<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 September 30, 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.)


               23120 Alicia Parkway #200, Mission Viejo, CA 92692
--------------------------------------------------------------------------------
                    (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 ( ) No (X)
Registrant has failed to timely file periodic reports on Form 10-QSB for the
period ended September 30, 1999, December 31, 1999 and March 31, 2000 and Form
10-KSB for the period ended June 30, 2000.

As of September 7, 2000 there were outstanding 3,810,171 shares of common stock.

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


                                       1
<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 ...........................   5

Notes to Consolidated Financial Statements ................................   6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF
         OPERATIONS .......................................................  10

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS ................................................  17

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ........................  18

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ..................................  18

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
         SECURITY HOLDERS .................................................  18

ITEM 5 - OTHER INFORMATION ................................................  18

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K .................................  18


                            PACIFIC BIOMETRICS, INC.

                                       2
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)
                           CONSOLIDATED BALANCE SHEET
                               September 30, 1999
                                   (unaudited)

                                     ASSETS

Current assets:
    Cash and cash equivalents                                      $    104,555
    Accounts receivable, net of allowance for doubtful
        accounts of $40,000                                             167,570
    Prepaid expenses and other                                           37,167
                                                                   ------------
        Total current assets                                            309,292

Property and equipment, net                                             422,826

Other assets:
    Restricted cash                                                      65,944
    Deposit and other                                                     1,750
                                                                   ------------
        Total assets                                               $    799,812
                                                                   ============


                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Notes payable to bank                                          $     51,232
    Notes payable to related parties                                    498,081
    Notes payable other                                                  16,218
    Accounts payable                                                    621,729
    Accrued liabilities                                                 537,610
    Dividends payable                                                   227,828
    Deferred compensation                                               102,834
    Advances from customers                                             158,596
    Technology licenses payable                                       2,244,040
    Capital lease obligations                                           367,122
                                                                   ------------
        Total current liabilities                                     4,825,290
                                                                   ------------

    Capital lease obligations - long term portion                        99,886
                                                                   ------------
        Total long term liabilities                                      99,886
                                                                   ------------

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                          13,618,624
    Additional paid-in capital Preferred Stock                        5,000,966
    Deficit accumulated during the development stage                (22,798,556)
                                                                   ------------
        Total stockholders' deficit                                  (4,125,364)
                                                                   ------------
        Total liabilities and stockholders' deficit                $    799,812
                                                                   ============


              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 September 30, 1999 and 1998
     And for the period from Inception (December 1992) to September 30, 1999

                                   (unaudited)

<TABLE>
<CAPTION>

                                                                                                      For the Period
                                                           Three Month Period Ended September 30      from Inception
                                                           -------------------------------------    (December 1992) to
                                                              1999                       1998       September 30, 1999
                                                           -----------               -----------    ------------------

<S>                                                        <C>                       <C>                  <C>
Revenues                                                   $   242,930               $   306,954          $  9,269,781
                                                           -----------               -----------          ------------

Operating expenses:
    Laboratory expense and cost of goods sold                  208,696                   316,948             7,115,162
    Research and product development                            23,151                   509,841             5,659,696
    Selling, general and administrative                        349,013                   579,389             8,831,908
    Purchased in-process research and development                    0                         0             6,373,884
    Amortization of intangible assets                                0                   200,452             1,616,565
                                                           -----------               -----------          ------------

       Total operating expenses                                580,860                 1,606,630            29,597,215
                                                           -----------               -----------          ------------

Operating loss                                                (337,930)               (1,299,676)          (20,327,434)
                                                           -----------               -----------          ------------

Other income (expense):
    Interest expense                                           (54,497)                  (69,859)             (670,830)
    Interest income                                                512                    12,201               317,794
    Write-off of intangible assets                                   0                         0            (2,078,100)
    Grant and other income                                       8,840                       965               (39,986)
                                                           -----------               -----------          ------------
                                                               (45,145)                  (56,693)           (2,471,122)
                                                           -----------               -----------          ------------

Net loss                                                   $  (383,075)              $(1,356,369)         $(22,798,556)
                                                           ===========               ===========          ============


Preferred stock dividend paid or accrued                       (62,000)                  (62,000)
                                                           -----------               -----------

Net loss applicable to common stockholders                 $  (445,075)              $(1,418,369)
                                                           ===========               ===========

