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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-QSB

|                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------
|[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From     to




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Commission File Number 0-21537

Pacific Biometrics, Inc.

(Exact name of registrant as specified in its charter)


|                                                                                           |  |                                                                    
|------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------
|Washington
(State or other jurisdiction of incorporation
or organization)                  |  | 93-1211114
(I.R.S. Employer Identification Number)                 
|                                                                                           |  |                                                                    
|220 West Harrison Street
Seattle, Washington 98119
(Address of principal executive office) |  | (206) 298-0068
(Registrants telephone number,
including area code)

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

As of March 31, 2003, the issuer had 8,484,597 shares of common stock
outstanding.

|                                               |  |         
|---------------------------------------------- |  | --------
|Transitional Small Business Disclosure Format: |  | Yeso Nox



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TABLE OF CONTENTS



|                             |                                                                     |                                                        |  |  |  |  |  | 
|---------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|                             |                                                                     | CONSOLIDATED BALANCE SHEET                            
|                             |                                                                     | CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                             |                                                                     | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                             |                                                                     | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                             | ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
|                             | ITEM 3.   CONTROLS AND PROCEDURES                                  
|PART II  - OTHER INFORMATION
|                             | ITEM 1   Legal Proceedings                                         
|                             | ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS                 
|                             | ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS       
|                             | ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K                          
|EXHIBIT 1.1                 
|EXHIBIT 3.1                 
|EXHIBIT 99.1                



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PACIFIC BIOMETRICS, INC.

INDEX TO FORM 10-QSB

|                                                                   |  |     
|------------------------------------------------------------------ |  | ----
|                                                                   |  | Page
|                                                                   |  |     
|PART I - FINANCIAL INFORMATION                                     |  |     
|ITEM 1 - FINANCIAL STATEMENTS                                      |  |     
|Consolidated Balance Sheet                                         |  | 3   
|Consolidated Statements of Operations (unaudited)                  |  | 4   
|Condensed Consolidated Statements of Cash Flows (unaudited)        |  | 5   
|Notes to Consolidated Financial Statements (unaudited)             |  | 6   
|ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION |  | 10  
|ITEM 3 - CONTROLS AND PROCEDURES                                   |  | 20  
|PART II - OTHER INFORMATION                                        |  |     
|ITEM 1 - LEGAL PROCEEDINGS                                         |  | 20  
|ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS                 |  | 21  
|ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS       |  | 21  
|ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                          |  | 22  



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PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2003 and June 30, 2002

|                                              |                                                                                                        |                                             |         |             |            |   |        |             |            |   | 
|--------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------- | ------- | ----------- | ---------- | - | ------ | ----------- | ---------- | - | 
|                                              |                                                                                                        | 3/31/03                                     |         | 6/30/02    
|                                              |                                                                                                        | (unaudited)                                 |         | (audited)  
|ASSETS                                        |                                                                                                        |                                             |         |             |            |   |        |            
|Current assets:                               |                                                                                                        |                                             |         |             |            |   |        |            
|                                              | Cash and cash equivalents                                                                              |                                             | $       | 135,978     |            |   | $      | 270,951     |           
|                                              | Accounts receivable, net of allowance for doubtful
accounts of $25,543                                 |                                             |         | 787,882     |            |   |        | 990,311     |           
|                                              | Notes receivable from related party                                                                    |                                             |         | 200,000     |            |   |        |            |           
|                                              | Prepaid expenses and other                                                                             |                                             |         | 98,833      |            |   |        | 75,314      |           
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total current assets                        |         |             | 1,222,693  |   |        |             | 1,336,576  |  
|Property and equipment, net                   |                                                                                                        |                                             | 424,868 |             |            |   | 98,543 |            
|Other assets:                                 |                                                                                                        |                                             |         |             |            |   |        |            
|                                              | Restricted cash                                                                                        |                                             |         | 70,919      |            |   |        | 70,346      |           
|                                              | Technology assets                                                                                      |                                             |         | 476,874     |            |   |        |            |           
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total assets                                |         | $           | 2,195,354  |   |        | $           | 1,505,465  |  
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|LIABILITIES AND STOCKHOLDERS DEFICIT         |                                                                                                        |                                             |         |             |            |   |        |            
|Current liabilities:                          |                                                                                                        |                                             |         |             |            |   |        |            
|                                              | Notes payable to related parties                                                                       |                                             | $       | 161,529     |            |   |        | 552,171     |           
|                                              | Note payable-lease                                                                                     |                                             |         | 314,150     |            |   |        | 414,016     |           
|                                              | Notes payable other                                                                                    |                                             |         | 57,922      |            |   |        | 84,167      |           
|                                              | Accounts payable                                                                                       |                                             |         | 527,044     |            |   |        | 508,968     |           
|                                              | Accrued liabilities                                                                                    |                                             |         | 433,228     |            |   |        | 371,445     |           
|                                              | Dividends payable                                                                                      |                                             |         |            |            |   |        | 909,828     |           
|                                              | Deferred compensation                                                                                  |                                             |         |            |            |   |        | 295,368     |           
|                                              | Advances from customers                                                                                |                                             |         | 93,396      |            |   |        | 203,418     |           
|                                              | Technology licenses payable                                                                            |                                             |         | 2,244,040   |            |   |        | 2,244,040   |           
|                                              | Capital lease obligations - current portion                                                            |                                             |         | 55,769      |            |   |        | 467,507     |           
|                                              | Notes payable - current portion                                                                        |                                             |         | 4,657       |            |   |        |            |           
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total current liabilities                   |         |             | 3,891,735  |   |        |             | 6,050,928  |  
|Capital lease obligations - long term portion |                                                                                                        |                                             | 214,056 |             |            |   | 13,456 |            
|Notes payable - long term portion             |                                                                                                        |                                             | 238,146 |             |            |   |       |            
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total liabilities                           |         | $           | 4,343,937  |   |        | $           | 6,064,384  |  
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|Stockholders deficit:                        |                                                                                                        |                                             |         |             |            |   |        |            
|                                              | Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 1,550,000 shares issued and outstanding |                                             |         | 15,500      |            |   |        | 15,500      |           
|                                              | Common stock, $0.01 par value, 30,000,000 shares
authorized, 8,484,597 shares issued and outstanding   |                                             |         | 254,539     |            |   |        | 38,102      |           
|                                              | Subscribed Stock -  Common                                                                             |                                             |         | 3,632       |            |   |        |            |           
|                                              | Additional paid-in capital preferred stock                                                             |                                             |         | 5,000,966   |            |   |        | 5,000,966   |           
|                                              | Additional paid-in capital common stock                                                                |                                             |         | 15,302,845  |            |   |        | 12,938,700  |           
|                                              | Accumulated deficit                                                                                    |                                             |         | (22,725,363 | )          |   |        | (22,552,187 | )         
|                                              | Treasury stock                                                                                         |                                             |         | (702        | )          |   |        |            |           
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total stockholders deficit                 |         | $           | (2,148,583 | ) |        | $           | (4,558,919 | )
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           
|                                              |                                                                                                        | Total liabilities and stockholders deficit |         | $           | 2,195,354  |   |        | $           | 1,505,465  |  
|                                              |                                                                                                        |                                             |         |             |            |   |        |             |           

The accompanying notes are an integral part of this consolidated financial statement.

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2003 and 2002
and Nine Months Ended March 31, 2003 and 2002
(unaudited)

|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|----------------------------------------------------- |  | ------------------ | --------- | ----------------- |  | ----------- | --------- | ---- |  | - | --------- | ----------- |  | - | --------- | -
|                                                      |  | Three Months Ended |           | Nine Months Ended
|                                                      |  | March 31           |           | March 31         
|                                                      |  |                    |           |                  
|                                                      |  | 2003               |           | 2002              |  | 2003        |           | 2002
|                                                      |  |                    |           |                   |  |             |           |     
|                                                      |  |                    |           |                   |  | Development |           |      |  |   |           | Development
|                                                      |  |                    |           |                   |  | Stage       |           |      |  |   |           | Stage      
|Revenues                                              |  | $                  | 2,087,933 |                   |  | $           | 1,450,385 |      |  | $ | 4,650,976 |             |  | $ | 2,567,190 |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Operating expenses:                                   |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Laboratory expense and cost of goods sold             |  |                    | 915,270   |                   |  |             | 612,475   |      |  |   | 2,111,012 |             |  |   | 1,236,578 |  
|Research and product development                      |  |                    | 54,695    |                   |  |             | 14,048    |      |  |   | 124,468   |             |  |   | 22,301    |  
|Selling, general and administrative                   |  |                    | 959,997   |                   |  |             | 254,858   |      |  |   | 2,929,607 |             |  |   | 834,307   |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Total operating expenses                              |  |                    | 1,929,962 |                   |  |             | 881,381   |      |  |   | 5,165,087 |             |  |   | 2,093,186 |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Operating
income (loss)                               |  |                    | 157,971   |                   |  |             | 569,004   |      |  |   | (514,111  | )           |  |   | 474,004   |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Other income (expense):                               |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Interest expense                                      |  |                    | (20,279   | )                 |  |             | (25,837   | )    |  |   | (88,901   | )           |  |   | (64,977   | )
|Interest income                                       |  |                    | 229       |                   |  |             | 223       |      |  |   | 599       |             |  |   | 1,013     |  
|Other income                                          |  |                    | 157,693   |                   |  |             | 65,429    |      |  |   | 259,853   |             |  |   | 216,762   |  
|Gain on troubled debt restructure                     |  |                    | 4,000     |                   |  |             |          |      |  |   | 169,384   |             |  |   |          |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|                                                      |  |                    | 141,643   |                   |  |             | 39,815    |      |  |   | 340,935   |             |  |   | 152,798   |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Net earnings (loss)                                   |  | $                  | 299,614   |                   |  | $           | 608,819   |      |  | $ | (173,176  | )           |  | $ | 626,802   |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Preferred stock dividend accrued                      |  |                    |          |                   |  |             | (62,000   | )    |  |   |          |             |  |   | (186,000  | )
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Net earnings (loss) applicable to common stockholders |  | $                  | 299,614   |                   |  | $           | 546,819   |      |  | $ | (173,176  | )           |  | $ | 440,802   |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Net earnings (loss) per share:                        |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Basic earnings (loss) per share                       |  | $                  | 0.04      |                   |  | $           | 0.43      |      |  | $ | (0.03     | )           |  | $ | 0.35      |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Diluted earnings (loss) per share                     |  | $                  | 0.03      |                   |  | $           | 0.43      |      |  | $ | (0.03     | )           |  | $ | 0.35      |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Weighted average common shares outstanding:           |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Basic                                                 |  |                    | 8,484,658 |                   |  |             | 1,270,057 |      |  |   | 6,901,768 |             |  |   | 1,270,057 |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  
|Diluted                                               |  |                    | 8,829,234 |                   |  |             | 1,270,057 |      |  |   | 6,901,768 |             |  |   | 1,270,057 |  
|                                                      |  |                    |           |                   |  |             |           |      |  |   |           |             |  |   |           |  

