<PAGE>

                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-QSB

/X/   QUARTERLY REPORT SECTION 13 OR 15(D) OF THE
       SECURITIES EXCHANGE  ACT OF 1934

                  For the quarterly period ended March 31, 1999

/ /   TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

                         Commission File Number 0-21537

                            PACIFIC BIOMETRICS, INC.
--------------------------------------------------------------------------------
         (Exact name of small business issuer specified in its charter)

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

          25651 Atlantic Ocean Drive, Suite A-1, Lake Forest, CA 92630
--------------------------------------------------------------------------------
                    (Address of principal executive offices)

                                  949-455-9724
--------------------------------------------------------------------------------
                           (Issuer's telephone number)

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

As of May 19, 1999, shares of common stock outstanding of the issuer were
3,810,171.

Transitional Small Business Disclosure Format (check one) Yes (   )  No ( X )

<PAGE>

                            PACIFIC BIOMETRICS, INC.
                              INDEX TO FORM 10-QSB

PART I - FINANCIAL INFORMATION

                                                                            Page
ITEM 1  - FINANCIAL STATEMENTS

Consolidated Balance Sheet................................................    3

Consolidated Statements of Operations.....................................    4

Condensed Consolidated Statements of Cash Flows...........................    6

Notes to Consolidated Financial Statements................................    8

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 
         CONDITION AND RESULTS OF OERATIONS...............................   12

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS................................................   20

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS........................   20

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..................................   20

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............   20

ITEM 5 - OTHER INFORMATION................................................   20

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.................................   21

                                       2
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)
                           CONSOLIDATED BALANCE SHEET
                                 March 31, 1999
                                  (unaudited)

                                     ASSETS
Current assets:
    Cash and cash equivalents                                     $    153,355
    Accounts receivable, net of allowance for doubtful
          accounts of $24,035                                          305,155
    Inventory                                                          196,828
    Prepaid expenses and other                                          92,568
                                                                  ------------
          Total current assets                                         747,906

Property and equipment, net                                            527,598

Other assets:
    Prepaid financing costs                                             80,406
    Restricted cash                                                     74,945
    Deposit and other                                                    2,250
                                                                  ------------
          Total assets                                            $  1,433,105
                                                                  ============


                     LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Notes payable to related parties                              $    452,247
    Notes payable--Other                                                15,000
    Accounts payable                                                   433,727
    Accrued liabilities                                                220,447
    Deferred compensation                                              159,979
    Advances from customers                                            102,802
    Technology licenses payable                                      2,244,040
    Capital lease obligations                                          274,342
                                                                  ------------
          Total current liabilities                                  3,902,584
                                                                  ------------

    Capital lease obligations - long term portion                      151,408
                                                                  ------------
          Total long term liabilities                                  151,408
                                                                  ------------

Stockholders' deficit:
    Preferred stock, $0.01 par value, 5,000,000 shares
          authorized, 1,550,000 shares issued and outstanding           15,500
    Common stock, $0.01 par value, 30,000,000 shares
          authorized, 3,810,171 shares issued and outstanding           38,102
    Additional paid-in capital Common Stock                         13,697,317
    Additional paid-in capital Preferred Stock                       5,062,654
    Deficit accumulated during the development stage               (21,434,460)
                                                                  ------------
          Total stockholders' deficit                               (2,620,887)
                                                                  ------------
          Total liabilities and stockholders' deficit             $  1,433,105
                                                                  ============

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


                                       3
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
           For the Three Month Periods Ended March 31, 1999 and 1998
                                   (unaudited)



                                               Three Month Period Ended March 31
                                               ---------------------------------
                                                      1999           1998
                                                  -----------    ------------

Revenues                                          $   411,435    $   558,309
                                                  -----------    -----------

Operating expenses:
    Laboratory expense and cost of goods sold         328,089        474,829
    Research and product development                  120,707        692,998
    Selling, general and administrative               426,757        597,453
    Write-off of intangible assets                  2,078,100              0
    Amortization of intangible assets                 200,452        214,342
                                                  -----------    -----------

          Total operating expenses                  3,154,105      1,979,622
                                                  -----------    -----------

Operating loss                                     (2,742,670)    (1,421,313)
                                                  -----------    -----------

Other income (expense):
    Interest expense                                  (25,684)       (15,927)
    Interest income                                     2,101         26,247
    Grant and other income                              1,605         96,474
                                                  -----------    -----------
                                                      (21,978)       106,794
                                                  -----------    -----------

Net loss                                          $(2,764,648)   $(1,314,519)
                                                  ===========    ===========

Preferred stock dividend paid or accrued              (62,000)       (16,444)

Deemed preferred stock dividend                             0     (1,937,500)
                                                  -----------    -----------

Net loss applicable to common stockholders        $(2,826,648)   $(3,268,463)
                                                  ===========    ===========