Basic and diluted loss per share                           $     (0.12)              $     (0.38)
                                                           ===========               ===========

Weighted average shares outstanding -
  basic and diluted                                          3,810,171                 3,709,671
                                                           ===========               ===========
</TABLE>


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


                                       4
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (a company in the development stage)
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         For the Three Month Periods Ended September 30, 1999 and 1998
     And for the period from Inception (December 1992) to September 30, 1999
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                 For the Period
                                                          Three Month Period September 30        from Inception
                                                          -------------------------------        (December 1992)
                                                             1999                1998         to September 30, 1999
                                                          ----------          -----------     ---------------------
<S>                                                         <C>               <C>                   <C>
   Cash (used in) provided by operations                    $ 41,268          $(1,117,976)          $(9,573,370)

   Cash (used in) provided by investing activities             9,419              (35,493)             (224,541)

   Cash (used in) provided by financing activities            17,490             (147,891)            9,902,466
                                                            --------          -----------           -----------

Increase (decrease) in cash and cash equivalents              68,177           (1,301,360)              104,555

Cash and cash equivalents:

Beginning of period                                           36,377            2,244,056                     0
                                                            --------          -----------           -----------

End of period                                               $104,555          $   942,696           $   104,555
                                                            ========          ===========           ===========
</TABLE>


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


                                       5
<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization and Basis of Presentation

Pacific Biometrics, Inc. ("PBI" or the "Company") is an early stage company
engaged in the development and commercialization of non-invasive 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. The Company also operates a specialty
reference laboratory, which supports the development and commercialization
process for PBI as well as other diagnostic and pharmaceutical manufacturers.

The Company was incorporated in Delaware in May 1996. The Company conducts its
business through its wholly owned subsidiaries, Pacific Biometrics, Inc., a
Washington corporation ("PBI-WA") and BioQuant, Inc., a Michigan corporation
("BioQuant"). On June 28, 1996, the Company completed the mergers (the
"Mergers") whereby BioQuant and PBI-WA became wholly owned subsidiaries of the
Company in separate stock-for-stock exchange transactions.

Except for the revenues from laboratory services, nominal revenues have been
generated from the Company's products. Consequently, the Company is a
development stage enterprise.

All material intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.

2.   Summary of Significant Accounting Policies

Technology

The Company had an exclusive worldwide license for the use of a transdermal
perspiration collection device for all medical diagnostic applications of
Sudormed's skin patch technology. In addition, the license allowed for the
development of all other potential applications of such technology, except for
those relating to alcohol and drugs of abuse. This new license agreement
replaced the Company's previous license agreement with Sudormed for the skin
patch technology, which was for the single application of measuring bone loss
markers in sweat, which is the basis for the Company's OsteoPatch(TM) system.


                                       6
<PAGE>

In exchange for the rights described above, the Company had agreed to pay
Sudormed approximately $3 million over a fifteen month period plus an ongoing
royalty payment based on the amount of sales of products developed under this
license. Such payments included a lump-sum payment of $1.6 million due in
December 1998. The Company is in default on this obligation (see Note 6).

The Company has licensed exclusive rights, related to bone resorption in human
perspiration, to use patented anti-pyridinium crosslinks antibody technology
(this is an exclusive worldwide license excluding Japan). Licensing fees to this
antibody technology have been fully amortized.

The Company also owns a fully paid license to the assay technology used with the
Osteopatch(TM) product. The SalivaSac(R) is a proprietary patented product of
the Company.

Risks and Uncertainties

The Company's products require approvals from the Food and Drug Administration
(FDA) and international regulatory agencies prior to commercialized sales. The
company failed to receive FDA approval for the Osteopatch(TM) product, has
ceased product development, has defaulted on the Sudormed agreement, and is
under contract to sell the laboratory business, the only source of revenue, and
has been delisted from Nasdaq SmallCap.

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 reported deficiencies in working capital and stockholders'
equity. Also the Company has significant amounts of debt past due. These matters
raise substantial doubt about the Company's ability to continue as a going
concern.

Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence. These steps include significant reductions in
expenses and staffing, suspension of research and development projects,
renegotiations of contractual commitments and a proposed sale of the Company's
laboratory (see Note 6).

