##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
 FORM 10-QSB x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
   Commission File Number 0-21537 Pacific Biometrics, Inc.  Delaware
(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 May 10, 2004, the issuer had 12,921,194 shares of common stock
outstanding. Transitional Small Business Disclosure Format: Yes x No o




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PACIFIC BIOMETRICS, INC. INDEX TO FORM 10-QSB  
 PagePART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSConsolidated Balance Sheets as of March 31, 2004 (unaudited) and June 30, 2003 (audited)
    
    
    3Consolidated Statements of Operations for the three and nine months ended March 31, 2004 and 2003 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the three and nine months ended March 31, 2004 and 2003 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3  CONTROLS AND PROCEDURES
    
    
    21PART II  OTHER INFORMATIONITEM 2  CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    22ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K
    
    
    22SIGNATURES
    
    
    22EXHIBIT 10.1EXHIBIT 21.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PACIFIC BIOMETRICS, INC. 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    June 30,2004
    
    2003(unaudited)
    
    (audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    975,484
    
    
    $
    440,326Accounts receivable, net of allowance for doubtful accounts
of $23,695 and $25,543, respectively
    
    
    481,366
    
    
    
    466,608Note receivable from related party
    
    
    
    
    
    
    200,000Inventories
    
    
    80,545
    
    
    
    158,104Prepaid expenses and other assets
    
    
    128,646
    
    
    
    73,176Total current assets
    
    
    1,666,041
    
    
    
    1,338,214Property and equipment, net
    
    
    421,649
    
    
    
    433,060Other assets:Restricted cash
    
    
    71,315
    
    
    
    71,074Technology assets
    
    
    476,874
    
    
    
    476,874Total assets
    
    $
    2,635,879
    
    
    $
    2,319,222LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    668,822
    
    
    $
    792,420Accrued liabilities
    
    
    646,063
    
    
    
    563,778Dividends payable
    
    
    2,020
    
    
    
    1,558Deferred compensation
    
    
    21,980
    
    
    
    Advances from customers
    
    
    437,611
    
    
    
    310,948Capital
lease obligations - current portion
    
    
    52,546
    
    
    
    58,239Notes
payable to related parties - current portion
    
    
    51,160
    
    
    
    123,576Other notes
payable - current portion
    
    
    192,958
    
    
    
    172,392Total current liabilities
    
    
    2,073,160
    
    
    
    2,022,911Capital
lease obligations - long term portion
    
    
    170,443
    
    
    
    208,717Notes
payable to related parties - long term portion
    
    
    
    
    
    
    11,775Other notes
payable - long term portion
    
    
    572,808
    
    
    
    470,696Total liabilities
    
    
    2,816,411
    
    
    
    2,714,099Stockholders deficit:Preferred stock, $0.01 par value, 5,000,000 shares authorizedSeries A preferred stock, 1,550,000 shares designated, 1,550,000 shares issued and
outstanding, liquidation preference of $2.00 per share, aggregating $3,100,000
    
    
    15,500
    
    
    
    15,500Series B preferred stock, 1,666,667 shares designated, 33,666.66 shares issued and
outstanding, liquidation preference of $3.00 per share, aggregating $101,000
    
    
    337
    
    
    
    337Common stock, $0.01 par value, 30,000,000 shares authorizedIssued and outstanding 12,921,194 shares at March 31, 2004 and 9,218,458
at June 30, 2003
    
    
    300,838
    
    
    
    263,189Common stock subscribed  10,000 shares at March 31, 2004
    
    
    5,000
    

    
    
    Additional paid-in capital
    
    
    22,065,547
    
    
    
    20,421,642Accumulated deficit
    
    
    (22,566,331
    )
    
    
    (21,094,843
    )Treasury stock
    
    
    (1,423
    )
    
    
    (702
    )Total stockholders deficit
    
    
    (180,532
    )
    
    
    (394,877
    )Total liabilities and stockholders deficit
    
    $
    2,635,879
    
    
    $
    2,319,222
 The accompanying notes are an integral part of these consolidated financial statements. -3-