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

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
and Nine Months Ended March 31, 2003 and 2002
(unaudited)

|                                                |  |                    |          |                   |  |             |          |      |  |   |          |             |  |   |         |  
|----------------------------------------------- |  | ------------------ | -------- | ----------------- |  | ----------- | -------- | ---- |  | - | -------- | ----------- |  | - | ------- | -
|                                                |  | Three Months Ended |          | Nine Months Ended
|                                                |  | March 31           |          | March 31         
|                                                |  |                    |          |                  
|                                                |  | 2003               |          | 2002              |  | 2003        |          | 2002
|                                                |  |                    |          |                   |  |             |          |     
|                                                |  |                    |          |                   |  | Development |          |      |  |   |          | Development
|                                                |  |                    |          |                   |  | Stage       |          |      |  |   |          | Stage      
|Cash
(used in) provided by operating activities |  | $                  | (40,558  | )                 |  | $           | (69,869  | )    |  | $ | 215,545  |             |  | $ | 255,317 |  
|Cash
(used in) investing activities             |  |                    | (280,701 | )                 |  |             | (30,721  | )    |  |   | (292,199 | )           |  |   | (44,775 | )
|Cash
(used in) financing activities             |  |                    | (39,024  | )                 |  |             | (9,748   | )    |  |   | (58,319  | )           |  |   | (86,215 | )
|                                                |  |                    |          |                   |  |             |          |      |  |   |          |             |  |   |         |  
|Net change in cash and cash equivalents         |  |                    | (360,283 | )                 |  |             | (110,338 | )    |  |   | (134,973 | )           |  |   | 124,327 |  
|Cash and cash equivalents, beginning of period  |  |                    | 496,261  |                   |  |             | 335,212  |      |  |   | 270,951  |             |  |   | 100,547 |  
|                                                |  |                    |          |                   |  |             |          |      |  |   |          |             |  |   |         |  
|Cash and cash equivalents, end of period        |  | $                  | 135,978  |                   |  | $           | 224,874  |      |  | $ | 135,978  |             |  | $ | 224,874 |  
|                                                |  |                    |          |                   |  |             |          |      |  |   |          |             |  |   |         |  

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

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PACIFIC BIOMETRICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



|1. |  | Organization and Basis of Presentation
|-- |  | --------------------------------------

Pacific Biometrics, Inc., a Delaware corporation (PBI or the Company),
provides specialty reference laboratory services to support pharmaceutical and
diagnostics manufacturers in the conduct of human clinical research for their
drug discovery and development efforts. The Companys specialty areas include
cardiovascular disease (atherosclerotic), diabetes (and obesity), osteoporosis
(or bone pathophysiology), and womens health. The Company also engages in
research and development and is developing two patented genetic platform
technologies. The Company was incorporated in Delaware in May 1996 and
conducts its operations through its wholly-owned subsidiary, Pacific
Biometrics, Inc., a Washington corporation (PBI-WA).

Unaudited interim financial statements include all adjustments such as normal
recurring accruals that are, in the opinion of management, necessary for a fair
statement of results of interim periods. The accompanying unaudited financial
statements and related notes should be read in conjunction with the audited
financial statement and the Form 10-KSB of Pacific Biometrics, Inc. and notes
thereto, for its fiscal year ended June 30, 2002.

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



|2. |  | Going Concern
|-- |  | -------------

Although the Company was profitable in the year ended June 30, 2002, and in the
quarters ending December 31, 2002 and March 31, 2003, it has experienced
recurring losses from operations over the last nine months and in prior years
and has had cash flow shortages. Additionally, the Company has deficiencies in
working capital and stockholders equity. Also, the Company has significant
amounts of past due debt. These matters raise substantial doubt about the
Companys ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the company with the ability to
continue in existence for the near term. These steps include expansion of
business development efforts and the renegotiation of contractual commitments
with Transamerica Business Credit Corporation. In addition, the purchase of
certain assets (primarily intangible assets) of Saigene, which concluded on
August 28, 2002, includes restructuring of debt and equity that the Company
believes will assist them in raising future capital (see Note 5).

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



|3. |  | Earnings (Loss) Per Share
|-- |  | -------------------------

Basic earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using the treasury
stock method.

-6-



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The components of basic and diluted earnings (loss) per share were as follows:

|                                                                                              |               |   |                 |      |                 |   |           |      |      |   |           |       |   |   |           |      | 
|--------------------------------------------------------------------------------------------- | ------------- | - | --------------- | ---- | --------------- | - | --------- | ---- | ---- | - | --------- | ----- | - | - | --------- | ---- | 
|                                                                                              |               |   | Three Months    |      | Nine Months    
|                                                                                              |               |   | Ended March 31, |      | Ended March 31,
|                                                                                              |               |   |                 |      |                
|                                                                                              |               |   | 2003            |      | 2002            |   | 2003      |      | 2002
|                                                                                              |               |   |                 |      |                 |   |           |      |     
|Net earnings (loss) available for common shareholders (A)                                     |               | $ | 299,614         |      |                 | $ | 546,819   |      |      | $ | (173,176  | )     |   | $ | 440,802   |     
|Weighted average outstanding shares of common stock (B)                                       |               |   | 8,484,658       |      |                 |   | 1,270,057 |      |      |   | 6,901,768 |       |   |   | 1,270,057 |     
|Diluted, weighted average outstanding shares of
common stock and common stock equivalents (C) |               |   | 8,829,234       |      |                 |   | 1,270,057 |      |      |   | 6,901,768 |       |   |   | 1,270,057 |     
|Earnings (loss) per share:                                                                    |               |   |                 |      |                 |   |           |      |      |   |           |       |   |   |           |     
|                                                                                              | Basic (A/B)   |   | $               | 0.04 |                 |   | $         | 0.43 |      |   | $         | (0.03 | ) |   | $         | 0.35 | 
|                                                                                              | Diluted (A/C) |   | $               | 0.03 |                 |   | $         | 0.43 |      |   | $         | (0.03 | ) |   | $         | 0.35 | 
|                                                                                              |               |   |                 |      |                 |   |           |      |      |   |           |       |   |   |           |     

For the nine months ended March 31, 2003, 344,576 shares of common stock
equivalents were excluded from the calculation of diluted earnings per share
because the effect was antidilutive. For the three and nine months ended March
31, 2002 the company had no potentially dilutive securities outstanding.



|4. |  | Commitments and Contingencies
|-- |  | -----------------------------

Legal Proceedings

The landlord of the office and laboratory space previously leased by the
Company in Lake Forest, California obtained a judgment against the Company for
approximately $150,000 related to the default on the lease. In addition,
liabilities continued to accrue at the rate of approximately $13,000 per month
until the space was leased. The total liability to the Company was estimated to
be approximately $350,000 and was recorded in 1999. In March 2000, Saigene
purchased from the landlord of the Lake Forest property, in exchange for a
convertible promissory note in the principal amount 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, due to the uncertainty surrounding the possible
reassignment by Saigene of its obligations to the landlord if the sale of the
laboratory assets to Saigene was not completed and the uncertainty of Saigenes
obligations to the Company regarding payment of this debt, the Company did not
remove this liability from its balance sheet. On August 28, 2002, pursuant to
the Asset Purchase Agreement (Note 5), the Company assumed the promissory note
obligations of Saigene. On September 5, 2002, the Company was notified of
certain defaults under the assumed Saigene obligation as well as a promissory
note of the Company in favor of the landlord in the principal amount of
$15,000. Although the Company is in active discussions with the landlord
regarding this obligation, no assurance can be given that the Company will be
successful in negotiating a favorable arrangement. Accordingly, should the
landlord seek to enforce its rights to collect amounts owed, the Company will
likely incur significant legal costs in defending any such action and may not
have sufficient funds to pay any adverse judgment should the landlord prevail
in any such action. As of March 31, 2003, total cumulative accruals relating to
this liability in the accompanying financial statements consist of $350,000 and
$15,000 in principal and related interest accrued monthly at the annual rate of
10% and 12% respectively. Pending negotiation of a final settlement of these
obligations, the Company is reducing the accrued amount remaining under the
$350,000 promissory note by making payments of approximately $50,000 per
quarter. No payments are being made on the $15,000 promissory note and
interest continues to accrue monthly. As of March 31 2003, the remaining
balances owing are approximately $314,000 and $25,000, respectively.