Basic and diluted loss per share                  $     (0.76)   $     (0.88)
                                                  ===========    ===========

Weight average shares outstanding                   3,710,788      3,709,671
                                                  ===========    ===========

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


                                        4
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
            For the Nine Month Periods Ended March 31, 1999 and 1998
       and For the Period from Inception (December 1992) to March 31, 1999
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                        For the Period  
                                                   Nine Month Period Ended March 31     from Inception  
                                                   --------------------------------   (December 1992) to
                                                        1999               1998          March 31, 1999
                                                    ------------       ------------       ------------
<S>                                                 <C>                <C>            <C>         
Revenues                                            $  1,047,663       $  2,067,946       $  8,581,906
                                                    ------------       ------------       ------------
                                                                                        
Operating expenses:                                                                     
    Laboratory expense and cost of goods sold            912,146          1,602,144          6,585,506
    Research and product development                     873,469          1,705,038          5,512,134
    Selling, general and administrative                1,540,669          1,559,739          7,683,219
    Purchased in-process research and development              0                  0          6,373,884
    Write-off of intangible assets                     2,078,100                  0          2,078,100
    Amortization of intangible assets                    601,356            245,592          1,624,378
                                                    ------------       ------------       ------------
                                                                                        
          Total operating expenses                     6,005,740          5,112,513         29,857,221
                                                    ------------       ------------       ------------
                                                                                        
Operating loss                                        (4,958,077)        (3,044,567)       (21,275,315)
                                                    ------------       ------------       ------------
                                                                                        
Other income (expense):                                                                 
    Interest expense                                    (161,637)           (45,091)          (555,418)
    Interest income                                       25,018            107,704            316,482
    Grant and other income                                 6,682            102,499             79,791
                                                    ------------       ------------       ------------
                                                        (129,937)           165,112           (159,146)
                                                    ------------       ------------       ------------
                                                                                        
Net loss                                            $ (5,088,014)      $ (2,879,455)      $(21,434,461)
                                                    ============       ============       ============
                                                                                        
Preferred stock dividend paid or accrued                (186,000)           (16,444)          (256,093)
                                                                                        
Deemed preferred stock dividend                                0         (1,937,500)        (1,937,500)
                                                    ------------       ------------       ------------
                                                                                        
Net loss applicable to common stockholders          $ (5,274,014)      $ (4,833,399)      $(23,628,054)
                                                    ============       ============       ============
                                                                                        
Basic and diluted loss per share                    $      (1.42)      $      (1.30)      $     (12.86)
                                                    ============       ============       ============
                                                                                        
Weight average shares outstanding                      3,710,038          3,707,188          1,911,321
                                                    ============       ============       ============
</TABLE>

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

                                         5
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                            (a Delaware corporation)
                      (a company in the development stage)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
            For the Three Month Periods Ended March 31, 1999 and 1998
                                   (unaudited)


                                              Three Month Period Ended March 31
                                              ---------------------------------
                                                  1999                  1998
                                              -----------           -----------
                                                                 
   Cash used by operations                    $  (298,752)          $(1,294,862)
                                                                 
   Cash used in investing activities                    0              (876,756)
                                                                 
   Cash provided by financing activities           83,976             1,761,733
                                              -----------           -----------
                                                                 
Decrease in cash and cash equivalents            (214,776)             (409,885)
                                                                 
Cash and cash equivalents:                                       
                                                                 
Beginning of period                               368,131             1,282,474
                                              -----------           -----------
                                                                 
End of period                                 $   153,355           $   872,589
                                              ===========           ===========


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


                                        6
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                            (a Delaware corporation)
                      (a company in the development stage)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Nine Month Periods Ended March 31, 1999
              and 1998 and For the Period from Inception (December
                             1992) to March 31, 1999
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                For the Period  
                                                         Nine Month Period Ended March 31       from Inception  
                                                         --------------------------------     (December 1992) to 
                                                             1999                1998           March 31, 1999
                                                          -----------         -----------         -----------

<S>                                                       <C>                 <C>             <C>         
   Cash used by operations                                $(1,906,167)        $(2,566,279)        $(9,423,056)

   Cash used in investing activities                          (35,493)         (1,113,980)           (261,055)

   Cash (used in) provided by financing activities           (149,041)          1,636,153           9,837,466
                                                          -----------         -----------         -----------

(Decrease) increase in cash and cash equivalents           (2,090,701)         (2,044,106)            153,355

Cash and cash equivalents:

Beginning of period                                         2,244,056           2,916,695                   0
                                                          -----------         -----------         -----------

End of period                                             $   153,355         $   872,589         $   153,355
                                                          ===========         ===========         ===========
</TABLE>


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


                                        7
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       Organization and Basis of Presentation

Pacific Biometrics, Inc. (the "Company" or "PBI") was incorporated in Delaware
in May 1996 in connection with the June 1996 acquisitions of BioQuant, Inc.
("BioQuant"), a Michigan corporation, and Pacific Biometrics, Inc. ("PBI-WA"), a
Washington corporation, whereby both became wholly-owned subsidiaries of the
Company.