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##### Table of Contents



PACIFIC BIOMETRICS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    547,676
    
    
    $
    2,087,933
    
    
    $
    3,389,974
    
    
    $
    4,650,976Laboratory expenses and cost of sales
    
    
    432,233
    
    
    
    915,270
    
    
    
    2,175,928
    
    
    
    2,111,012Gross margin
    
    
    115,443
    
    
    
    1,172,663
    
    
    
    1,214,046
    
    
    
    2,539,964Operating expenses:Research and product development
    
    
    17,252
    
    
    
    54,695
    
    
    
    94,605
    
    
    
    124,468Selling, general and administrative
    
    
    749,564
    
    
    
    959,997
    
    
    
    2,346,402
    
    
    
    2,929,607Operating income (loss)
    
    
    (651,373
    )
    
    
    157,971
    
    
    
    (1,226,961
    )
    
    
    (514,111
    )Other income (expense):Interest expense
    
    
    (30,378
    )
    
    
    (20,279
    )
    
    
    (91,326
    )
    
    
    (88,901
    )Interest income
    
    
    81
    
    
    
    229
    
    
    
    16,590
    
    
    
    599Other income
    
    
    42,275
    
    
    
    157,693
    
    
    
    42,807
    
    
    
    259,853Gain on troubled debt restructure
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    169,384Loss on settlement of note receivable
from related party
    
    
    
    
    
    
    
    
    
    
    (72,072
    )
    
    
    11,978
    
    
    
    141,643
    
    
    
    (104,001
    )
    
    
    340,935Net earnings (loss) before tax expense
    
    
    (639,395
    )
    
    
    299,614
    
    
    
    (1,330,962
    )
    
    
    (173,176
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (639,395
    )
    
    $
    299,614
    
    
    $
    (1,330,962
    )
    
    $
    (173,176
    )Preferred stock dividend
    
    
    (2,020
    )
    
    
    
    
    
    
    (6,074
    )
    
    
    Net earnings (loss) applicable to common stockholders
    
    $
    (641,415
    )
    
    $
    299,614
    
    
    $
    (1,337,036
    )
    
    $
    (173,176
    )Net earnings (loss) per share:Basic earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Diluted earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Weighted average common shares outstanding:Basic
    
    
    11,022,263
    
    
    
    8,484,658
    
    
    
    9,420,913
    
    
    
    6,901,768Diluted
    
    
    11,022,263
    
    
    
    9,345,901
    
    
    
    9,420,913
    
    
    
    6,901,768
 The accompanying notes are an integral part of these consolidated financial statements. -4-




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PACIFIC BIOMETRICS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Cash flows from operating activities:Net earnings (loss)
    
    $
    (639,395
    )
    
    $
    299,614
    
    
    $
    (1,330,962
    )
    
    $
    (173,176
    )Reconciliation of net earnings (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    28,881
    
    
    
    27,998
    
    
    
    85,458
    
    
    
    64,440Interest income on note receivable from related party settled by common stock
    
    
    
    
    
    
    
    
    
    
    (16,218
    )
    
    
    Board compensation settled by stock options
    
    
    
    
    
    
    
    
    
    
    24,840
    
    
    
    Loss on settlement of note receivable from related party
    
    
    
    
    
    
    
    
    
    
    72,072
    
    
    
    Gain recognized on troubled debt restructuring
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (169,384
    )Gain on restructuring of capital leases
    
    
    
    
    
    
    (22,018
    )
    
    
    
    
    
    
    (22,018
    )Compensation expense (income) from fair value adjustment to options
    
    
    2,307
    
    
    
    80,926
    
    
    
    (43,742
    )
    
    
    152,011Changes in assets and liabilities:Accounts receivable, net
    
    
    (64,142
    )
    
    
    (65,485
    )
    
    
    (14,757
    )
    
    
    202,429Inventories
    
    
    (80,545
    )
    
    
    
    
    
    
    77,559
    
    
    