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

The Minnesota Mining and Manufacturing Company (3M) manufactured certain
products that Sudormed supplied to the Company pursuant to the supply
agreement. As described above, Sudormed terminated both the license agreement
and the supply agreement in May 1999 due to the failure of the Company to make
required payments. 3M subsequently foreclosed upon certain assets of Sudormed
and became a party in possession of secured property of Sudormed. In May 2000,
3M notified the Company that, in its capacity as a secured party in possession
of the Sudormed assets, it demanded payment in full of the $1.6 million plus
accrued interest and fees due under the Sudormed license agreement. The
Company disputes 3Ms demand, and intends to vigorously defend any action that
3M may bring. In addition, the Company believes that 3Ms claim may be barred
by the applicable statute of limitations, and accordingly that the likelihood
of liability to 3M, based upon advice from legal counsel, is remote. The full
amount of $2,240,000, which represents the amount owing to 3M under the
technology license as of March 31, 2003 and includes accrued interest and fees,
continues to be reserved on the Companys balance sheet pending a definitive
legal opinion or settlement.



|5. |  | Saigene Investment Transaction
|-- |  | ------------------------------

On June 27, 2002, the Company, and its wholly-owned subsidiary, Pacific
Biometrics, Inc., a Washington corporation (PBI-WA), entered into an Asset
Purchase Agreement, as amended by Amendment Number One to Asset Purchase
Agreement, dated as of August 28, 2002 (collectively, the Asset Purchase
Agreement) with Saigene, providing for the purchase by PBI-WA of certain
technology, intellectual property and equipment assets in connection with
certain DNA amplification and cell viability and related technologies and
processes. On August 28, 2002, pursuant to the Asset Purchase Agreement, as
consideration for the purchased assets, the Company issued to Saigene 6,541,431
shares, and to certain of Saigenes designees an additional 458,569 shares, of
PBIs common stock, par value $.01 per share.

Subsequent to the closing of the transactions contemplated by the Asset
Purchase Agreement, Saigene proposed a contribution of approximately $600,000
(in the form of cash, reduction of payments due from the Company to Saigene, or
a combination thereof or as otherwise determined by Saigene) to the Company
toward the development and commercialization of certain technologies acquired
by the Company from Saigene in connection with the Asset Purchase Agreement.
On December 19, 2002, Saigene entered into an agreement with the Company in
which Saigene (i) executed a promissory note in the principal amount of
$200,000 in favor of the Company payable on or before September 30, 2003,
either in cash or by the tender of shares of common stock of the Company
currently held in Saigenes name at an attributed value of $1.00 per share at
Saigenes election, (ii) forgave a creditor obligation assumed by the Company
from Saigene pursuant to the Asset Purchase Agreement in the aggregate amount
of approximately $229,000, (iii) settled a credit obligation in the aggregate
amount of approximately $150,000, and (iv) cancelled 10,000 shares of common
stock of the Company held in Saigenes name. As a result of the December 19,
2002 agreement, an adjustment to decrease the value of the acquired technology
assets in the approximate amount of $430,000 was recorded.



|6. |  | Stock-Based Compensation
|-- |  | ------------------------

The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation and apply Accounting Principles Board
Opinion No. 25, or APB 25, and related interpretations in accounting for our
stock options plan. Accordingly, our employee stock-based compensation expense
is recognized based on the intrinsic value of the option on the date of grant.

The following table illustrates the effect on net earnings (loss) if we had
applied the fair value recognition of Statement of Financial Standards No. 123,
Accounting for Stock-Based Compensation,to stock-based employee compensation:

-8-



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|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | - | --------------- | ---- | --------------- | - | ------- | ---- | ---- | - | -------- | ----- | - | - | ------- | ---- | 
|                                                                                                                                            |                       |   | Three Months    |      | Nine Months    
|                                                                                                                                            |                       |   | Ended March 31, |      | Ended March 31,
|                                                                                                                                            |                       |   |                 |      |                
|                                                                                                                                            |                       |   | 2003            |      | 2002            |   | 2003    |      | 2002
|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |     
|Net earnings (loss), as reported                                                                                                            |                       | $ | 299,614         |      |                 | $ | 546,819 |      |      | $ | (173,176 | )     |   | $ | 440,802 |     
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects |                       | $ |                |      |                 | $ | 8,592   |      |      | $ | 16,736   |       |   | $ | 9,685   |     
|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |     
|Pro forma net earnings, (loss)                                                                                                              |                       | $ | 299,614         |      |                 | $ | 538,227 |      |      | $ | (189,912 | )     |   | $ | 431,117 |     
|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |     
|Net earnings (loss) per share:                                                                                                              |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |     
|                                                                                                                                            | Basic  - as reported  |   | $               | 0.04 |                 |   | $       | 0.43 |      |   | $        | (0.03 | ) |   | $       | 0.35 | 
|                                                                                                                                            | Diluted - as reported |   | $               | 0.03 |                 |   | $       | 0.43 |      |   | $        | (0.03 | ) |   | $       | 0.35 | 
|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |     
|                                                                                                                                            | Basic  - pro forma    |   | $               | 0.04 |                 |   | $       | 0.42 |      |   | $        | (0.03 | ) |   | $       | 0.34 | 
|                                                                                                                                            | Diluted - pro forma   |   | $               | 0.03 |                 |   | $       | 0.42 |      |   | $        | (0.03 | ) |   | $       | 0.34 | 
|                                                                                                                                            |                       |   |                 |      |                 |   |         |      |      |   |          |       |   |   |         |     

Variable Accounting

On May 3, 2002, the Board of Directors voted to reprice all outstanding options
to purchase Common Stock to the then current market price, which was $.02 on
that day. As of March 31, 2003, 124,502 of these options remained outstanding.
For the nine months ended March 31, 2003, the Company recognized approximately
$151,000 in expense to adjust these options to fair market value. In the
future, the net income of the Company on a quarterly basis may be affected by
fluctuations in the market value of the Companys Common Stock. If the market
price of the Companys Common Stock increases, the Company will recognize
expense for the number of options outstanding times the incremental increase in
per share stock value.



|7. |  | Troubled Debt Restructure -  Transamerica
|-- |  | -----------------------------------------

In April 1997, the Company entered into a capital equipment leasing facility
with Transamerica Business Credit Corporation (Transamerica) to provide
credit for equipment purchases up to $1,500,000. The Company issued warrants to
purchase 17,143 shares of Common Stock to Transamerica as part of this
agreement. The Company negotiated forbearance agreements with Transamerica
Business Credit related to payments due on capital leases. In exchange for the
first forbearance agreement, the warrants to purchase 17,143 shares of Common
Stock were repriced to $1.50 per share in December 1998. 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 had repriced warrants previously issued to Transamerica to $0.1875, and
had granted Transamerica a lien position on the assets of the Company. This
Forbearance Agreement expired on September 30, 1999, and was extended again
through December 31, 1999, in exchange for 50,169 additional warrants. In
December 2002, the Company and Transamerica restructured the Companys debt
obligation of approximately $470,000. In settlement of its prior obligations,
the Company issued 50,000 shares of restricted common stock with a market price
of $0.45 to Transamerica and entered into a promissory note payable to
Transamerica in the principal amount of $245,000. The Promissory Note carries
an interest rate of approximately 10% and is payable over a 36-month period
with final payment due on October 1, 2005. Title to the previously leased
assets, subject to security interest retained by Transamerica, was conveyed to
the Company as part of the Restructure Agreement. A gain of approximately
$165,500 was recognized in December 2002 and $4,000 in January 2003
respectively, on the troubled debt restructure. A cumulative total of $169,500
is reflected in other income on the accompanying Statement of Operations.

9



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ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 audited financial statements and notes thereto for the
year ended June 30, 2002, included in the Companys Annual Report on Form
10-KSB.

When used in this Form 10-QSB, the words expects, anticipates, estimates,
believe, may, will, should, expect, intend, objective, seek,
plan, strive, or similar words, or the negatives of these words, are
intended to identify forward-looking statements. Examples of forward looking
statements include statements as to our critical accounting policies, our
estimates for future revenues and cost of revenues, our expectations regarding
future expenses, including research and development and sales and marketing
expenses, our estimates regarding the adequacy of our capital resources, our
capital requirements and our needs for additional financing, planned capital
expenditures, use of our working capital, sources of revenue and anticipated
revenue, including licenses of intellectual property, technology development
and service contracts, our business development efforts, future acquisitions or
investments, the impact of economic and industry conditions on us and our
customers, the anticipated growth of our business, our ability to attract
clients, expectations regarding competition and the impact of recent accounting
pronouncements. The forward-looking statements contained in this Report are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but
are not limited to, the concentration of business with large clients, the
ability to develop new technology and introduce new products, competition,
fluctuations in general economic conditions, the risk of bankruptcy, and
changes in policies by regulatory agencies. For additional factors that can
affect these forward-looking statements, see Other Factors that May Affect
Operating Results below and the Risk Factors section within the Companys
Annual Report on Form 10-KSB for the year ending June 30, 2002. The
forward-looking statements contained in this Report speak only as of the date
hereof. The Company cautions readers not to place undue reliance on any such
forward-looking statements. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Companys expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.