The unaudited financial statements of the Company presented herein, have been
prepared pursuant to the rules of the Securities and Exchange Commission for
quarterly reports on Form 10-QSB and do not include all of the information and
footnote disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the financial statements and notes
thereto for the year ended June 30, 1998 included in the Company's Annual Report
on Form 10-KSB. In the opinion of management, the financial statements include
all adjustments (consisting solely of normal, recurring adjustments) necessary
for a fair presentation of results for these interim periods.

Revenues are primarily from the laboratory business. Although the Company's
Osteopatch(TM) product has been launched in Italy, all other potential products
are in research and development, and only $86,000 in revenues has been generated
year-to-date from the Osteopatch(TM) product. Consequently, the Company is a
development stage enterprise.

2.       Summary of Significant Accounting Policies

Technology

In connection with the acquisition of an exclusive worldwide license for the use
of a transdermal sweat collection device from Sudormed, Inc. ("Sudormed") for
all applications of such skin patch technology, except for those relating to
alcohol and drugs of abuse, the Company had agreed to pay Sudormed approximately
$3 million over a twenty-month period, of which approximately $928,000 was paid
through March 31, 1999. The remaining payments, including a lump-sum payment of
$1.6 million, which was originally due on December 31, 1998 were deferred by
agreement until March 31, 1999. The Company was unable to make the required
payment when due and on May 12, 1999 received a formal notice of termination of
the Sudormed License Agreement. Prior to May 12, 1999, Sudormed had surrendered
essentially all of its assets to The Minnesota Mining and Manufacturing Company
("3M") as a party in possession of secured property. The Company is currently
negotiating with 3M to reinstate the license rights or enter into another
arrangement directly with 3M. Accordingly, the license from Sudormed is not in
effect as of 

                                       8
<PAGE>

the date of this Report (see Note 5). However, the license agreement does permit
the Company to use inventory in its possession in the event of termination.
There can be no assurance that the Company will be able to successfully
negotiate with 3M on terms acceptable to the Company, in which case the Company
would have to abandon all development and commercialization efforts related to
the Osteopatch(Trademark) product. As a result of the foregoing, the Company has
writen-off the remaining balance of the Sudormed license (see Note 3). The
Company also owns a fully paid license to the assay technology used with the
Osteopatch(Trademark) product in addition to certain trademarks and other
proprietary information.

The SalivaSac(Registered), a saliva collection and processing device, is a
proprietary patented product of the Company. There are no current financial or
other obligations related to SalivaSac.

Risks and Uncertainties

The Company's products require approvals from the U.S. Food and Drug
Administration (FDA) and may require approval from international regulatory
agencies prior to commercialization. There can be no assurance that the
Company's products will receive any of the required approvals. If the Company
does not receive such approvals, such actions would have a material adverse
effect on the Company. Further as a result of the termination of the Sudormed
license, the Company cannot proceed with the commercialization of the
Osteopatch(Trademark).

The Company's financial position also creates risks and uncertainties as
discussed below in Note 3.

3.  Going Concern

The Company has experienced recurring losses from operations and cash flow
shortages, and has deficiencies in working capital and stockholders' equity.
Also, the Company has significant amounts of currently due debt. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described below. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis.

Management has taken the following steps to revise its operating and financial
requirements, which it believes are necessary to provide the Company with the
ability to continue in 

                                       9
<PAGE>

existence. These steps include significant reductions in expenses and staffing,
delay of research and development projects, renegotiations of certain
contractual commitments and engagement of firms to raise capital.

The Company's ability to satisfy operating requirements are entirely dependent
on the monthly revenues generated by the laboratory and the Company is unable to
predict if such revenues will be adequate to sustain operations. The Company is
also actively working to raise additional funds through bridge financing, equity
sales, debt arrangements and product licensing agreements to alleviate the
current liquidity problems. Failure to do so could have a material adverse
effect on the Company and its ability to continue to operate as currently
contemplated. See Management Discussion and Analysis of Financial Condition and
Results of Operations.

4.  Earnings Per Share

As the Company had a net loss from continuing operations for the periods ended
March 31, 1999, and 1998 and for the period from inception to March 31, 1999,
basic and diluted net loss per share are the same.