    Prepaid expenses and other assets
    
    
    16,555
    
    
    
    (36,223
    )
    
    
    (56,231
    )
    
    
    (23,519
    )Advances from customers
    
    
    359,327
    
    
    
    (365,091
    )
    
    
    126,663
    
    
    
    (110,022
    )Accounts payable
    
    
    (200,831
    )
    
    
    34,593
    
    
    
    (123,598
    )
    
    
    18,076Accrued liabilities
    
    
    (10,686
    )
    
    
    76,130
    
    
    
    82,285
    
    
    
    156,106Deferred compensation
    
    
    8,206
    
    
    
    
    
    
    
    21,980
    
    
    
    Stock options granted at less than fair market value
    
    
    
    
    
    
    
    
    
    
    2,584
    
    
    
    Net cash provided by (used in) operating activities
    
    
    (580,323
    )
    
    
    26,444
    
    
    
    (1,092,067
    )
    
    
    94,943Cash flows from investing activities:Purchases of capital equipment
    
    
    (47,330
    )
    
    
    (4,184
    )
    
    
    (74,047
    )
    
    
    (38,699
    )Net cash used in investing activities
    
    
    (47,330
    )
    
    
    (4,184
    )
    
    
    (74,047
    )
    
    
    (38,699
    )Cash flows from financing activities:Payments on notes payable
    
    
    (47,036
    )
    
    
    (57,211
    )
    
    
    (127,322
    )
    
    
    (128,308
    )Payments on notes payable to related parties
    
    
    (28,531
    )
    
    
    (26,420
    )
    
    
    (84,191
    )
    
    
    (62,168
    )Transfer to restricted cash
    
    
    (79
    )
    
    
    (223
    )
    
    
    (241
    )
    
    
    (573
    )Net proceeds from loan and security agreement
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    Payments on capital lease obligations
    
    
    (14,487
    )
    
    
    (2,786
    )
    
    
    (43,967
    )
    
    
    (4,404
    )Payment of cash dividends
    
    
    
    
    
    
    
    
    
    
    (5,684
    )
    
    
    Stock split  fractional share payout
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Proceeds from exercise of stock options
    
    
    1,164
    
    
    
    3,634
    
    
    
    1,564
    
    
    
    4,242Net proceeds from private placement of common stock
    
    
    1,023,180
    
    
    
    
    
    
    
    1,711,113
    
    
    
    Net cash provided by (used in) financing activities
    
    
    934,211
    
    
    
    (83,012
    )
    
    
    1,701,272
    
    
    
    (191,217
    )Net increase (decrease) in cash and cash equivalents
    
    
    306,558
    
    
    
    (60,752
    )
    
    
    535,158
    
    
    
    (134,973
    )Cash and cash equivalents, beginning of period
    
    
    668,926
    
    
    
    196,730
    
    
    
    440,326
    
    
    
    270,951Cash and cash equivalents, end of period
    
    $
    975,484
    
    
    $
    135,978
    
    
    $
    975,484
    
    
    $
    135,978Cash paid during the period for interest
    
    $
    23,374
    
    
    $
    10,131
    
    
    $
    63,235
    
    
    $
    25,960Non-Cash ActivitiesAssets purchased under capital lease
    
    $
    
    
    
    $
    253,500
    
    
    $
    
    
    
    $
    253,500Donated equipment
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    70,766Note payable issued in exchange for capital lease obligation
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    245,000Common stock issued in exchange for accrued preferred dividends
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    909,828Warrants and options issued in exchange for deferred compensation and notes payable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    933,472Purchase of technology assets and equipment in exchange for common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    490,698Contribution toward development and commercialization of technology assets
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    429,533Preferred stock dividends accrued
    
    $
    2,020
    
    
    $
    
    
    
    $
    6,074
    
    
    $
    Note receivable from related party settled by common stock
    
    $
    
    
    
    $
    
    
    
    $
    200,000
    
    
    $
    Shares released from escrow under restructure agreement with prior landlord
    
    $
    
    
    
    $
    
    
    