Overview

Pacific Biometrics, Inc., a Delaware corporation (PBI or the Company),
provides specialty reference laboratory and contract research services to
support pharmaceutical and diagnostics manufacturers conducting human clinical
research. The Companys specialty areas include cardiovascular disease
(atherosclerotic), diabetes (and obesity), osteoporosis (or bone
pathophysiology) and womens health. The Company was incorporated in May 1996
and conducts its operations through its wholly-owned subsidiary, Pacific
Biometrics, Inc., a Washington corporation (PBI-WA).

The Companys laboratory in Seattle, Washington has established itself as a
technical leader due to its strong expertise in research related to
cardiovascular disease (lipids). The laboratory services include development
of laboratory reference methods, development of clinical trial protocols, and
contract research and development. The Companys laboratory has also developed
an expertise in the emerging field of osteoporosis laboratory assessments
through its work with diagnostic manufacturers of assays for bone markers such
as Ostex International, Inc. and Metra Biosystems, Inc., in addition to
pharmaceutical manufacturers of drugs that prevent bone loss such as Merck &
Co., Inc. and The Procter & Gamble Company. This work has helped to establish
the Companys laboratory as a leader in the understanding of biochemical
markers for bone formation and bone resorption. The laboratory provides
general and specialty biomarker (efficacy) analysis services, as well as full
central laboratory services. Special areas of expertise include testing for
biomarkers of lipid status and cardiovascular disease risk, osteoporosis and
bone metabolism, and diabetes mellitus. The Companys expertise is concentrated
on the measurement of cardiovascular disease markers, especially cholesterol
and lipoproteins, including HDL, LDL and, HDL and LDL subfractions, remnant
cholesterol, apolipoproteins, Lp, and lipoprotein fraction compositions.
Diabetes testing includes markers such as glucose, hemoglobin A1c,
fructosamine, insulin, C-peptide, glucagon, advanced glycation end-products
(AGEs), microalbumin, non-esterified fatty acid (NEFA), in addition to the
lipid markers. In the areas of bone metabolism, (primarily osteoporosis), and
womens health, the Company specializes in the measurement of hormones and
biochemical markers of bone metabolism including pyridinolines, various C- and
N- terminal telopeptides, procollagens, osteocalcin and bone specific alkaline
phosphatase. In addition, the Companys laboratory manages the routine safety
profiles: hematology, coagulation, urinalysis and general chemistry.

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On August 28, 2002, the Company acquired certain technology from Saigene
Corporation (see Saigene Investment Transaction below and in Note 6 to the
Notes to Consolidated Financial Statements). The technology acquired from
Saigene include a DNA technology platform called LIDA (Logarithmic Isothermal
DNA Amplification), a novel chemistry designed to rapidly replicate DNA, and
technology related to cell viability, a broad-based and novel chemistry
platform that may be the first molecular method of its kind to rapidly
distinguish a live cell from a dead cell. The Company has been engaged in
research and development efforts with regards to these acquired technologies,
and was recently issued two patents by the U.S. Patent and Trademark Office.
On January 28, 2003, the Company was issued U.S. Patent No. 6,511,804, entitled
A Selective Assay for Determining the Identity of Live Microorganisms in a
Mixed Culture. This patent encompasses a technology for discriminating live
cells from dead cells and may have specific potential applications towards
pathogen detection and testing for drug-resistant microorganisms. The Company
is currently developing a test that can distinguish drug-susceptible from
drug-resistant Mycobacterium tuberculosis, the causative agent of tuberculosis
infections in humans. This new test would reduce the diagnostic time for a
drug-resistant tuberculosis infection from 3 weeks to only 2 days. On March
21, 2003, the Company was issued U.S. Patent No. 6,531,300 entitled Target
Amplification of Nucleic Acid with Mutant RNA Polymerase. This patent
encompasses a technology that provides a method to amplify genetic material and
may play a strategic role in the Companys development of proprietary molecular
technologies. Management believes that the acquisition of these technology
assets and associated intellectual property may provide potential future value
to the Company and its business to the extent the technologies can be
successfully developed and exploited. However, there can be no assurance that
this will be the case or that any proposed products will receive any necessary
regulatory approvals, or will not be the subject of litigation or other claims
from competitors or others with respect to such products or the patents and
methodologies upon which they are based. As of March 31, 2003, these
technologies are still in research and development stage and no revenues have
been generated from any of the technologies. There are no assurances that the
Company will be able to successfully develop these technologies or that they
will generate revenue.

In addition, the Company retains certain intellectual property rights relating
to two patented platform technologies regarding the use of sweat and saliva as
diagnostic fluids. These technologies were initially developed in the late
1990s, but due to lack of funding and the Companys failure to obtain FDA
approval for resultant products, in 1998 the Company suspended all further
development efforts relating to these products. The Company expensed all of
these assets in 1999. The Company currently has no plans to resume development
efforts relating to these products.

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

Saigene Investment Transaction

On August 28, 2002, the Company, through PBI-WA, purchased certain technology,
intellectual property and equipment assets in connection with certain DNA
amplification and cell viability and related technologies and processes from
Saigene Corporation, a Delaware corporation (Saigene), pursuant to an Asset
Purchase Agreement, dated as of June 27, 2002, as amended (the Saigene Asset
Purchase Agreement). In consideration for the purchased assets, the Company
issued to Saigene 19,624,292 shares (representing 6,541,431 shares after giving
effect to the March 2003 1:3 reverse stock split), and to certain of Saigenes
designees an additional 1,375,708 shares (representing 458,569 shares after
giving effect to the reverse split), of Company common stock.

Subsequent to the closing of the transactions contemplated by the Asset
Purchase Agreement, Saigene proposed a contribution of approximately $600,000
(in the form of cash, reduction of payments due from the Company to Saigene, or
a combination thereof or as otherwise determined by Saigene) to the Company
toward the development and commercialization of certain technologies acquired
by the Company from Saigene in connection with the Saigene Asset Purchase
Agreement. This was affected pursuant to an agreement entered into on December
19, 2002, in which Saigene:



| |  |  | executed a promissory note in the principal amount of $200,000
in favor of the Company payable on or before September 30, 2003,
either in cash or by the tender of shares of common stock of the
Company currently held in Saigenes name at an attributed value of
$1.00 per share at Saigenes election;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | forgave a creditor obligation assumed by the Company from
Saigene pursuant to the Saigene Asset Purchase Agreement in the
aggregate amount of approximately $229,000;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | settled a credit obligation in the aggregate amount of approximately $150,000; and                                                                                   
|
| |  |  | cancelled 10,000 shares of common stock of the Company held in Saigenes name.                                                                                       

Further, in connection with the Saigene Asset Purchase Agreement, the following
additional actions were taken:



| |  |  | PBI-WA and Saigene executed an Option Agreement whereby PBI-WA
has the right, in its sole discretion, to purchase certain additional
assets of Saigene in exchange for, at PBI-WAs election, either
$5,147,118 in cash, the issuance by PBI of an additional 1,715,706
shares of common stock, or a combination of cash and shares, and the
assumption of additional liabilities associated with such transferred
assets;                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company and Saigene entered into an amended and restated
management agreement, whereby Saigene will continue to operate and
manage the PBI-WA laboratory in exchange for monthly payments to
Saigene of $90,000, and terminable by either PBI or Saigene upon 30
days prior written notice;                                                                                                                                                     
|
| |  |  | The Company and Saigene agreed to terminate a prior purchase
agreement, dated June 22, 2000, for the proposed purchase by Saigene
of PBI-WAs laboratory operations;                                                                                                                                                                                                                                                                                
|
| |  |  | Holders of PBIs Series A preferred stock consented to an
amendment of the Companys Certificate of Designation with respect to
the rights and preferences of the Series A convertible preferred
stock, and agreed to convert all accrued dividends (approximately
$910,000) on the Series A preferred stock into an aggregate of
150,000 shares of common stock;                                                                                   
|
| |  |  | PBI entered into consulting arrangements with Paul Kanan and
Terry Giles, former founders and officers of the Company;                                                                                                                                                                                                                                                                                                                              
|
| |  |  | PBI converted $904,626 of deferred compensation and notes
payable to warrants and options to purchase an aggregate of 301,542
shares of common stock; and                                                                                                                                                                                                                                                                                           
|
| |  |  | Each of Saigene, Paul Kanan, Terry Giles and Burkhalter,
Michaels, Kessler & George, LLP, agreed not to sell any PBI
securities until August 28, 2003, except at a price per share equal
to or greater than $3.00, in a private transaction, in a transaction
solely for estate planning, or, in the event PBI completes a private
financing, at a per share price equal to or greater than the per
share price set forth in such private financing.

Critical Accounting Policies and Estimates

PBIs consolidated financial statements are prepared in accordance with
accounting principals generally accepted in the United States, which require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates. The following discussion highlights
what management believes to be certain of the critical accounting policies and
judgments made in the preparation of these consolidated financial statements.

Revenue Recognition

PBI recognizes revenue in the period that the related services are performed.
Historically, a majority of the Companys net revenues have been earned under
contracts which range in duration from six months to eighteen months, but can
extend in duration up to two years or longer. Service contracts generally take
the form of fixed-price arrangements. Under fixed-price contracts, revenue is
recognized as services are performed, with performance generally assessed using
output measures, such as units-of-work performed to date as compared to the
total units-of-work contracted. Changes in the scope of work generally result
in a renegotiation of contract pricing terms. Renegotiated amounts are not
included in net revenues until earned and realization is assured. The Company
also receives advances from certain customers to perform consulting laboratory
and clinical studies. These advances are deferred and recognized as revenue in
the period the related services are performed. Estimates of costs to complete
are made, as appropriate, to provide for losses expected on contracts. Costs
are not deferred in anticipation of contracts being awarded, but instead are
expensed as incurred. All out-of-pocket costs are included in total revenues
and expenses.