Even if the Company is able to sell the laboratory operations, the Company will
still have various debts and claims that need to be settled. The Company will
attempt to settle these debts with cash, stock, and technology assets. There can
be no assurance that the Company


                                       7
<PAGE>

will be successful in these negotiations and may have to seek protection from
creditors under the bankruptcy laws.

4.   Earnings Per Share

As the Company had a net loss from continuing operations for the period ended
September 30, 1999 and 1998 basic and diluted net loss per share are the same.

Net loss applicable to common stockholders includes $62,000 in cumulative
dividends on the convertible preferred stock for the period ended September 30,
1999 and 1998.

Basic and diluted net loss per common share for the period ended September 30,
1999 and 1998 were calculated as follows:

                                                   Three Month      Three Month
                                                  Period Ended     Period Ended
                                                     9/30/1999        9/30/1998
                                                 ------------------------------

Net Loss                                           $  (383,075)     $(1,356,369)
Preferred Stock cumulative dividend                    (62,000)         (62,000)
                                                   -----------      -----------

Net Loss available to Common stockholders          $  (445,075)     $(1,418,369)
                                                   ===========      ===========

Basic and diluted net loss per share               $     (0.12)     $     (0.38)
                                                   ===========      ===========

Weighted average shares outstanding -
    basic and diluted                                3,810,171        3,709,671
                                                   ===========      ===========


5.   Commitments and Contingencies

Legal Proceedings

On September 24, 1997 the Company received from the former manufacturer of
SPINPRO(R) a demand for arbitration in connection with alleged breaches of the
contract relating to the manufacture of SPINPRO(R). 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 vigorously
contesting such claims and has filed counterclaims against the former
manufacturer. The Company has also filed for arbitration against a former vendor
relating to SPINPRO(R), seeking damages for alleged breach of contract with
respect to the manufacture of molds for SPINPRO(R) parts.

The landlord of the Company's previous office and laboratory space in Lake
Forest, California was proceeding against the Company to cancel the lease. The
landlord has


                                       8
<PAGE>

obtained a judgment against the Company from Orange County Superior
Court for approximately $150,000 related to the default on the lease. In
addition, liabilities continue to accrue at about $13,000 per month until the
space is leased. The total liability to the Company is estimated to be
approximately $350,000. The Company has been advised by Saigene Corporation
("Saigene"), the proposed purchaser of the Company's laboratory, that Saigene
has purchased from the landlord of the Lake Forest property, for the sum of
$350,000, the rights to all claims and judgments rendered against the Company
related to its default on the Lake Forest lease, subject to the sale of the
Company's laboratory assets to Saigene. However, it is unclear whether or not
Saigene may re-assign such rights to the landlord if the sale of the laboratory
assets to Saigene is not completed. In any event, Saigene, under the terms of
the First Amendment (see Note 6), has agreed that Saigene will be responsible
for satisfaction of such judgment and, therefore, the Company believes it would
be entitled to seek recovery from Saigene for any costs or liabilities as a
result of Saigene's failure to satisfy such claim.


6.   Subsequent Events

In May 2000, 3M notified the Company that, in its capacity as a secured party in
possession of the Sudormed assets, it demands payment in full of the $1.6
million plus accrued interest and fees due owing under the License Agreement
between the Company and Sudormed. 3M is seeking to settle this claim or seek a
judgment in a court of law and has objected to the laboratory sale transaction
that is proceeding with Saigene. The Company disputes 3M's claim and intends to
defend itself in this matter. If 3M should be successful in blocking the
proposed sale of the laboratory, or commences a legal action against the
Company, the Company may have no alternative than to seek protection from
creditors under the bankruptcy laws.

As previously reported, the Company executed an Agreement of Purchase and Sale
of Assets dated April 18, 2000 and a First Amendment to Agreement of Purchase
and Sale of Assets dated June 22, 2000 (together, the "Purchase Agreement") with
Saigene. The Purchase Agreement, which is subject to stockholder approval, will
transfer the business and all assets of the Company's Seattle laboratory
operation to Saigene for a total consideration of $4,000,000. Saigene has failed
to satisfy certain conditions relating to payments as required and is in default
on the Purchase Agreement. Saigene has requested a further extension to January
20, 2001 to complete the Purchase Agreement and the Company and Saigene signed a
Second Amendment to Agreement of Purchase and Sale of Assets, dated August 4,
2000 (the "Second Amendment").