    $
    833
    
    
    $
    Warrants issued in consideration of issuance costs for private placement
    
    $
    111,414
    
    
    $
    
    
    
    $
    189,487
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. -5-




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##### Table of Contents



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 the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business through its wholly owned subsidiary, Pacific
Biometrics, Inc., a Washington corporation (PBI-WA). All material
intercompany balances and transactions have been eliminated in the accompanying
consolidated financial statements. Unaudited interim financial statements include all adjustments such as normal
recurring accruals that are, in the opinion of management, necessary for a fair
statement of results of interim periods. The accompanying unaudited financial
statements and related notes should be read in conjunction with the audited
financial statements and the Form 10-KSB of Pacific Biometrics, Inc. and notes
thereto, for its fiscal year ended June 30, 2003. The accompanying unaudited
financial statements and related notes should also be read in conjunction with
the unaudited financial statements and the Form 10-QSB of Pacific Biometrics,
Inc. and notes thereto, for its fiscal quarters ended December 31, 2003 and
September 30, 2003. 2. Summary of Significant Accounting Policies Stock-Based Compensation The Company has a stock-based employee compensation plan. The Company applies
APB Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plan. The Company has adopted the
disclosure-only provisions of SFAS No. 123. Had compensation cost been
determined based on the fair value of stock options granted in a manner
consistent with the method promulgated by SFAS No. 123, the Companys net
earnings (loss) and earnings (loss) per share would have been changed to the
pro forma amounts below for the three and nine months ended March 31: Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) as reported
    
    $
    (641,415
    )
    
    $
    299,614
    
    
    $
    (1,337,036
    )
    
    $
    (173,176
    )Deduct: Total stock-based employee compensation
awards, net of related tax benefits
    
    
    81,436
    
    
    
    
    
    
    
    257,665
    
    
    
    16,736Pro forma net earnings (loss)
    
    $
    (722,851
    )
    
    $
    299,614
    
    
    $
    (1,594,701
    )
    
    $
    (189,912
    )Net earnings (loss) per share:Basic  as reported
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Diluted  as reported
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Basic  pro forma
    
    $
    (0.07
    )
    
    $
    0.04
    
    
    $
    (0.17
    )
    
    $
    (0.03
    )Diluted  pro forma
    
    $
    (0.07
    )
    
    $
    0.03
    
    
    $
    (0.17
    )
    
    $
    (0.03
    )
 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 $0.06 on
that day. As of March 31, 2004, 39,473 of these options remained outstanding.
For the three and nine month periods ended March 31, 2004, the Company
recognized $2,307 in expense and $43,742 in income, respectively, to adjust
these options to fair market value. For the three and nine month periods ended
March 31, 2003, the Company recognized $80,926 and $152,011, respectively, in
expense to
adjust these options to fair market value. In the future, the net earnings
(loss) 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 -6-




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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. Intangible Assets In August 2002, the Company acquired from Saigene Corporation a DNA technology
platform called LIDA (Logarithmic Isothermal DNA Amplification). LIDA is a
chemistry designed to rapidly replicate DNA. The Company also acquired from
Saigene another technology relating to cell viability, a chemistry platform
that can distinguish a live cell from a dead cell. Applications for this cell
viability technology could include antibiotic susceptibility testing, sterility
testing and environmental monitoring in the water and beverage industries. The Company will begin amortizing its technology assets over their then
remaining useful lives at the point the related technologies become
commercially available for sale. The Companys technology assets currently
still require additional development prior to commercialization and their
future value as well as the timing of their ongoing development is dependent
upon additional capital being available to fund continuing research and
development. Management does not believe that an impairment event has occurred
to date related to the technology assets. The Company intends to continue to explore strategic alternatives for its
technology assets, which, in addition to further development, may include sale,
partnership, joint venture, licensing or other means of developing or otherwise
realizing the value of these assets. Earnings (Loss) Per Share Basic earnings (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is computed using
the weighted average number of common shares outstanding plus the effect of
outstanding stock options and warrants using the treasury stock method and
the effect of preferred stock on an as-converted basis. All per share
calculations exclude treasury shares and shares held in an escrow account as
security for a note payable. Net earnings (loss) applicable to common
stockholders includes dividends on the Series B convertible preferred stock of
$2,020 and $6,074, respectively, for the three and nine months ended March 31,
2004, and $0 for the comparable periods of 2003. Components of basic and diluted earnings (loss) per share were as follows for
the three and nine month periods ended March 31: Three months ended
    