Net loss applicable to common stockholders includes $62,000 and $186,000 in
cumulative dividends on the convertible preferred stock for the three and
nine-month periods ended March 31, 1999. The Company has not yet fully paid the
quarterly dividends due on January 1, 1999 and on March 31, 1999. The Company
intends to make these payments provided additional funding can be arranged.. The
imputed dividends shown in the Period from Inception and the nine month period
ending 3/31/98 are non-cash; one-time charges based on the immediate conversion
feature. Basic and diluted net loss per common share for the Period from
Inception and the nine month periods ended March 31, 1999 and 1998 were
calculated as follows:

<TABLE>
<CAPTION>
                                                       Nine Month   Nine Month    For the Period
                                                     Period Ended  Period Ended   from Inception
                                                        3/31/1999    3/31/1998     To 3/31/1999
                                                    -------------- ------------   --------------
<S>                                                 <C>            <C>            <C>
Net Loss                                            $(5,088,014)   $(2,879,455)   $ (21,434,461)
Preferred Stock cumulative dividend                    (186,000)       (16,444)        (256,093)
Imputed dividend on Preferred
   Stock issued                                               0     (1,937,500)      (1,937,500)
                                                    -----------    -----------    -------------
Net Loss applicable to
    Common stockholders                             $(5,274,014)   $(4,833,399)   $ (23,628,054)
                                                    ===========    ===========    =============

Basic and diluted net loss per share                $     (1.42)   $     (1.30)   $      (12.86)
                                                    ===========    ===========    =============

Weighted average shares
  outstanding                                         3,710,038      3,707,188        1,911,321
                                                    ===========    ===========    =============
</TABLE>

                                       10
<PAGE>

5.  Commitments and Contingencies

Legal Proceedings

On September 24, 1997, the Company received from the former manufacturer of
SPINPRO(Registered) a demand for arbitration in connection with alleged breaches
of the contract relating to the manufacture of SPINPRO(Registered). The former
manufacturer is seeking damages of approximately $515,000. The Company does not
believe that the claims have any merit and believes that the ultimate outcome of
this proceeding will not have a material impact on the Company. The Company is
contesting such claims and has filed counterclaims against the former
manufacturer. At this time, an arbitration hearing has not been scheduled.

The Company has also filed for arbitration against a former vendor relating to
SPINPRO(Registered), seeking damages for alleged breach of contract with respect
to the manufacture of molds for SPINPRO(Registered) parts. Arbitration for this
case has been scheduled for July 1999.

The landlord of the California property is proceeding with the legal process of
canceling the lease, holding the Company responsible for contractual costs, and
may require the Company to vacate the premises. The Company believes the
landlord will commence this process imminently.

6.  Impairment of Long-Lived Assets

Based on the formal notification of termination of the Sudormed license received
on May 12, 1999, the Company has recorded an impairment loss for the net book
value of the asset of $2,078,100. In addition, since the related liability has
not been paid. Such liability remains on the balance sheet as a current
liability.

7.       Financing Arrangements

Operations after March 31, 1999 are being funded primarily by factoring accounts
receivables based on an Accounts Receivable Purchase Agreement established with
Silicon Valley Bank ("the Bank"). The terms of the loan permit the Company to
receive an 80% advance on receivables accepted by the Bank. The Company is
charged an administrative fee of .75% and an interest rate of 1.75% per month.
There is no balance due to the Bank at March 31, 1999.

                                       11
<PAGE>

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

The following discussion and analysis should be read in conjunction with the
preceding consolidated financial statements and notes in this Form 10-QSB and in
conjunction with the financial statements and notes thereto for the year ended
June 30, 1998 included in the Company's Annual Report on Form 10-KSB.

Overview

PBI was incorporated in Delaware in May 1996 in connection with the acquisition
of BioQuant and PBI-WA. On June 28, 1996, the Company completed the mergers
whereby BioQuant and PBI-WA became wholly owned subsidiaries of the Company.

The mission of PBI is to develop and commercialize non-invasive technologies for
use in medical diagnostics and laboratory services to improve the detection and
management of chronic diseases. The Company has developed two patented platform
technologies that permit the use of sweat and saliva as diagnostic fluids.
However, the license to one of these technologies has been terminated and the
Company is in the process of trying to raise capital to reacquire the license
and maintain current operations (see Products and Services).

Expenses consist, and are expected to continue to consist, primarily of
operating expenses necessary to continue the commercial laboratory operation
(the Company's only significant source of revenue) and administrative expenses.
Spending on research and development costs for products under development and
payment of license and royalty fees will be made only if adequate funding is
raised.

As of March 31, 1999, the Company had an accumulated deficit since inception of
$21,434,461. Of this amount $10.8 million relate to non-cash charges which
included one-time non-cash charges of $6.8 million incurred prior to fiscal
1997, a non cash charge for imputed dividends of $1.9 million in fiscal 1998 and
a non-cash charge of $2.1 million in the current quarter related to recording an
impairment loss for the net book value of the Sudormed license assets.