In exchange for this extension, Saigene has agreed to the following additional
terms. Saigene paid the Company $75,000 on July 19, 2000 as part of the purchase
price. Saigene will pay $20,000 on each of August 28th, September 20th, October
20th, November 20th and December 20, 2000. One half of each $20,000 payment will
be credited toward the purchase price and one-half of each payment will be
consideration paid for the additional time extension. Payments toward the
purchase price will be credited against the escrow


                                       9
<PAGE>

payment required at the time of closing. All payments made according to the
Second Amendment will be forfeited by Saigene if they fail to make any of the
required payments, including the closing payments. Saigene and the Company have
further agreed that Saigene may extend the January 20, 2001 Closing Date on a
month-by-month basis by increasing the monthly payments to $30,000 beginning
January 20, 2001. One-half of each payment would be credited to the purchase
price and one-half of each payment would be consideration for the additional
time extension. The Company has the right to terminate the Purchase Agreement at
the end of any extension period by giving 20 days prior written notice.

There can be no assurance that Saigene will be able to complete the Purchase
Agreement as amended or consummate the transactions contemplated therein.
Failure to complete this transaction would likely return operational control of
the laboratory to the Company. While the laboratory would have less debt as a
result of the Second Amendment, the Company will not be financially capable of
maintaining the laboratory operation and there can be no assurance that another
buyer could be found in a timely manner. This could force the Company to seek
protection from creditors under the bankruptcy laws.

Even upon completion of the transaction with Saigene, the Company will still
have various debts and claims that need to be settled. These include amounts
owed to various consultants, vendors and suppliers of the Company not related to
the Seattle laboratory operation (estimated to be between $250,000 and
$400,000); deferred pay to current and former employees (approximately
$700,000); and a potential liability of approximately $2.0 million related to
the OsteoPatch technology. The Company will attempt to settle these debts with
cash, stock, and technology assets. There can be no assurance that the Company
will be successful in these negotiations and may have to seek protection from
creditors under the bankruptcy laws. If the Company is successful in settling
the remaining debts, then the Company plans to pursue a merger with another
company as a means of providing some value to common stockholders. There can be
no assurance that the Company will be successful in finding and negotiating a
successful merger or that any such merger would create value for the
stockholders.


                     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, 1999 included in the Company's Annual Report on Form 10-KSB.

Overview

Pacific Biometrics, Inc. ("PBI" or the "Company") was incorporated in Delaware
in May 1996 in connection with the acquisition of BioQuant, Inc. ("BioQuant"), a
Michigan corporation, and Pacific Biometrics, Inc. ("PBI-WA"), a Washington
corporation. On June


                                       10
<PAGE>

28, 1996, the Company completed the mergers whereby BioQuant and PBI-WA became
wholly owned subsidiaries of the Company in separate stock-for-stock exchange
transactions.

The mission of PBI is to develop and commercialize non-invasive technologies for
use in non-invasive 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. PBI's intellectual property position in sweat and saliva based
collection technology is based on thirteen issued U.S. patents and four pending
U.S. patents with respect to the Company's SweatPatch (TM) and SalivaSac(R)
technology.

Expenses consist, and are expected to continue to consist, primarily of
operating expenses necessary to complete the sale of the Company's , and
thereafter, to settle claims of creditors and possibly identify a buyer or
merger candidate with respect to the remaining technology assets.

As of September 30, 1999, the Company had an accumulated deficit since inception
of $22,760,556 which included a one-time charge of $6,373,884 for the value of
purchased research and development expenses relating to the Company's merger
with BioQuant and a one-time charge of $428,368 relating to a prior merger
involving PBI-WA in 1995.