    Nine months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss) (A)
    
    $
    (639,395
    )
    
    $
    299,614
    
    
    $
    (1,330,962
    )
    
    $
    (173,176
    )Preferred stock dividend
    
    
    (2,020
    )
    
    
    
    
    
    
    (6,074
    )
    
    
    Net earnings (loss) applicable to common
stockholders (B)
    
    $
    (641,415
    )
    
    $
    299,614
    
    
    $
    (1,337,036
    )
    
    $
    (173,176
    )Weighted average number of outstanding shares
of common stock (C)
    
    
    11,022,263
    
    
    
    8,484,658
    
    
    
    9,420,913
    
    
    
    6,901,768Weighted average number of outstanding shares
of common stock and common stock
equivalents (D)
    
    
    11,022,263
    
    
    
    9,345,901
    
    
    
    9,420,913
    
    
    
    6,901,768Earnings (loss) per share:Basic (B/C)
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )Diluted (A/D)
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    (0.03
    )
 As of March 31, 2004, options to purchase 1,307,205 shares of common stock and
warrants to purchase 594,093 shares of common stock (including the 384,600
warrants discussed in Note 4 below) were outstanding, but were not -7-




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included in
the computation of diluted earnings (loss) per share because the effect would
be anti-dilutive. In addition, for both the three and nine month periods ended
March 31, 2004, 1,550,000 shares of Series A Preferred Stock and 33,666.66
shares of Series B Preferred Stock convertible into 516,667 and 33,666 shares
of common stock, respectively, were also not included in the computation of
diluted earnings (loss) per share because the effect would be anti-dilutive. As of March 31, 2003, options to purchase 155,173 shares of common stock and
warrants to purchase 389,222 shares of common stock were outstanding. For the
three months ended March 31, 2003, 210,414 and 134,162 of the outstanding
warrants and options, respectively, were included in the computation of diluted
earnings (loss) per share after giving effect to the treasury stock method.
For the nine months ended March 31, 2003, none of the outstanding warrants or
options were included in the computation of diluted earnings (loss) per share
because the effect would be anti-dilutive. In addition, for the three month period ended March 31, 2003, 1,550,000 shares of Series A Preferred
Stock convertible into 516,667 shares of common stock were included in the
computation of diluted earnings (loss) per share. For the nine
months ended March 31, 2004, the effect of the Series A
Preferred Stock was excluded from the computation of dilutive
earnings (loss) per share because the effect would be anti-dilutive. 3. Managements Plans The Company had a net loss for the quarter ended March 31, 2004, experienced
recurring losses from operations in prior years, and has regularly had cash
flow shortages. In March 2004, the Company entered into a new clinical
services contract with a pharmaceutical company for a study with anticipated
revenues of approximately $1.4 million, of which the Company recognized
approximately $331,000 in revenues in the quarter ended March 31, 2004. This
new clinical services contract is expected to be completed before June 30, 2004
and should positively impact revenues and earnings for the quarter ending June
30, 2004. The Company does not, however, currently have significant amounts of
other signed clinical services contracts, and the Company expects further
significant losses to continue into fiscal 2005. Additionally, the Company has
deficiencies in working capital and stockholders equity and 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 closing of a private placement of unregistered
common stock through registered broker-dealers. In addition, the Company is
continuing to review its operational and financial requirements. To that end,
in November and December, the Company implemented certain cost reductions and
deferrals that included generally all of its employees. In addition to
headcount reductions, the Companys senior management and certain other
employees accepted salary deferrals ranging from 15% to 20%, and the majority
of the Companys other employees were subjected to the State of Washingtons
Shared Work Program. Under the Shared Work Program, employees hours worked
may be reduced by up to 50%, and the employees are eligible to apply for
unemployment benefits for the reduction in hours worked. Additionally, the
Company began to implement further cost reductions beginning in February 2004,
including additional headcount reductions, and reduction of the monthly
management fee paid to Saigene from $70,000 per month to $40,000 per month.
Also, effective February 1, 2004, the salary deferrals to senior management and
certain other employees became salary reductions, and the Companys Board of
Directors approved the grant of stock options to these employees in connection
with the salary reductions for the month of February 2004.
Subsequently, in May 2004, the Company and Saigene agreed to a
further reduction in the management fee to $20,000 per month,
effective June 15, 2004. Beginning in mid-March 2004, however, in connection with the new clinical
services contract described above, the Company suspended employee participation
in the Shared Work Program and began to incur overtime expenses. Effective
March 16, 2004, three department managers were restored to full salary, and
effective March 1, 2004 the prior salaries deferred from December 2003 and
January 2004 were begun to paid out, pro rata monthly through June
30, 2004. As work is completed on the March 2004 clinical services contract,
the Company will review reimplementing the Shared Work Program and other
expense controls that were suspended during work on the contract. There can be no assurance, however, that the Companys efforts to reduce
expenses and generate revenue will be successful. The Company is continuing to
review its operational and financial requirements, and may implement -8-