                                       12
<PAGE>

Results of Operations:

Comparison of the three and nine month periods ended March 31, 1999 and 1998:

<TABLE>
<CAPTION>
     Rounded to Nearest        Three       Nine                   Comments on increase or decrease from
      Thousand Dollars         Months     Months                       Fiscal 1998 to Fiscal 1999
----------------------------------------------------------------------------------------------------------------------
<S>                            <C>        <C>          <C>         
Revenues:

Ended 3/31/99                   $411      $1,048       Revenues for all quarters are primarily comprised of laboratory
Ended 3/31/98                   $558      $2,068       service revenues. Revenues were higher for the prior year
$ variance                     ($147)     ($1020)      periods due to work performed on a large contract that was not
% variance                      -26%        -49%       replaced.

Laboratory expenses and cost of sales:

Ended 3/31/99                   $328        $912       The decrease is related directly to the decline in revenues,
Ended 3/31/98                   $475      $1,602       partially offset by additions to capital equipment and
$ variance                     ($147)      ($690)      relocation into a new facility in fiscal 1998.
% variance                      -31%        -43%

Research and product development:

Ended 3/31/99                   $121        $873       The decrease in the three and nine month periods is due to
Ended 3/31/98                   $693      $1,705       curtailment of almost all R&D programs as a result of the
$ variance                     ($572)      ($832)      Company's financial condition. The lower costs in the
% variance                      -83%       -118%       nine-month periods are partially offset by the accrual of
                                                       severance costs.

Selling, general and administration expenses:

Ended 3/31/99                   $427      $1,541       The decrease in expenses results primarily from lower staff
Ended 3/31/98                   $597      $1,560       levels and reduced expenditures partially off set by increased
$ variance                     ($171)       ($19)      sales efforts for laboratory operations.
% variance                      -29%         -1%

Amortization of intangible assets:

Ended 3/31/99                   $200        $601       The increase in the nine-month numbers is due to the inclusion
Ended 3/31/98                   $214        $245       of non-cash amortization of the Sudormed license for all
$ variance                      ($14)       $356       three-quarters.
% variance                       -6%        145%

Total other income (expense):

Ended 3/31/99                   ($22)       ($130)     The additional net expense is due to an increase in interest
Ended 3/31/98                   $107         $165      expense and a decline in interest income.
$ variance                     ($129)       ($295)
% variance                      -121%        -179%

Net loss:

Ended 3/31/99                ($2,765)     ($5,088)     Write-off of $2,078,000 related to the Sudormed license,
Ended 3/31/98                ($1,315)     ($2,879)     decreased revenue and Sudormed license amortization during the
$ variance                   $(1,450)     ($2,209)     three and nine month periods is partially offset by the
% variance                       110%          77%     decreases in R&D and G&A expenses.
</TABLE>

                                       13
<PAGE>

Liquidity and Capital Resources:

Prior Financing Activities

The Registration Statement pertaining to the initial public offering ("IPO") of
the Company's securities was declared effective by the Securities and Exchange
Commission on October 29, 1996. Gross proceeds from the public offering were
approximately $8.1 million. The Company has used the net proceeds from the
offering (approximately $6.3 million) for product development activities
relating to the Osteopatch(Trademark), for funding the growth of its central
reference laboratory operations, for research on SalivaSac(Registered) potential
products, working capital, and approximately $1.2 million to repay debt.

On February 20, 1998, the Company consummated the sale of 925,000 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") with an
institutional investor for an aggregate purchase price of $1,850,000. In
addition, the Company granted such institutional investor an option (the
"Option") to purchase up to 625,000 shares of Preferred Stock until May 20, 1998
for an exercise price of $1,250,000. The Option was exercised in full during May
1998. The Company has not yet paid the quarterly dividends due on January 1,
1999 and March 31, 1999 which continue to accrue until paid. The Company intends
to make this payment provided additional funding can be arranged.

Operations

As of March 31, 1999 the Company had cash and cash equivalents of 153,355. In
addition, the Company's current liabilities exceeded its current assets. During
the quarter ended March 31, 1999, the Company's cash and cash equivalents
declined by approximately $240,000 from the prior quarter. This represents a
significant reduction from the average cash usage of over $1 million per quarter
for the past four quarters prior to September 30, 1998.

Although the Company has implemented cost reduction measures to minimize cash
expenditures, the Company's ability to satisfy operating requirements are
entirely dependent on the monthly revenues generated by the laboratory and the
Company is unable to predict if such revenues will be adequate to sustain
current or future operations. These cost reduction measures include: reducing
staffing from 50 employees in May 1998 to 18 employees as of May 1999, a
reduction in spending on outside consultants, deferral of approximately $248,000
in compensation, and suspension of current research and development activities
except for a 70 subject clinical trial focused on developing data to support the
use of the Company's SalivaSac(Registered) as a glucose screening device.

                                       14
<PAGE>

Revenues generated in March and April of 1999 for laboratory operations was
approximately $180,000 for each month. This represents a significant increase
over the nine-month average revenue of $116,000 a month. However, May and June
revenues are currently expected to be lower than the preceding nine-month
average.