Bad Debt Allowance

PBI endeavors to assess and monitor the creditworthiness of its customers to
which it grants credit terms in the ordinary course of business. PBI maintains
a provision for doubtful accounts to provide for the possibility that amounts
due PBI

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may not be collected. The allowance for bad debt is approximately 2-3% of the
Companys accounts receivable. This bad debt provision is monitored on a
monthly basis and adjusted as circumstances warrant. Since the recorded bad
debt provision is based upon managements judgment, actual bad debt write-offs
may be greater or less than the amount recorded. Historically bad debt
write-offs have not been material.

Operating Expenses

PBI segregates its recurring operating expenses among three categories:
laboratory and cost of goods sold; selling, general and administrative
expenses; and research and development. Laboratory expenses and cost of goods
sold consists of appropriate amounts necessary to complete the revenue and
earnings process, and includes direct labor and related benefits, other direct
costs, and an allocation of facility charges and information technology costs,
and depreciation and amortization. Also, laboratory expenses and cost of goods
sold includes shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenues,
tends and is expected to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving studies
conducted during any period of time. Selling, general and administrative
expenses consist primarily of administrative payroll and related benefit
charges, management fees, legal and accounting fees, advertising and
promotional expenses, administrative travel and an allocation of facility
charges and information technology costs, and excludes depreciation and
amortization. Research and development expenses consist of direct labor and
related benefits, supplies, legal fees for patent applications, travel
expenses, and depreciation and amortization.

Equipment and computers are depreciated by the Company over five years, while
leasehold improvements are depreciated over the remaining life of the lease or
ten years. This estimate of a five year useful life on equipment and computers
and ten year useful life on leasehold improvements reflects managements
judgment that these useful life periods reflects a reasonable estimate of the
life over which the equipment, computers and leasehold improvements will be
used by the Company. However, the amount of depreciation expense recorded by
the Company in any given period will change if managements estimates of the
useful life of its equipment, computers and lease hold interests were to
increase or decrease.

Impairment of Assets

PBIs long-lived assets consist of LIDA and cell viability technologies. PBI
reviews its long-lived assets for impairment on a yearly basis or when events
or changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based
upon PBIs judgment of its ability to recover the asset from the expected
future undiscounted cash flows of the related operations. Actual future cash
flows may be greater or less than estimated. If the sum of expected future
cash flows is less than the carrying amount of the asset, a loss is recognized.
During the three- and nine-month periods ended March 31, 2003, the Company did
not recognize a loss on any of its long-lived assets.

There have been no material changes to our critical accounting policies and
estimates since June 30, 2002. For detailed information on our critical
accounting policies and estimates, see our Annual Report on Form 10-KSB for the
year ended June 30, 2002.

Results of Operations for Three and Nine Months Ended March 31, 2003

Revenues:

|                            |  |                    |       |      |  |        |       |          |  |      |     |                   |  |        |    |        |  |   |       |  |  |   |       |  |  |   |       |  |  |  |    |  
|--------------------------- |  | ------------------ | ----- | ---- |  | ------ | ----- | -------- |  | ---- | --- | ----------------- |  | ------ | -- | ------ |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  |  | -- | -
|                            |  | Three Months Ended |       |      |  |        |       |          |  |      |     | Nine Months Ended |  |        |    |        |  |   |       | 
|Dollars in thousands,       |  | March 31           |       | $    |  | %      |       | March 31 |  | $    |     | %                
|rounded to nearest thousand |  | 2003               |       | 2002 |  | Change |       | Change   |  | 2003 |     | 2002              |  | Change |    | Change
|                            |  |                    |       |      |  |        |       |          |  |      |     |                   |  |        |    |       
|Revenues                    |  | $                  | 2,088 |      |  | $      | 1,450 |          |  | $    | 638 |                   |  |        | 44 | %      |  | $ | 4,651 |  |  | $ | 2,567 |  |  | $ | 2,084 |  |  |  | 81 | %

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The Companys revenues consist of revenues generated from clinical trials
testing services and revenues generated from the provision of diagnostic
services. The 44% and 81% increase in revenues during each of the three- and
nine-month periods ended March 31, 2003, respectively, over the comparable
periods in fiscal 2002 was primarily attributable to an increase in the size
and number of clinical trials testing services performed by the Company.

During the third quarter of fiscal 2003 and for the nine-months ended March 31,
2003, revenue generated from clinical trials testing services accounted for
over 93% of the Companys total revenues. Revenue generated from the provision
of diagnostic services accounted for approximately 7% of the Companys total
revenues during the same period. Historically, over 93% of the Companys total
revenues have been generated from clinical trials. The Company expects that
clinical trials will continue to account for a significant portion of the
Companys revenues in the future.

In February 2002, PBI-WA entered into a services agreement with a large
pharmaceutical company to provide laboratory research services from time to
time based on specifications to be included in one or more work orders
submitted by the pharmaceutical company. There are no guaranteed minimum
number of work orders or revenues to PBI under this agreement. Each work order
is separately negotiated with the pharmaceutical company and is usually
limited to a specific project with limited duration. For the three- and
nine-months ended March 31, 2003, the Company provided services through work
orders under this agreement aggregating approximately $1,901,000 and
$3,764,000, respectively. Services provided to this customer accounted for
approximately 80% of the Companys outstanding accounts receivable balance of
approximately $788,000 as of March 31, 2003. This customer accounted for
approximately 81% and 68% of the revenues for the nine-months ended March 31,
2003 and 2002, respectively.

Other than the services agreement with this one customer, the Company has no
long-term contracts or agreements with its customers. Each contract is
negotiated separately with the pharmaceutical manufacturer or research
organization and is usually limited to a specific project with limited
duration. The cancellation of any contracts with existing customers, including
the services agreement, or the failure to replace such contracts upon
expiration or termination could have a material adverse effect on the Companys
laboratory operations.

Laboratory Expenses and Cost of Goods Sold:

|                                      |  |                    |     |      |  |        |     |          |  |      |     |                   |  |        |    |        |  |   |       |   |  |   |       |   |  |   |     |  |  |  |    |  
|------------------------------------- |  | ------------------ | --- | ---- |  | ------ | --- | -------- |  | ---- | --- | ----------------- |  | ------ | -- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | --- |  |  |  | -- | -
|                                      |  | Three Months Ended |     |      |  |        |     |          |  |      |     | Nine Months Ended |  |        |    |        |  |   |       |  
|Dollars in thousands,                 |  | March 31           |     | $    |  | %      |     | March 31 |  | $    |     | %                
|Rounded to nearest                    |  |                    |     |      |  |        |     |          |  |      |     |                  
|thousand                              |  | 2003               |     | 2002 |  | Change |     | Change   |  | 2003 |     | 2002              |  | Change |    | Change
|                                      |  |                    |     |      |  |        |     |          |  |      |     |                   |  |        |    |       
|Laboratory Expenses
and Cost of Sales |  | $                  | 915 |      |  | $      | 612 |          |  | $    | 303 |                   |  |        | 50 | %      |  | $ | 2,111 |   |  | $ | 1,237 |   |  | $ | 874 |  |  |  | 71 | %
|Percentage of
Revenues                |  |                    | 44  | %    |  |        | 42  | %        |  |      |     |                   |  |        |    |        |  |   | 45    | % |  |   | 48    | % |  |   |     |  |  |  |    |  

Laboratory expenses and cost of goods sold in actual dollar amounts increased
50% between the three-months ended March 31, 2003 and March 31, 2002,
respectively, and 71% between the comparable nine-month periods. The increase
in laboratory expenses and cost of goods sold was primarily attributable to
increased expenses incurred by the Company in meeting the increased demand in
the size and number of clinical trials testing services performed by the
Company during the period. As a percentage of revenue, laboratory expenses
and cost of goods sold for the ninth-month period ended March 31, 2003
decreased from the comparable period in fiscal 2002. However, during the
third quarter of fiscal 2003, laboratory expenses and cost of goods sold, as
percentage of revenue, increased from the comparable period in fiscal 2002.

The increase in laboratory expenses and cost of goods sold consisted primarily
of an increase in the cost of supplies for clinical trials and payment of
salaries, commissions and related benefits to employees performing clinical
trials, and to a lesser extent, an increase in payments to subcontractors of
laboratory services and payment of business and occupation taxes. During the
first and second quarters of fiscal 2003, the Company hired five lab employees
to meet the demand for its laboratory services. The Company hired one lab
employee during the third quarter of fiscal 2003. The Company

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also purchased additional supplies, such as test kits, reagent chemicals and
other chemical supplies to accommodate the significant increase in clinical
trials. In addition, during the third quarter and for the nine-months ended
March 31, 2003, business and occupation taxes paid by the Company were
significantly higher than the taxes the Company paid in comparable periods in
fiscal 2002. Laboratory expenses and cost of goods sold are expected to remain
relatively stable from quarter-to-quarter during the remainder of fiscal 2003.