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additional
cost reductions and deferrals. In addition to the best efforts private
placement of unregistered common stock through registered broker-dealers, the
Company is seeking to raise other financing to fund operations. There can be
no assurance the Company will be able to raise additional funds from debt or
equity financing on terms favorable to the Company. Even after the steps the Company has taken to reduce its operating and
financial requirements, the Company still has significant debts and claims that
need to be settled. The Company will continue to review its operating and
financial requirements with the objective of controlling expenses while
minimizing any adverse impact on its future business opportunities, and attempt
to settle outstanding debts with cash generated from its operations, with
stock, and/or with technology assets. However, there can be no assurance that
the Company will raise sufficient financing from any equity or debt financing
to help fund operations during the near term. Accordingly, management is
contemplating 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 operations, it may be
forced to seek protection from creditors under the bankruptcy laws and/or cease
operations. Any inability to obtain additional cash as needed could have a
material adverse effect on the Companys financial position, results of
operations and ability to continue in existence. 4. Private Placement of Common Stock In November 2003, the Company initiated a best efforts private placement of
unregistered common stock through registered broker-dealers. Through the
closing of the private placement in March 2004, the Company sold 3,846,000
shares of unregistered common stock and received gross proceeds of $1,923,000.
In accordance with the terms of the private placement, the broker dealers
receive a commission of 10% of the gross proceeds. Also, for every 10 shares
of unregistered common stock sold, the broker dealers received a warrant
covering one share of unregistered common stock at $0.60 per share expiring on
December 31, 2006. Accordingly, as of March 31, 2004, the Company had recorded
broker dealer commissions of $192,300 and warrants covering 384,600 shares of
unregistered common stock at $0.60 per share. As of March 31, 2004, the
Company had incurred $19,587 of legal expenses related to the private
placement, which have been netted against gross proceeds of the private
placement. As of March 31, 2004, there were 10,000 shares of common stock
subscribed, representing common stock which was included in the 3,846,000
shares sold, but for which shares were not issued until April 2004. 5. Subsequent Event In May 2004, the Company and
Saigene executed Amendment No. 3 to Amended and Restated
Management Agreement, by and among the Company, Saigene, and PBI-WA.
Under the terms of this amendment, the management fee payable to
Saigene will be reduced from $40,000 to $20,000 per month, effective
June 15, 2004. -9-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. Investors should read the following discussion and analysis in conjunction with
our consolidated financial statements and related notes in this Form 10-QSB,
our Form 10-QSBs for the periods ended December 31, 2003 and September 30,
2003, and our audited financial statements and related notes for the year ended
June 30, 2003, included in our Annual Report on Form 10-KSB. Except for
historical information, the following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. We desire to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. This Quarterly Report on Form 10-QSB
contains a number of forward-looking statements that reflect managements
current views and expectations with respect to our business, strategies,
products, future results and events and financial performance. All statements
other than statements of historical fact, including future results of
operations or financial position, made in this Quarterly Report on Form 10-QSB
are forward looking. In particular, the words expect, anticipate,
estimate, desire, goal,  believe, may, will, should, intend,
objective, seek, plan, strive, variations of such words, or similar
expressions, or the negatives of these words, are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. Examples of forward looking statements include statements as
to 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, including those discussed below and in the section captioned
Factors that May Affect Operating Results, and, in our Annual Report on Form
10-KSB for the year ended June 30, 2003, 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 the Risk Factors section within
our Annual Report on Form 10-KSB for the year ending June 30, 2003, and in our
Registration Statement on Form SB-2. The forward-looking statements contained
in this Report speak only as of the date hereof. We caution readers not to
place undue reliance on any such forward-looking statements. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in managements expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. Overview We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and development efforts. Our clients include a number of
the worlds largest multi-national pharmaceutical, biotechnology and diagnostic
companies. Our well-recognized specialty areas include cardiovascular disease
(dyslipidemia, atherosclerosis, and coronary heart disease), diabetes (and
obesity), and bone and joint diseases (osteoporosis and arthritis). Coupled
with our specialty testing, we also have central laboratory capability and
provide full-service central laboratory support for multi-center clinical
trials, including routine safety lab tests (general chemistry, hematology, and
urinalysis). Our company is a Delaware corporation, incorporated on May 9,
1996, and we conduct our operations primarily through our wholly-owned
subsidiary, Pacific Biometrics, Inc., a Washington corporation. For each of the prior two quarters, as well as for the nine months ended March
31, 2004, we experienced a significant reduction in revenues and had a large
net loss. We expect that revenues for the quarter ending June 30, -10-




