based on our past experience.





Total
liabilities recorded on our balance sheet as of December 31, 2009 were
approximately $5,404,000 compared to approximately $1,986,000 as of June 30,
2009. This significant increase in liabilities was the result of our $4 million
debt financing in September 2009. The loan is due and payable over 48 months,
with the first 8 months being interest only ($40,000 per month) beginning
September 30, 2009, and thereafter 40 monthly payments of principal and interest
($121,822 each). During the first 12 months of the term of the loan, we have the
right, in our sole discretion, to obtain an additional $500,000 loan from Mr.
Giles on the same terms. Other than this term loan with Mr. Giles, we do not
have available to us a bank line of credit or other general borrowing
facility.





At
December 31, 2009, we had working capital of approximately $3,434,000, compared
to approximately $2,459,000 at June 30, 2009. The increase of approximately
$975,000 in our working capital is mainly attributable to a significant increase
in our cash position from net proceeds from debt financing, whereas only a
portion of this loan is recorded as a current liability (affecting working
capital) and the balance is recorded as a long-term liability. Other changes
providing a positive impact in working capital included decreases in accounts
payable and accrued liabilities. Changes providing a negative impact included
decreases in accounts receivable and prepaid expenses and increases in advances
from customers and our secured note obligation.





Net cash
provided by operating activities was approximately $268,000 for the six-month
period ended December 31, 2009 and included the effect of approximately $151,000
in depreciation and amortization, $50,000 in expense from share-based
compensation and $18,000 in amortization of fair value assigned to repurchased
shares of common stock. Our investing activities used cash of approximately
$599,000 for the six-month period ended December 31, 2009 for the purchase of
capital equipment and investments. Cash flow provided by or used in financing
activities included $4,000,000 provided by gross loan proceeds, approximately
$1,674,000 used in common stock repurchase, $66,000 used in payment of employee
withholding taxes from transferred restricted stock and $30,000 used in payments
on capital lease obligations.





We
believe that our cash, current assets and cash flows from operations will be
sufficient to at least fund current operations through calendar
2010.





In fiscal
2010, we will continue to actively pursue business development and marketing
activities to broaden our client and revenue base. In particular, we anticipate
making additional capital and investments for our clinical biomarker services.
We may also invest from time to time in our technology infrastructure,
operations and other areas of our business. These efforts will use significant
amounts of time, effort and funding.





We will
also continue to explore other strategic alternatives, which may include a
merger, acquisition, asset sale, joint venture or other similar transaction with
one or more strategic partners to provide additional capital resources to fund
operations and growth opportunities.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet financing arrangements.





ITEM
      4T.
            CONTROLS
      AND PROCEDURES





We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is (a) recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms and (b) accumulated and communicated to management, including our Chief
Executive Officer and Vice President and Controller, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues if any, within a company have been detected.


23





As of the
end of the period covered by this Report on Form 10-Q, we carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation
was carried out under the supervision and with the participation of management,
including our Chief Executive Officer and Vice President and Controller. Based
upon that evaluation, our Chief Executive Officer and Vice President and
Controller concluded that our disclosure controls and procedures are effective
at December 31, 2009.





During
the quarterly period covered by this report, there were no changes in our
internal controls or in other factors that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.





PART
II – OTHER INFORMATION





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





We held
our 2009 annual meeting of stockholders on December 14, 2009. At the meeting,
the stockholders voted on the following matters:





1.            The
stockholders elected the following seven directors, receiving the number of
votes set forth opposite their respective names:





Votes
For
                
                
                Votes
      WithheldRonald
      R. Helm
                
                
                14,544,764
                
                
                
                115,934Mario
      R. Ehlers
                
                
                14,535,098
                
                
                
                125,600Paul
      G. Kanan
                
                
                14,539,838
                
                
                
                120,860Richard
      W. Palfreyman
                
                
                14,527,002
                
                
                
                133,696Curtis
      J. Scheel
                
                
                14,544,764
                
                
                
                115,934Stanley
      L. Schloz
                
                
                14,527,002
                
                
                
                133,696Kenneth
      R. Waters
                
                
                14,525,069
                
                
                
                135,629





2.            The
stockholders approved the amendment to our Certificate of Incorporation to
change our corporate name to “Pacific Biomarkers, Inc.”, by a vote of 14,644,913
shares FOR, 1,781 shares AGAINST and 14,004 shares ABSTAINING. There were no
broker non-votes.





3.            Finally,
the stockholders ratified the appointment of PMB Helin Donovan, LLP as our
independent auditors for the fiscal year ending June 30, 2010, by a vote of
14,590,733 shares FOR, 2,781 shares AGAINST and 67,184 shares ABSTAINING. There
were no broker non-votes.





ITEM
      5.
            OTHER
      INFORMATION





1.            On
January 15, 2010, we awarded a total of 87,500 shares of restricted stock
pursuant to our 2005 Stock Incentive Plan to non-management directors on our
Board of Directors. The restricted shares fully vest on the third anniversary of
the grant date and are subject to forfeiture under certain conditions if
director appointment is terminated prior to the vesting date. The terms of the
awards are materially consistent with the form of restricted stock purchase
agreement under our 2005 Stock Incentive Plan. The restricted stock awards are
detailed on the following table:


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No.
      of SharesMario
      Ehlers
                    
                    Director
                    
                    
                    17,500Paul
      G. Kanan
                    
                    Director
                    
                    
                    17,500Richard
      W. Palfreyman
                    
                    Director
                    
                    
                    17,500Curtis
      J. Scheel
                    
                    Director
                    
                    
                    17,500Stanley
      L. Schloz
                    
                    Director
                    
                    
                    17,500TOTAL
                    
                    
                    
                    
                    87,500





2.            We
have scheduled an investor conference call for 11:15 a.m. EST (8:15 a.m. PST) on
Friday, February 12, 2010 to review our operating results for the second quarter
of fiscal 2010. Stockholders and other interested parties may participate in the
conference call by dialing 800-860-2442 (international/local participants dial
412-858-4600) and requesting participation in the “Pacific Biomarkers, Inc.
Conference Call” a few minutes before 11:15 a.m. EST on February 12, 2010. A
replay of the conference call will be available one hour after the call through
Friday, February 19, 2010 at 5:00 p.m. EDT by dialing 877-344-7529
(international/local participants dial 412-317-0088) and entering the Conference
ID # 437808.





ITEM
      6.
            EXHIBITS





3.1
                  Second
      Amended and Restated Certificate of Incorporation, dated December 15,
      200921.1
                  Subsidiaries
      of Pacific Biomarkers, Inc.31.1
                  Certification
      of Ronald R. Helm, Chief Executive Officer31.2
                  Certification
      of John P. Jensen, Vice President and Controller32.1
                  Certification
      of Ronald R. Helm, Chief Executive Officer and John P. Jensen, Vice
      President and Controller, of Pacific Biomarkers, Inc., pursuant to 18
      U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.


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SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





Dated:  February
11, 2010





/s/
      Ronald R. HelmRonald
      R. HelmChief
      Executive Officer(principal
      executive officer)/s/
      John P. JensenJohn
      P. JensenVice
      President and Controller(principal
      financial and accounting
officer)


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