Results of Operations - Comparison of the three month periods ended September
30, 1999 and 1998:

------------------------------------
Rounded to Nearest          Three
 Thousand Dollars           Months
------------------------------------

Revenues:
------------------------------------
Ending 9/30/99             $   243      Revenues for both quarters are almost
------------------------------------    entirely comprised of laboratory service
Ending 9/30/98             $   307      revenue. Revenues were higher for the
------------------------------------    quarter ended 9/30/98 as a result of a
Dollar variance            $   (64)     higher volume of laboratory contracts.
------------------------------------
Percent variance               (21)%
------------------------------------


Laboratory expenses and cost of goods sold:
------------------------------------
Ending 9/30/99             $   209      The decrease is related directly to the
------------------------------------    lower level of laboratory service
Ending 9/30/98             $   317      revenues.
------------------------------------
Dollar variance            $  (108)
------------------------------------
Percent variance               (34)%
------------------------------------


Research and product development:
------------------------------------
Ending 9/30/99             $    23      The decrease is related to the Company's
------------------------------------    decrease in R&D activity due to lack of
Ending 9/30/98             $   510      financial resources.
------------------------------------
Dollar variance            $  (487)
------------------------------------
Percent variance               (95)%
------------------------------------


Selling, general and administration expenses:
------------------------------------
Ending 9/30/99             $   349      The decrease is due to reductions in
------------------------------------    staffing and activity due to the
Ending 9/30/98             $   579      Company's lack of financial resources.
------------------------------------
Dollar variance            $  (230)
------------------------------------
Percent variance               (40)%
------------------------------------


                                       11
<PAGE>

Amortization of intangible assets:
------------------------------------
Ending 9/30/99             $     0      The decrease is due to the write-off of
------------------------------------    the remainder of the Sudormed license in
Ending 9/30/98             $   200      fiscal 1999.
------------------------------------
Dollar variance            $  (200)
------------------------------------
Percent variance              (100)%
------------------------------------


Total other income (expense):
------------------------------------
Ending 9/30/99             $   (45)     The decrease in net expense in the
------------------------------------    quarter ended September 1999 was due
Ending 9/30/98             $   (57)     primarily to the inclusion of imputed
------------------------------------    interest on the Sudorm license
Dollar variance            $    12      obligation in September 1998, mitigated
------------------------------------    by interest expense from warrants issued
Percent variance               (12)%    to TransAmerica in conjunction with the
------------------------------------    Forbearance Agreement.


Net income (loss):
------------------------------------
Ending 9/30/99             $  (345)     The decreased net loss is due to lower
------------------------------------    research and development and selling,
Ending 9/30/98             $(1,356)     general and administrative costs,
------------------------------------    primarily due to reductions in staff and
Dollar variance            $ 1,011      activity levels in the Company's
------------------------------------    non-laboratory operations and a decrease
Percent variance               (75)%    in operating profit related to the
------------------------------------    laboratory operation.


                                       12
<PAGE>

Liquidity and Capital Resources:

Financing Activities

The Registration Statement pertaining to the initial public offering ("IPO") of
the Company was declared effective by the Securities and Exchange Commission on
October 29, 1996. Gross proceeds from the public offering were $8,075,000. The
Company has used the net proceeds from the offering (approximately $6.3 million)
for product development activities relating to the OsteoPatch(TM), for funding
the growth of its central reference laboratory operations, 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 an additional 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 Preferred Stock is convertible into shares of the Company's
Common Stock at the option of the holder at any time on a one-for-one basis,
subject to adjustment for stock splits, dividends and similar events. The
Preferred Stock provides for a cumulative cash dividend payable quarterly in
arrears at an annual rate of 8%. The Company has the right to force conversion
of the Preferred Stock in the event the price per share of the Common Stock is
$8.00 or more for twenty consecutive trading days. The Company has agreed to use
commercially reasonable efforts to effect the registration of the Common Stock
into which the Preferred Stock is convertible. To date, no such efforts have
been undertaken. The Company is not current on dividend payments and, as of
September 30, 1999 approximately $248,000 in dividends have accrued.

In April 1997, the Company entered into a capital equipment leasing facility
with Transamerica Business Credit Corporation to provide credit for equipment
purchases up to $1,500,000. The Company issued 51,429 warrants to Transamerica
as part of this agreement. The Company received gross proceeds of $376,808 under
the agreement during fiscal 1997 and received gross proceeds of $329,154 during
fiscal 1998. The Company is required to raise additional capital in order to
draw additional funding from this arrangement.

The Company has continued to negotiate forbearance agreements with Transamerica
Business Credit related to payments due on capital leases. In exchange for the
first forbearance agreement the 51,429 warrants were repriced to $0.50 per share
in March 1999. No discount was recorded for the value of the warrants because
the amount was not material.