With operating expenses exceeding $300,000 per month, without additional sources
of capital, the Company will not be able to sustain its current operations
beyond June 30, 1999 without taking more drastic measures, including, but not
limited to, sale of the laboratory or the Company's proprietary technology. In
the event the Company is not successful in raising additional capital in the
near term or selling significant assets, the Company may have no alternative
other than to seek protection from its creditors under the bankruptcy laws.

Operations during the nine months ended March 31, 1999 have been funded in part
by deferring approximately $248,000 in salaries, paying for services by issuing
100,500 shares of stock, extending the payment time on accounts payable,
arranging with certain capital equipment lenders to accept half payment for a
period of months, drawing down $30,000 from restricted cash with the permission
of the landlord of the Seattle facility, and borrowing $15,000 from the landlord
of the California facility, which loan is currently due and payable. The
landlord of the California property is proceeding with the legal process of
canceling the lease and may require the Company to vacate the premises. As a
result, the Company may have to move certain administrative functions and its
corporate headquarters to Seattle.

Operations after March 31, 1999 are being funded primarily by factoring accounts
receivables based on an Accounts Receivable Purchase Agreement established with
Silicon Valley Bank ("the Bank") to accelerate the Company's working capital
turnaround. The terms of the loan permit the Company to receive an 80% advance
on receivables accepted by the Bank. The Company is charged an administrative
fee of .75% and an interest rate of 1.75% per month. The maximum loan amount is
$400,000. The Bank has taken a security interest covering all the Company's
assets, other than secured equipment.

Products and Services

In connection with the acquisition of an exclusive worldwide license for the use
of a transdermal sweat collection device from Sudormed, Inc. ("Sudormed") for
all applications of such skin patch technology, except for those relating to
alcohol and drugs of abuse, the Company had agreed to pay Sudormed approximately
$3 million over a twenty-month period, of which approximately $928,000 was paid
through March 31, 1999. The remaining payments, including a lump-sum payment of
$1.6 million, which was originally due on December 31, 1998 were deferred by
agreement until March 31, 1999. The Company was unable to make the required
payment when due and on May 12, 1999 received a formal notice of termination of
the Sudormed License Agreement. Prior to May 12, 1999, Sudormed had surrendered
essentially all of its assets to The Minnesota Mining and 


                                       15
<PAGE>

Manufacturing Company ("3M") as a party in possession of secured property. The
Company is currently negotiating with 3M to reinstate the license rights or
enter into another arrangement directly with 3M. Accordingly, the license from
Sudormed is not in effect as of the date of this Report. However, the license
agreement does permit the Company to use inventory in its possession in the
event of termination. There can be no assurance that the Company will be able to
successfully negotiate with 3M on terms acceptable to the Company, in which case
the Company would have to abandon all development and commercialization efforts
related to the Osteopatch(Trademark) product. As a result of the foregoing, the
Company has writen-off the remaining balance of the Sudormed license. The
Company also owns a fully paid license to the assay technology used with the
Osteopatch(TM) product in addition to certain trademarks and other proprietary
information.

The SalivaSac(Registered), a saliva collection and processing device, is a
proprietary patented product of the Company. There are no current financial or
other obligations related to SalivaSac.

In December 1997, the Company entered into the ActiMed Agreement, which provided
the Company with exclusive worldwide rights to ActiMed's patented analyte
detection technology in the field of saliva glucose testing. In conjunction with
the ActiMed Agreement, the Company had entered into a development program with
ActiMed, which the Company was required to fund based on a mutually agreed upon
budget. As part of the Company's cost reduction measures, the Company has ceased
funding of the development program. ActiMed has notified the Company of the
cancellation of the ActiMed Agreement as of February 18, 1999. Although the
Company would like to continue this development project once additional funding
has been arranged, there can be no assurance that the Company will be able to
resurrect this relationship, in which case the Company would have to establish a
similar relationship with another entity with similar technology, which in turn
would delay development of the Company's saliva glucose products during the
period in which the Company sought such a replacement. There can be no assurance
that such replacement could be identified or that the terms of any arrangement
would be acceptable to the Company.

On September 8, 1998, the Company announced it is seeking development partners
for new applications and marketing partners for existing products and products
under development utilizing its proprietary non-invasive collection
technologies, the SweatPatch(Trademark) and the SalivaSac(Registered). Several
firms with resources much greater than the Company's have expressed interest in
the Company's technology but at this time no formal arrangements are being
negotiated.