Research and Product Development:

|                                 |  |                    |    |      |  |        |    |          |  |      |    |                   |  |        |     |        |  |   |     |   |  |   |    |   |  |   |     |  |  |  |     |  
|-------------------------------- |  | ------------------ | -- | ---- |  | ------ | -- | -------- |  | ---- | -- | ----------------- |  | ------ | --- | ------ |  | - | --- | - |  | - | -- | - |  | - | --- |  |  |  | --- | -
|                                 |  | Three Months Ended |    |      |  |        |    |          |  |      |    | Nine Months Ended |  |        |     |        |  |   |     |  
|                                 |  | March 31           |    | $    |  | %      |    | March 31 |  | $    |    | %                
|Dollars in thousands,            |  |                    |    |      |  |        |    |          |  |      |    |                  
|rounded to nearest               |  |                    |    |      |  |        |    |          |  |      |    |                   |  |        |     |        |  |   |     |   |  |   |    |   |  |   |     |  |  |  |     |  
|thousand                         |  | 2003               |    | 2002 |  | Change |    | Change   |  | 2003 |    | 2002              |  | Change |     | Change
|                                 |  |                    |    |      |  |        |    |          |  |      |    |                   |  |        |     |       
|Research and Product
Development |  | $                  | 55 |      |  | $      | 14 |          |  | $    | 41 |                   |  |        | 293 | %      |  | $ | 124 |   |  | $ | 22 |   |  | $ | 102 |  |  |  | 464 | %
|Percentage of
Revenues           |  |                    | 3  | %    |  |        | 1  | %        |  |      |    |                   |  |        |     |        |  |   | 3   | % |  |   | 1  | % |  |   |     |  |  |  |     |  

Research and product development expenses in actual dollar amounts increased
293% between the three-months ended March 31, 2003 and March 31, 2002,
respectively, and 464% between the nine-months ended March 31, 2003 and March
31, 2002, respectively. For the nine-month period ended March 31, 2003, the
increase in research and development expenses is primarily attributable to an
increase in compensation due to hiring of three new employees during the first
and second quarter of fiscal 2003, and to a lesser extent, an increase in
depreciation on equipment acquired from Saigene and legal fees associated with
the filing of patents on technology acquired from Saigene. Research and
development expenses for the three- and nine-month periods ended March 31, 2003
consisted mainly of expenditures made by the Company in developing technology
acquired from Saigene in August 2002. Compensation expense accounted for
approximately 79% of the total research and development expenses for the three-
and nine-month periods ended March 31, 2003. The Company had minimum research
and development expenses for the comparable period in fiscal 2002. The Company
anticipates that it will continue to incur research and development expenses
for the remainder of fiscal 2003. However, if the Company is unable to
increase revenues or raise additional funding to continue to fund its existing
research and development efforts, it will seek to reduce its research and
development efforts.

Selling, General and Administrative Expense:

|                                            |  |                    |     |      |  |        |     |          |  |      |     |                   |  |        |   |        |   |       |    |   |   |     |    |   |   |       |  |  |  |     |   | 
|------------------------------------------- |  | ------------------ | --- | ---- |  | ------ | --- | -------- |  | ---- | --- | ----------------- |  | ------ | - | ------ | - | ----- | -- | - | - | --- | -- | - | - | ----- |  |  |  | --- | - | 
|                                            |  | Three Months Ended |     |      |  |        |     |          |  |      |     | Nine Months Ended |  |        |   |        |   |       |    |  
|Dollars in thousands,                       |  | March 31           |     | $    |  | %      |     | March 31 |  | $    |     | %                
|Rounded to nearest                          |  |                    |     |      |  |        |     |          |  |      |     |                  
|thousand                                    |  | 2003               |     | 2002 |  | Change |     | Change   |  | 2003 |     | 2002              |  | Change |   | Change
|                                            |  |                    |     |      |  |        |     |          |  |      |     |                   |  |        |   |       
|Selling, General and
Administrative
Expense |  | $                  | 960 |      |  | $      | 255 |          |  | $    | 705 |                   |  | 276    | % |        | $ | 2,930 |    |   | $ | 834 |    |   | $ | 2,096 |  |  |  | 251 | %
|Percentage of
Revenues                      |  |                    | 46  | %    |  |        | 18  | %        |  |      |     |                   |  |        |   |        |   |       | 63 | % |   |     | 32 | % |   |       |  |  |  |     |   | 

Selling, general and administrative expense in actual dollar amounts increased
by 276% between the comparable three-month periods and 251% during the
nine-month periods ended March 31, 2003 and 2002. Selling, general and
administrative expenses as percentage of revenue represented 46% and 63% for
the three- and nine-month periods ended March 31, 2003, respectively, as
compared to 18% and 32% for the comparable periods in fiscal 2002. The overall
increases are primarily attributable to the payment of management fees to
Saigene under the terms of the amended and restated management agreement
(approximately $270,000 for the quarter and $1,000,000 for the nine months).
These

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expenses also increased due to increased compensation expense associated with
the hiring of the Companys new Chief Executive Officer, Chief Medical Officer
and a Business Development Representative since August 2002, and to a lesser
extent, increased accounting and legal fees incurred by the Company in
connection with the Saigene asset purchase acquisition, the Companys reporting
obligations and negotiation of settlements with certain creditors of the
Company. Salary, benefits and commissions were approximately $754,000 for the
nine month period ended March 31, 2003, 56% of which was payable to the
Companys Chief Executive Officer, Chief Medical officer, Chief Scientific
Officer and Business Development Representative.

Selling, general and administrative expenses represented 63% of revenues for
the nine months ended March 31, 2003 and 46% of revenues for the three months
ended March 31, 2003. The decrease in selling, general and administrative
expenses as a percentage of revenue in the third quarter of fiscal 2003
reflects a non-recurring recruiting expense and legal and accounting expenses
incurred by the Company in connection with purchase of assets from Saigene in
the second quarter of fiscal 2003.

We anticipate selling, general and administrative expenses to remain relatively
steady throughout the remainder of fiscal 2003. However, if the Company is
unable to increase revenues or obtain financing in amounts sufficient to fund
operations, the Company will institute measures to reduce selling, general and
administrative expenses.

On May 3, 2002, the Board of Directors voted to reprice all outstanding options
to purchase common stock to the then current market price, which was $0.06 on
that day. As of March 31, 2003, 124,502 of these options remained outstanding.
For the nine-month period ended March 31, 2003, the Company recognized
approximately $151,000 in compensation expense to adjust these options to fair
market value. Approximately $81,000 of this amount represents compensation
expense recognized by the Company during the third quarter of fiscal 2003. In
the future, the amount of compensation expense recognized by the Company will
fluctuate based on the value of the Companys common stock and the number of
options that are outstanding as of each valuation date. (See Note 7 to Notes
to Consolidated Financial Statements in this Report).

Other Income:

|                            |  |                    |     |      |  |        |    |          |  |      |     |                   |  |        |     |        |  |   |     |   |  |   |     |   |  |   |     |  |  |  |     |  
|--------------------------- |  | ------------------ | --- | ---- |  | ------ | -- | -------- |  | ---- | --- | ----------------- |  | ------ | --- | ------ |  | - | --- | - |  | - | --- | - |  | - | --- |  |  |  | --- | -
|                            |  | Three Months Ended |     |      |  |        |    |          |  |      |     | Nine Months Ended |  |        |     |        |  |   |     |  
|Dollars in thousands,       |  | March 31           |     | $    |  | %      |    | March 31 |  | $    |     | %                
|rounded to nearest thousand |  | 2003               |     | 2002 |  | Change |    | Change   |  | 2003 |     | 2002              |  | Change |     | Change
|                            |  |                    |     |      |  |        |    |          |  |      |     |                   |  |        |     |       
|Other Income                |  | $                  | 142 |      |  | $      | 40 |          |  | $    | 102 |                   |  |        | 255 | %      |  | $ | 341 |   |  | $ | 153 |   |  | $ | 188 |  |  |  | 123 | %
|Percentage of Revenues      |  |                    | 7   | %    |  |        | 3  | %        |  |      |     |                   |  |        |     |        |  |   | 7   | % |  |   | 6   | % |  |   |     |  |  |  |     |  

Total other income in actual dollar amounts increased by 255% between the
comparable three-month periods ended March 31, 2003 and 2002. The increase in
total other income was primarily attributable to a one-time gain associated
with the write off of $166,000 in liabilities during the third quarter of
fiscal 2003, partially offset by payment of approximately $20,000 in interest
on outstanding debt obligations and a $3,800 expense reclassification. During
the third quarter of fiscal 2003, the Company reassessed all of its existing
liabilities and wrote off some of its old accounts payables and an old lease
obligation.

Total other income in actual dollar
amounts increased by 123% between the
comparable nine-month periods ended March 31, 2003 and 2002. The increase in
total other income was primarily attributable to a one time gain recognized on
the restructuring of certain outstanding debt of approximately $165,000of the
Company during the second quarter of fiscal 2003, a $3,800 expense reduction,
the write off of $166,000 in liabilities and an additional gain recognized on
the restructure of certain debt outstanding of $4,000 during the third quarter
of fiscal 2003 partially offset by the payment of approximately $89,000 in
interest on outstanding debt obligations.

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Net Earnings (Loss):

|                            |  |                    |     |      |  |        |     |          |  |      |      |                   |  |        |     |        |  |   |      |   |  |   |     |   |  |   |      |   |  |  |      |   
|--------------------------- |  | ------------------ | --- | ---- |  | ------ | --- | -------- |  | ---- | ---- | ----------------- |  | ------ | --- | ------ |  | - | ---- | - |  | - | --- | - |  | - | ---- | - |  |  | ---- | --
|Dollars in
thousands,       |  | Three Months Ended |     |      |  |        |     |          |  |      |      | Nine Months Ended |  |        |     |        |  |   |      |  
|rounded to nearest thousand |  | March 31           |     | $    |  | %      |     | March 31 |  | $    |      | %                
|                            |  | 2003               |     | 2002 |  | Change |     | Change   |  | 2003 |      | 2002              |  | Change |     | Change
|Net Earnings (Loss)         |  | $                  | 300 |      |  | $      | 609 |          |  | $    | (309 | )                 |  |        | (51 | )%     |  | $ | (173 | ) |  | $ | 627 |   |  | $ | (800 | ) |  |  | (128 | )%
|Percentage of Revenues      |  |                    | 14  | %    |  |        | 42  | %        |  |      |      |                   |  |        |     |        |  |   | 0    | % |  |   | 24  | % |  |   |      |   |  |  |      |   

Net earnings in actual dollar amounts decreased by 51% between the comparable
three-month periods ended March 31, 2003. The decrease in net earnings is
primarily attributable to ongoing management fees paid to Saigene during the
quarter, increased compensation expense as a result of employees hired by the
Company during the first and second quarters of fiscal 2003, partially offset
by approximately $166,000 in other income resulting from a one-time gain
associated with the reassessment of liabilities and accrued costs.