In exchange for the most recent Forbearance Agreement, dated August 1999, the
Company has repriced warrants previously issued to Transamerica from $.50 per
share to $.09 per share, granted Transamerica additional warrants and granted
Transamerica a priority lien position on assets of the Company. This
Forebearance Agreement expired on September


                                       13
<PAGE>


30, 1999 and was extended again through December 31, 1999 in exchange for
150,508 additional warrants with an exercise price of $.09 per share. Although
the Forbearance Agreement has expired, Transamerica has not taken action to
collect the debt, which approximates $450,000. Most of this debt will be assumed
by Saigene upon sale of the laboratory. The expense associated with the warrant
re-pricings was not material. The Company recorded a discount of approximately
$38,000 in connection with issuance of the 150,508 warrants.

In April of 1999 the Company and its subsidiaries entered into a Accounts
Receivable Factoring Agreement (the "Factoring Agreement") with Silicon Valley
Bank (the "Bank"). The Company issued 93,024 warrants to the Bank as part of
this agreement. The Company has been factoring the majority of the accounts
receivable from laboratory operations to provide the Company with working
capital to meet laboratory operation obligations and to maintain minimal
corporate operations. Under the terms of this agreement, the Bank will advance
80% of accepted receivables and charge the Company an administrative fee of .75%
and an annualized rate of 21% on outstanding balances. Amounts outstanding as of
September 30, 1999 were $51,232.

Operations

As of September 30, 1999 the Company had cash and cash equivalents of $104,555.
In addition, the Company's current liabilities exceeded its current assets.
During the quarter ended September 30, 1999, the Company's cash and cash
equivalents increased by approximately $68,178 from the prior quarter.

Products and Services

In May 1998, the Company received a letter from the FDA in response to its
510(k) application for the OsteoPatch(TM) device notifying the Company that the
agency did not find the device to be substantially equivalent to the predicate
device, a urine test marketed by Metra Biosystems. Despite numerous discussions
and a meeting with the FDA in July 1998, the Company was unable to reverse the
agency's decision or negotiate requirements for additional data that were within
the Company's financial ability to perform. Due to lack of funds, the Company
ceased development activities on the OsteoPatch device in August 1998.

In December 1998, the Company failed to make a payment of $1.6 million to
Sudormed, the licensor of the patch technology relating to the SweatPatch and
OsteoPatch, resulting in a default under the License Agreement and the Supply
Agreement. Sudormed terminated the License Agreement in May, 1999 for failure to
make required payments. The Agreement permits the Company to retain full license
rights as long as the Company has inventory of patches. As of September 30, 1999
the Company had approximately 100,000 patches in inventory. All investments in
SweatPatch technology, including the OsteoPatch and inventory, were expensed in
March 1999.


                                       14
<PAGE>

In May 2000, the Company announced the signing of an Agreement of Purchase and
Sale of Assets with Saigene Corporation, a privately held company located in
Redmond, Washington. This Purchase Agreement, which is subject to stockholder
approval, will transfer the business and assets of the Company's Seattle
laboratory operation to Saigene for a total consideration of $4,000,000,
including cash, cash advances, notes to Preferred Stockholders, and assumption
of debt. In August 2000, the Company announced a further extension to the
closing date from August 15, 2000 to January 20, 2001.

The SalivaSac(R), developed by the Company, collects a non-invasive saliva
sample that the Company had hoped would be able to replace blood and urine
testing in various applications. The Company had been awarded two SBIR Phase I
grants to research this technology for non-invasive glucose monitoring. As a
result of this research the Company is using its SalivaSac(R) technology to
develop a screening product to detect diabetes in the general population and a
monitoring product to produce detailed quantitative measurements of glucose
levels to enable diabetics to monitor glucose levels throughout the day. While
previous attempts by others to correlate saliva glucose with blood glucose have
been unsuccessful, the Company has had encouraging preliminary results using the
SalivaSac(R) device, as it appears to exclude substances that interfere with
accurate glucose measurements. However, almost all development of the SalivaSac
has been suspended as of December, 1998 due to a lack of funding and without
additional funding the Company will not be able to successfully develop the
Saliva Sac for such use. In September, 1999 the Company received a SBIR Phase I
grant to research the use of the SalivaSac technology for the collection and
measurement of homocysteine, a newly discovered marker with potential
application for use as a risk factor in heart disease. It is not known at this
time if the grant research will be successful. Even if successful, the Company
does not have sufficient resources to develop a commercially feasible product.