On September 8, 1998, the Company also announced that Segix Italia S. p. A.
("Segix") exercised its option to enter into an exclusive ten year license,
supply and distribution agreement with the Company for the distribution of the
Osteopatch(Trademark) system in Italy. This agreement was finalized after the
successful market and technical evaluation of the Osteopatch(Trademark) system
in Italy during the past year. Segix launched the Osteopatch(Trademark) system

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<PAGE>

in Italy in April of 1999. With the Company's current loss of its rights under
the Sudormed license agreement (see "Future Operations" below), Sudormed, or 3M
as a secured party in possession of Sudormed's assets, would have the option (if
Segix's agrees) to continue to license the patch technology to Segix directly.
However, Segix (or any other licensee of Sudormed's technology) in order to use
the Osteopatch(Trademark) would still require the Company's Pyridinoline and/or
Deoxypyridinoline Assay Kit, which is covered by a fully paid exclusive license
with Metra Biosystems, Inc. Development of a separate assay would take
considerable time and expense. Segix placed their first significant order of
approximately $124,000 in January of 1999. The Company will continue to use
current inventory to fulfill Segix's orders. However, such inventory will not
last beyond eighteen months. Failure to fulfill Segix's requirements, due to the
loss of the Sudormed License or otherwise, could result in Segix's cancellation
of the Distribution Agreement.

In February 1998 the Company completed the initial clinical trials for the
Osteopatch(Trademark), for the collection and analysis of bone resorption, an
indicator of fracture risk and filed a 510(k) premarket notification with the
U.S. Food and Drug Administration (FDA). While the Company was encouraged by the
results of the clinical trials, the FDA will require additional information
before this product can be approved as a collection and analytical device for
bone resorption markers. If the Company is able to reacquire the Sudormed
license rights and if the Company is able to raise adequate funding, the Company
will continue to seek out other opportunities in Europe where the Company has
the CE mark approval and to work with the FDA to determine which additional
studies and information will be required to support the approval process. Given
the novelty of sweat as a diagnostic fluid today, the Company believes this
product application, if approved, will establish a precedent for future
applications of the SweatPatch(Trademark) technology and therefore will require
a more detailed review on the part of the FDA than originally anticipated.

The additional studies required for resubmission to the FDA will not begin until
after license rights have been reacquired, appropriate funding has been raised
by the Company and the clinical trial design has been reviewed with the FDA. The
Company estimates that reaquiring the license rights to the patch technology
will cost at least $1.6 million and completion of clinical studies and
resubmission to the FDA will cost approximately $2.4 million. If the Company
commences these trials, it is expected it will take at least nine to twelve
months before the Company can resubmit its application to the FDA. Based on
current capital requirements and current license status, without an immediate
infusion of capital, the Company will not be able to commence such trials.
Further, even if commenced, there can be no assurance that the Company will have
sufficient resources to complete such trials or that the FDA will not require
further studies so as to delay the Company's application, or that the FDA will
ultimately approve the Company's products.

                                       17
<PAGE>

Future Operations

If the Company is unable to reaquire the Sudormed license or raise funding
adequate to pay or finance such reaquisition, it will abandon the
Osteopatch(Trademark) product and all research and development efforts relating
to the SweatPatch(Trademark) technology. The Company would then focus on the
operation of the laboratory and development or sale of the SalivaSac(Registered)
technology.

The Company is working to raise approximately $4 million in debt or equity
financings. This would permit the Company to reacquire the Sudormed license and
continue with the Company's plans to develop and license non-invasive diagnostic
products using both the SweatPatch(Trademark) and SalivaSac(Registered)
technologies and build the laboratory service business. If the Company is
unsuccessful in these efforts, the Company will likely not be able to reacquire
the SweatPatch(Trademark) license and will focus its efforts on the laboratory
service business and SalivaSac(Registered) licensing opportunities to fund its
operations.

Even if the Company is absolved of its payment obligations under the Sudormed
license, current liabilities would still exceed current assets. Laboratory
service revenues would have to be increased and/or expenses would have to be
reduced in order to achieve self-sufficiency without additional funding.
Therefore, without additional outside funding the Company will not be able to
meet its operating expense requirements beyond mid-June 1999.

The Company is actively working to raise the funds mentioned above and
additional funds to cover longer-term requirements for product research and
development and laboratory operations. In addition, the Company is contemplating
sale of technology rights and assets to meet current and longer-term financial
requirements. However, there can be no assurance that the Company's efforts will
be successful or that it will be able to avoid seeking protection from its
creditors under the bankrupcy laws.

In August 1998, the Company announced that it had retained R&R Capital Group to
assist in raising capital. The Company has terminated its relationship with R&R
Capital Group and is currently working with other groups to raise capital. There
can be no assurance that such external sources of funding will be available on
terms acceptable to the Company, in which event, the Company will be required to
eliminate its research and development programs, including but not limited to
the development of the Osteopatch(Trademark) and other products involving the
SweatPatch(Trademark) and the SalivaSac(Registered) technologies. Alternatively,
the Company may obtain funds through entering into arrangements with
collaborative partners or others that may require the Company to relinquish
rights, which may be substantial, to certain of its technologies or potential
products that the Company would not otherwise relinquish. Outside funding, if
available, will probably involve substantial dilution to existing stockholders
or changes in stockholder rights in order to raise the necessary additional
funds.