The Company had a net loss in the amount of approximately $173,000 for the
nine-month period ended March 31, 2003, which represents a decrease in net
earnings of 128% from the comparable period in fiscal 2002. Net loss for the
nine-month period ending March 31, 2003 was primarily attributable to one-time
expenses associated with the acquisition of Saigenes assets pursuant to the
Saigene Asset Purchase Agreement, increased compensation expense as a result of
the Companys hiring of 12 employees since August 2002 and the ongoing payment
of management fees to Saigene.

Liquidity and Capital Resources:

The operations of the Company historically have primarily been funded through
revenues generated from operations and from the issuance of common stock and
preferred stock of the Company from time to time.

As of March 31, 2003, the Companys cash and cash equivalents were
approximately $136,000, compared to cash and cash equivalents of $271,000 as of
June 30, 2002. Total liabilities of the Company as of March 31, 2003 were
approximately $4,344,000 compared to $6,064,000 as of June 30, 2002. The
decrease in the Companys cash and cash equivalents is primarily attributable
to losses from operations, purchases of equipment and laboratory supplies and
payments to Makena Partners to reduce the Companys outstanding obligations to
Makena Partners. During third quarter of fiscal 2003, the Company acquired
approximately $254,000 in capital leases for equipment for use in the Companys
laboratory.

As of March 31, 2003, the Company had restricted cash of approximately $71,000.
The restricted cash represents a security deposit that the Company was
required to set aside in connection with the office lease the Company signed in
1997 for office space in Seattle, Washington. The Companys office lease
expires in July 2007.

As of March 31, 2003, the Company had negative working capital of $2,669,000.
As described below, the Company has fully reserved on its balance sheet as a
current liability a potential obligation to 3M in the amount of $2,244,000
under a prior license agreement. (See 3M Contingency). The Company believes
based on advice of legal counsel that the applicable statute of limitations
with respect to this license agreement has expired and that the likelihood of
liability to 3M is remote. If this amount were excluded from the balance sheet,
this would result in total current liabilities of $1,648,000 and negative
working capital of $425,000.

Net cash provided from operating activities was $215,545for the nine months
ended March 31, 2003. The Companys investing activities used $292,199 for the
nine months ended March 31, 2003 primarily for the purchase of equipment
through cash purchases or lease agreements. Cash flow used in financing
activities was $58,319 for the nine months ended March 31, 2003 and consisted
primarily of payments to decrease the balance due on the note payable to
related parties.

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Saigene has informed PBI that in order to develop and commercialize the
technology that PBI purchased from Saigene pursuant to the Saigene Asset
Purchase Agreement, PBI will likely require in the near term a capital infusion
in excess of $5,000,000. Moreover, management believes that an additional
$15,000,000 over the next two years will be required to achieve regulatory
approval and commercialization of both technologies acquired under the Saigene
Asset Purchase Agreement and the technologies that may be acquired under the
Option Agreement. The Company intends to seek suitable financing to continue
R&D, commence the regulatory approval process and commercialization of the
technologies, but there can be no assurance that PBI will be able to obtain
such financing, on favorable terms or at all.

The Company is currently seeking to raise up to $5,000,000 dollars in a private
offering of 1,666,667 shares of its Series B 8% convertible, cumulative
redeemable, preferred stock (the Series B Preferred Stock) at a purchase
price of $3.00 per share to accredited investors. Each share of Series B
Preferred Stock will be convertible at any time in the holders discretion into
one share of the Companys common stock, and will be convertible by the Company
at any time after the one year anniversary of the date of the offering when the
closing price of the Companys common stock is at least $5.00 per share for a
period of at least ten consecutive trading days. Holders of shares of Series B
Preferred Stock will not be entitled to receive a liquidation preference of
$3.00 per share on such shares until the holders of Series A preferred stock
have received their full liquidation preferences. PBI has engaged a placement
agent to offer the Series B Preferred Stock on a best efforts basis. There are
no assurances that the placement agent will be able to sell any or all of the
shares of Series B Preferred Stock in this private offering. The placement
agent is also entitled to receive warrants to purchase shares of common stock
at an exercise price of $3.00 per share equal to 10 percent of the number of
shares of Series B Preferred Stock sold in the offering. The Company intends
to use funds received from the offering to purchase additional laboratory
equipment, upgrade information systems, reduce debt, and for working capital.
The Company may also use a portion of the funds in the exercise of an option
that it holds to purchase certain intellectual property of Saigene. The shares
of Series B Preferred Stock have not been registered under the Securities Act
of 1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration. This Report shall
not constitute an offer to sell or the solicitation of an offer to buy shares
of Series B Preferred Stock.

The Company has 1,550,000 shares of Series A preferred stock issued and
outstanding. Each share of Series A preferred stock is
convertible at the option of the holder at any time, into one-third
share of common stock, subject to adjustment for stock splits, dividends and similar events.
Each share of Series A preferred stock receives a liquidation preference of
$2.00 per share. In August 2002, the Company amended the Certificate of
Designation to modify certain mandatory conversion rights, eliminate dividend
rights and eliminate the right of the holders of the Series A preferred stock
to designate a director to PBIs Board. Each share of Series A preferred stock
is convertible at the option of the Company into one-third share of common
stock when the closing price of the Companys common stock is at least $8.00 or
more for thirty consecutive trading days. For the three-months ended March 31,
2003, the Company did not declare dividends payable on its Series A preferred
stock and does not intend to declare dividends for the 2003 fiscal year.

In December 2002, the Company entered into a settlement agreement with
Transamerica Business Credit Corporation relating to rental payments owed on a
capital leasing facility. In connection with the settlement agreement, the
Company, among other things, issued a secured promissory note in the amount of
$245,000 in favor of Transamerica. The promissory note carries an interest
rate of approximately 10% and is payable monthly over a 36-month period with
final payment due on October 1, 2005. For the three months ended March 31,
2003, the Company made required payments of $8,000 and the principal current
balance as of March 31, 2003 was approximately $243,000. See
Note 7 to Notes
to Consolidated Financial Statements.

The Company is currently in discussions with its prior landlord in California
relating to certain defaults on two promissory notes in the aggregate principal
amount of $365,000. See Note 4 to Notes to Consolidated Financial
Statements. The Company has been making payments in the amount of
approximately $50,000 per quarter since October 2002, while the Company has
been attempting to negotiate a final settlement with the landlord. As of March
31, 2003, the Company has a current liability on its balance sheet of
approximately $339,000. The Company can give no assurance that it will be
successful in negotiating a favorable settlement with the landlord.
Accordingly, should the landlord seek to enforce its rights to collect amounts
owed, the Company will likely incur significant legal costs in defending any
such action and may not have sufficient funds to pay any adverse judgment
should the landlord prevail in any such action.

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The Companys auditors added an explanatory paragraph to their opinion on our
fiscal 2002 financial statements stating that there was substantial doubt about
our ability to continue as a going concern. There can be no assurance that our
efforts to monitor expenses and generate revenue will be successful. The
Company is currently seeking to raise financing in its private offering to fund
operations. However, in the current market conditions raising capital will be
difficult. See also Note 2 to the Notes to the Consolidated Financial
Statements. There can be no assurance that the Company will raise sufficient
financing from its current Series B Preferred Stock offering to help fund
operations during the near term. Accordingly, management will need to
contemplate other alternatives to enable the Company to fund continuing
operations, including, but not limited to, exploring strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction, loans from management or employees, salary deferrals or other cost
cutting mechanisms, or raising additional capital by private placements of
equity or debt securities or through the establishment of other funding
facilities. None of these potential alternatives may be available to the
Company, or may only be available on unfavorable terms. If the Company is
unable to obtain sufficient cash to continue to fund its operations, the
Company may be forced to seek protection from creditors under the bankruptcy
laws and/or cease operations. The Companys inability to obtain additional
cash as needed could have a material adverse effect on our financial position,
results of operations and its ability to continue in existence. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

3M Contingency

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

The Minnesota Mining and Manufacturing Company (3M) manufactured certain of
the products that Sudormed supplied to the Company pursuant to the supply
agreement. As described above, Sudormed terminated both the license agreement
and the supply agreement in May 1999 due to the failure of the Company to make
required payments. 3M subsequently foreclosed upon certain assets of Sudormed
and became a party in possession of secured property of Sudormed. In May 2000,
3M notified the Company that, in its capacity as a secured party in possession
of the Sudormed assets, it demanded payment in full of the $1.6 million plus
accrued interest and fees due under the Sudormed license agreement. The
Company disputes 3Ms demand, and intends to vigorously defend any action that
3M may bring. In addition, the Company believes based on advice form legal
counsel that 3Ms claim may be barred by the applicable statute of limitations,
and accordingly that the likelihood of liability to 3M is remote. The full
amount of $2,240,000, which represents the amount owing to 3M under the
technology license as of March 31, 2003 and includes accrued interest and fees,
continues to be reserved on the Companys balance sheet pending a definitive
legal opinion or settlement.