Future Operating Results

As previously reported, the Company executed a Purchase Agreement with Saigene.
The Purchase Agreement, which is subject to stockholder approval, will transfer
the business and all assets of the Company's Seattle laboratory operation to
Saigene for a total consideration of $4,000,000. Saigene has failed to satisfy
certain conditions relating to payments as required and is in default on the
Purchase Agreement. Saigene has requested a further extension to January 20,
2001 to complete the Purchase Agreement and the Company and Saigene signed a
Second Amendment to Agreement of Purchase and Sale of Assets, dated August 4,
2000 (the "Second Amendment").

In exchange for this extension, Saigene has agreed to the following additional
terms. Saigene paid the Company $75,000 on July 19, 2000 as part of the purchase
price. Saigene will pay $20,000 on each of August 28th, September 20th, October
20th, November 20th and December 20, 2000. One half of each $20,000 payment will
be credited toward the purchase price and one-half of each payment will be
consideration paid for the additional time extension. Payments toward the
purchase price will be credited against the escrow payment required at the time
of closing. All payments made according to the Second


                                       15
<PAGE>

Amendment will be forfeited by Saigene if they fail to make any of the required
payments, including the closing payments. Saigene and the Company have further
agreed that Saigene may extend the January 20, 2001 Closing Date on a
month-by-month basis by increasing the monthly payments to $30,000 beginning
January 20, 2001. One-half of each payment would be credited to the purchase
price and one-half of each payment would be consideration for the additional
time extension. The Company has the right to terminate the Purchase Agreement at
the end of any extension period by giving 20 days prior written notice.

There can be no assurance that Saigene will be able to complete the Purchase
Agreement as amended or consummate the transactions contemplated therein.
Failure to complete this transaction would likely return operational control of
the laboratory to the Company. The landlord of the Company's previous office and
laboratory space in Lake Forest, California was proceeding against the Company
to cancel the lease. The landlord has obtained a judgment against the Company
from Orange County Superior Court for approximately $150,000 related to the
default on the lease. In addition, liabilities continue to accrue at about
$13,000 per month until the space is leased. The total liability to the Company
is estimated to be approximately $350,000. The Company has been advised by
Saigene Corporation ("Saigene"), the proposed purchaser of the Company's
laboratory, that Saigene has purchased from the landlord of the Lake Forest
property, for the sum of $350,000, the rights to all claims and judgments
rendered against the Company related to its default on the Lake Forest lease,
subject to the sale of the Company's laboratory assets to Saigene. However, it
is unclear whether or not Saigene may re-assign such rights to the landlord if
the sale of the laboratory assets to Saigene is not completed. In any event,
Saigene, under the terms of the First Amendment (see Note 6), has agreed that
Saigene will be responsible for satisfaction of such judgment and, therefore,
the Company believes it would be entitled to seek recovery from Saigene for any
costs or liabilities as a result of Saigene's failure to satisfy such claim.
While the laboratory would have less debt as a result of the Second Amendment,
the Company will not be financially capable of maintaining the laboratory
operation and there can be no assurance that another buyer could be found in a
timely manner. This could force the Company to seek protection from creditors
under the bankruptcy laws.

Even upon completion of the transaction with Saigene, the Company will still
have various debts and claims that need to be settled. These include amounts
owed to various consultants, vendors and suppliers of the Company not related to
the Seattle laboratory operation (estimated to be between $250,000 and
$400,000); deferred pay to current and former employees (approximately
$700,000); and a potential liability of approximately $2.0 million related to
the OsteoPatch technology (See below). The Company will attempt to settle these
debts with cash, stock, and technology assets. There can be no assurance that
the Company will be successful in these negotiations and may have to seek
protection from creditors under the bankruptcy laws. If the Company is
successful in settling the remaining debts, then the Company plans to pursue a
merger with another company as a means of providing some value to common
stockholders. There can be no assurance that the Company will be successful in
finding and negotiating a successful merger or that any such merger would create
value for the stockholders.