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<PAGE>

On March 29, 1999 the Nasdaq Stock Market delisted the Company's securities. The
Company did not comply with the net tangible assets maintenance criteria for
continued listing of the Company's securities on the Nasdaq SmallCap Market and
was not in compliance with the $1.00 minimum bid requirement with respect to its
common stock. Trading, if any, in the Company's securities may now continue to
be conducted on the OTC Electronic Bulletin Board or in the non-Nasdaq
over-the-counter market. As a result, an investor may find it more difficult to
purchase, sell, or to obtain accurate quotations as to the market value of, the
Company's securities and it could become more difficult for the Company to raise
capital.

Future Operations - Year 2000

As a supplier of laboratory services, readiness for the Year 2000 is critical to
our customers. The Company's Year 2000 Compliance Team is working to ensure that
all our systems are compliant in advance of the turn of the century. We have
been addressing Year 2000 compliance since the latter part of calendar year
1997.

Our basic systems: hardware platform and network operating system is compliant
as per their manufacturers. Our accounting system is warranted by the
manufacturer as compliant. Our database engine for our Laboratory Information
System (LIS) and Proficiency Testing (PT) System is compliant per its
manufacturer.

Our programmers have analyzed our LIS and PT application software and we have
found no compliance issues. For added assurance, end-user functional testing is
in progress. This is being performed on a mirror duplicate system that can be
advanced to the year 2000 and beyond. The main cost involved in our Year 2000
compliance is the time and effort of our programming and support staff.

We are in the midst of the final part of our plan which includes obtaining Year
2000 compliance status from our vendors (reagent suppliers, instrument
manufacturers, shipping companies, etc) and developing contingency plans in the
event any problems arise (i.e. alternate suppliers/shippers).

In summary, the Company has examined its internal systems, finding no
significant compliance issues. We are presently addressing the problem of a
potential "ripple effect", that is, how Year 2000 problems with external
systems/suppliers may affect us and our ability to deliver our services.

While the Company believes its planning efforts are adequate to address its Year
2000 concerns, there can be no assurance that the systems and products of other
companies on which the Company's operations rely and interact with will be
compliant and will not have a material adverse effect on the Company's results
of operations.

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<PAGE>

PART II  - OTHER INFORMATION

ITEM 1 - Legal Proceedings

The Company is not a party to any material legal proceedings. However, on
September 24, 1997 the Company received from the former manufacturer of
SPINPRO(Registered) a demand for arbitration in connection with alleged breaches
of the contract relating to the manufacture of SPINPRO(Registered). The former
manufacturer is seeking damages of approximately $515,000. The Company does not
believe that the claims have any merit and believes that the ultimate outcome of
this proceeding will not have a material impact on the Company. The Company is
contesting such claims and has filed counterclaims against the former
manufacturer. At this time, an arbitration hearing has not been scheduled.

The Company has also filed for arbitration against a former vendor relating to
SPINPRO(Registered), seeking damages for alleged breach of contract with respect
to the manufacture of molds for SPINPRO(Registered) parts. Arbitration for this
case has been scheduled for July 1999.

The landlord of the California property is proceeding with the legal process of
canceling the lease, holding the Company responsible for contractual costs, and
may require the Company to vacate the premises. The Company believes the
landlord will commence this process imminently.

ITEM 2 - Changes in Securities and Use of Proceeds - Not applicable.

ITEM 3 - Defaults upon Senior Securities

The Company has not yet fully paid the quarterly dividends due on January 1,
1999 and on March 31, 1999 with respect to its outstanding Preferred Stock.
Accrued dividends on the Preferred Stock amount to approximately $45,000. The
Company intends to make these payments provided additional funding can be
arranged.

Based on the formal notification of termination of the Sudormed License received
on May 12, 1999, the Company has recorded an impairment loss for the net book
value of the asset of $2,078,100. In addition, since the related liability has
not been paid, such liability remains on the balance sheet as a current
liability.

ITEM 4 - Submission of Matters to a Vote of Security Holders - Not Applicable.

ITEM 5 - Other Information - Not Applicable.

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<PAGE>

ITEM 6 - Exhibits and Reports on Form 8-K

   (a)   (27.1)   Financial Data Schedule.

   (b)   On April 13, 1999, the Company filed a Current Report on Form
         8-K with respect to the notification of Nasdaq's action to
         delist the Company's Common Stock.

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:    May 20, 1999

Pacific Biometrics, Inc.

By:    \s\ Paul G. Kanan            President and Chief Executive Officer
--------------------------------
         Paul G. Kanan                  

By:    \s\ Peter B. Ludlum          Vice President and Chief Financial Officer
--------------------------------    (Principal Financial and Accounting Officer)
         Peter B. Ludlum            

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