Other Factors that May Affect Operating Results

The Companys operating results may fluctuate due to a number of factors,
including, but not limited to:



| |  |  | the Companys ability to raise financing, manage its expenses
or generate sufficient cash flows to support general operating
activities and capital expansion;              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the number of clinical trials being undertaken by
pharmaceutical and biotechnology companies, especially those clinical
trials that utilize the Companys area of expertise;
|
| |  |  | the ability of the Company to successfully bid and win
contracts on request for proposals for clinical trials submitted by
pharmaceutical and biotechnology companies;      
|
| |  |  | the Companys dependence on one customer for a majority of its
revenue and ability to successfully negotiate work orders under the
services agreement with this customer;   

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| |  |  | the timing of commencement, progress, completion or
cancellation of clinical trials and contracts for the Companys lab
services;                                                                                                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of, or delays in, payments made by customers on contracts;                                                                                                                                                                                                      
|
| |  |  | the Companys ability to retain and recruit experienced personnel;                                                                                                                                                                                                         
|
| |  |  | the pharmaceutical industrys ability to recruit patients in
the North America with appropriate demographics for clinical trials,
which may adversely affect the number of samples the Company is able
to test on a given project, thereby affecting the Companys revenue;
|
| |  |  | the Companys ability to compete with other larger contract
research organizations, in-house departments of pharmaceutical
companies and hospitals, and universities and teaching hospitals;                                                                               
|
| |  |  | the Companys ability to generate referrals and its reputation
as a provider of clinical trial testing services;                                                                                                                                                           
|
| |  |  | the timing and cost of adopting new technology and equipment
used in the provision of laboratory services;                                                                                                                                                                 
|
| |  |  | implementation of new health care reform legislation that may
adversely affect research and development expenditures (including
clinical trials) by pharmaceutical and biotechnology companies;                                                                            
|
| |  |  | the ability to the Company to resolve claims or disputes with
existing creditors of the Company;                                                                                                                                                                           
|
| |  |  | the Companys ability to comply with federal, state, local and
provincial laws and regulations, and the cost and effect of such
compliance; and                                                                                                                            
|
| |  |  | the Companys ability to maintain certifications for the
provision of laboratory services.                                                                                                                                                                                 

In addition, fluctuations in quarterly results or other factors beyond the
Companys control could affect the Companys operations. Such factors include
changes in earnings, market conditions in the Companys industry, changes in
pharmaceutical and biotechnology industries, general economic conditions, and
differences in assumptions used as compared to actual results.

ITEM 3.   CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Treasurer, who is both our principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and Treasurer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Treasurer concluded that our
disclosure controls and procedures were effective. There have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect the internal controls subsequent to the date
management completed its evaluation.

The Company is currently interviewing prospective candidates for the position
of Chief Financial Officer and anticipates hiring someone for this position
during the fourth quarter of fiscal 2003. It is expected that the new Chief
Financial Officer will assist in performing a further review of the Companys
internal controls and procedures and will work closely with the Chief Executive
Officer and the Audit Committee to make any revisions, as appropriate, to the
Companys internal controls and procedures.

PART II  - OTHER INFORMATION

ITEM 1   Legal Proceedings

On May 10, 2001, a Final Judgment of Permanent Injunction was issued by the
United States District Court for the District of Columbia ordering the Company
to (a) file with the SEC, on or before June 29, 2001: (1) the Companys

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Annual Report on Form 10-KSB for its fiscal year ended June 30, 2000; (2) the
Companys Quarterly Reports on Form 10-QSB for its quarters ended March 31,
September 30, and December 31, 2000; and (3) such other periodic reports which
may become due prior to the entry of the Final Judgment, and (b) file timely
and in proper form with the SEC accurate and complete information and reports
of the Company as are required to be filed under the securities laws. All such
reports were filed on June 29, 2001 and since that date has filed all such
subsequent reports by the required due dates. The Company believes it is
currently in compliance with the Final Judgment and it intends to remain so in
the future, failing which the Company might be subject to sanctions from the
SEC.

As previously disclosed in the Quarterly Report on Form 10-QSB filed on
February 14, 2003, the Company received a demand for arbitration from the
former manufacturer of SPINPRO® in connection with alleged breaches of a
contract relating to the manufacture of SPINPRO®. The former manufacturer is
seeking damages of approximately $515,000. The Company disputes these claims
and is vigorously contesting such claims and has filed counterclaims against
the former manufacturer. The former manufacturer has subsequently made no
effort to prosecute its claim and the Company will move to dismiss this action.
No amounts have been accrued for this potential liability in the accompanying
financial statements.

ITEM 2   CHANGES IN SECURITIES AND USE OF PROCEEDS

As previously stated in the Liquidity and Capital Resources above, the
Company is conducting a private offering of up to 1,666,667 shares of its
Series B Preferred Stock at a purchase price of $3.00 per share. The Series B
Preferred Stock has the following terms and conditions:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  | Cumulative dividends at the rate of 8% per annum;
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - |  | -------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  | Liquidation preference of $3.00 per share;       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       The Series B Preferred Stock liquidation preference is payable by the
Company only after the holders of Series A preferred stock receive a
liquidation preference of $2.00 per share;                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       At the option of the holder, each share of Series B Preferred Stock may
be converted into one share of common stock;                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       At the option of the Company, on or after March 10, 2004, the Company
may convert each share of Series B Preferred Stock into one share of common
stock, provided that price for one share of common stock is at least $5.00 per
share for ten consecutive trading days; and                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       The Company is required to obtain the approval of a majority of the
holders of Series B Preferred Stock for amendments to Companys Certification
of Incorporation or Bylaws if such amendment (i) alters or modifies the rights
of the Series B Preferred Stock, (ii) creates a class of stock with rights that
are equal or senior to that of the Series B Preferred Stock, or (iii)
reclassifies shares of common stock into shares having rights that are equal or
senior to the rights of the Series B preferred Stock.

The shares of Series B Preferred Stock have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from registration.
This Report shall not constitute an offer to sell or the solicitation of an
offer to buy shares of Series B Preferred Stock. As of March 31, 2003, the
Company had no sales of shares of Series B Preferred Stock.

ITEM 4   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 10, 2003, the board of directors of the Company unanimously
approved, and recommended that the stockholders adopt, a one-for-three reverse
stock split of the issued shares of the Companys common stock pursuant to an
amendment to the Companys Certificate of Incorporation. The holders of
19,163,213 shares of the issued and outstanding common stock and 950,000 shares
of the issued and outstanding Series A preferred stock, representing 75.7% and
61.3% of the votes entitled to be cast with regard to the approval of the
amendment, respectively, approved the reverse split by written consent on
February 6, 2003. The effective date of the reverse split was March 14, 2003.

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ITEM 6   EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

|     |  |                                                                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | Placement Agent Agreement, dated February 3, 2003,
between Joseph Carl Securities and Pacific Biometrics, Inc.                                                                                    
|     |  |                                                                                                                                                                                                   
|3.1  |  | Certificate of Incorporation of Pacific Biometrics,
Inc., as amended.                                                                                                                             
|     |  |                                                                                                                                                                                                   
|99.1 |  | Certification of Ronald Helm, Chief Executive
Officer and Treasurer of Pacific Biometrics, Inc., pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.



| | (b) |  | The following current reports on Form 8-K were filed during the
quarter ended March 31, 2003:
| | --- |  | ---------------------------------------------------------------------------------------------

|    |  |                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Current Report on Form 8-K filed on January 24,
2003 under Item 5 disclosing the approval by the Companys
Board of Directors of a one-for-three reverse stock split of
the Companys common stock.                                                                                
|    |  |                                                                                                                                                                                                                                                                                    
|(2) |  | Current Report on Form 8-K filed on February 6,
2003 under Item 5 disclosing the issuance by the U.S. Patent
and Trademark Office to the Company of U.S. Patent No.
6,511,804, entitled A Selective Assay for Determining the
Identity of Live Microorganisms in a Mixed Culture.
|    |  |                                                                                                                                                                                                                                                                                    
|(3) |  | Current Report on Form 8-K filed on March 21, 2003
under Item 5 disclosing the issuance by the U.S. Patent and
Trademark Office to the Company of U.S. Patent No. 6,531,300,
entitled Target Amplification of Nucleic Acid with Mutant RNA
Polymerase.                           
|    |  |                                                                                                                                                                                                                                                                                    
|(4) |  | Current Report on Form 8-K filed on March 27, 2003
under Item 5 disclosing an offering of up to 1,666,667 shares
of the Companys Series B 8% convertible, cumulative
redeemable, $0.01 par value, preferred stock at a purchase
price of $3.00 per share to accredited investors. 

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 14, 2003

| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | /s/ Ronald R. Helm                                                                                                
| |                                                                                                                   
| | Ronald R. Helm
Chief Executive Officer and Treasurer
(principal executive officer and
principal financial officer)

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CERTIFICATION

I, Ronald R. Helm, Chief Executive Officer and Treasurer, certify that:

1.     I have reviewed this quarterly report on Form 10-QSB of Pacific Biometrics,
Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a)  designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)  evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|
| | c)  presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):



| | a)  all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)  any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

Date: May 14, 2003

| |                                                     
| | ----------------------------------------------------
| | /s/ Ronald R. Helm                                  
| |                                                     
| | Ronald R. Helm
Chief Executive Officer and Treasurer

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