                                       16
<PAGE>

The Minnesota Mining and Manufacturing Company (3M), as a party in possession of
secured property, has not informed the Company of its plans for the Sudormed
assets. This includes the SkinPatch(TM) technology rights, which are part of the
Company's OsteoPatch(TM) product. The Company had sought to reestablish certain
rights to this technology in order to create additional value for the Company's
other intellectual property related to the OsteoPatch. Without an agreement with
3M, the Company's OsteoPatch assets may not have any value. The Company expensed
all of these assets in March 1999. In May 2000, 3M notified the Company that, in
its capacity as a secured party in possession of the Sudormed assets, it demands
payment in full of the $1.6 million plus accrued interest and fees due under the
License Agreement between the Company and Sudormed. The Company and 3M are
seeking to settle this claim. 3M has objected to the laboratory sale transaction
that is proceeding with Saigene. Although, the Company disputes 3M's claim, 3M
may seek to enforce its rights through legal process. The Company is not certain
of the impact of 3M's demand on the proposed transaction with Saigene or what
legal rights may be asserted by 3M to protect its claim. If 3M should be
successful in blocking the proposed sale of the laboratory, or commences a legal
action against the Company, the Company may have no alternative than to seek
protection from creditors under the bankruptcy laws.

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings

On September 24, 1997 the Company received from the former manufacturer of
SPINPRO(R) a demand for arbitration in connection with alleged breaches of the
contract relating to the manufacture of SPINPRO(R). 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 vigorously
contesting such claims and has filed counterclaims against the former
manufacturer. The Company has also filed for arbitration against a former vendor
relating to SPINPRO(R), seeking damages for alleged breach of contract with
respect to the manufacture of molds for SPINPRO(R) parts.

As previously reported, the landlord of the Company's office and laboratory
space in Lake Forest, California was proceeding against the Company to cancel
the lease. The landlord has obtained a judgment against the Company from Orange
County Superior Court for approximately $150,000 related to the default on the
lease. In addition, liabilities continue to accrue at about $13,000 per month
until the space is leased. The total liability to the Company is estimated to be
approximately $350,000. The Company has been advised by Saigene that Saigene has
purchased from the landlord of the Lake Forest property, for the sum of
$350,000, the rights to all claims and judgments rendered against the Company
related to its default on the Lake Forest lease, subject to the sale of the
Company's laboratory assets to Saigene. However, it is unclear whether or not
Saigene may re-assign such rights to the landlord if the sale of the laboratory
assets to Saigene is not completed. In any event, Saigene, under the terms of
the Amendment, has agreed that Saigene will be


                                       17
<PAGE>

responsible for satisfaction of such judgment and, therefore, the Company would
be entitled to seek recovery from Saigene for any costs or liabilities as a
result of Saigene's failure to satisfy such claim.

ITEM 2 - Changes in Securities and Use of Proceeds - See MD&A "Liquidity and
Capital Resources".

ITEM 3 - Defaults upon Senior Securities - Not Applicable.

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

ITEM 5 - Other Information - Not Applicable.

ITEM 6 - Exhibits and Reports on Form 8-K

         (a)    Exhibits:

         (27.1) Financial Data Schedule.

         (b)    The following current reports on Form 8-K were filed during and
subsequent to the quarter ended September 30, 1999:

                (i) Current Report on Form 8-K filed with the Commission on
August 31, 1999 under Item 5 disclosing letter of intent with Saigene.

                (ii) Current Report on Form 8-K filed with the Commission on
October 28, 1999 under Item 5 disclosing failure to file Form 10-KSB for the
fiscal year ended June 30, 1999 and certain other matters.

                (iii) Current Report on Form 8-K filed with the Commission on
May 15, 2000 under Item 5 disclosing failure to file Form 10-QSB for the periods
ended September 30, 1999, December 31, 1999 and March 31, 2000 and disclosing
the execution and terms of the Purchase Agreement with Saigene.

                (iv) Current Report on Form 8-K filed with the Commission on
June 26, 2000 under Item 5 disclosing an amendment to the Purchase Agreement
with Saigene.

                (v) Current Report on Form 8-K filed with the Commission on
August 9, 2000 under Item 5 disclosing a second amendment to the Purchase
Agreement with Saigene.


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<PAGE>

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:    September 15, 2000

/s/  Paul G. Kanan                     President and Chief Executive
--------------------------------       Officer
Paul G. Kanan

/s/  Paul G. Kanan                     Acting Principal Financial and Accounting
-------------------------------        Officer
Paul G. Kanan


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