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2004 will be improved over the most recent two quarters as a result of a March
2004 clinical services contract we recently entered into with a pharmaceutical
company for a study with anticipated revenues of approximately $1.4 million.
Revenues under this new clinical services contract commenced in March 2004, and
accounted for approximately $331,000 or 60% of our total revenues for the
quarter just ended. We expect to recognize the remainder of the revenues from
this clinical services contract in the quarter ending June 30, 2004. Even with
the improvement to revenues and positive impact on earnings expected in the
quarter ending June 30, 2004 resulting from the March 2004 clinical services
contract, we expect to incur a net loss for the fiscal year ending June 30,
2004 and that revenues for fiscal year ending June 30, 2004 will be
significantly lower than those in the comparable prior year period. We do not
currently have significant amounts of other signed clinical services contracts.
We also regularly have had cash flow shortages and deficiencies in working
capital, and have significant amounts of past due debt, including approximately
$335,000 of accounts payable that is 90 or more days old. We have revised our operating and financial plan, which we believe will provide
us with the ability to continue in existence for the near term, assuming that
our revenues increase. These steps include expanding our business development
efforts and closing on a private placement of unregistered common stock. In
November and December 2003, we implemented certain cost reductions and
deferrals including headcount reductions, salary deferrals and participation in
the State of Washington Shared Work Program (whereby rather than terminating
an employee, we can retain the employee but reduce his or her hours worked by
up to 50%, and the employee will be eligible to apply for unemployment benefits
from the State of Washington for the reduction in hours worked). The decrease
in expenses and improved cash flow from these expense reductions and deferrals
began to benefit us in the quarter ended December 31, 2003, and had a greater
beneficial impact in the quarter ended March 31, 2004, because they were in
effect from the beginning of the period. Beginning in mid-March 2004, however,
in connection with the recent new clinical services study that we anticipate
lasting for an eight to ten week period, we began ramping up work and taking
most of our employees out of the Shared Work Program, and we may incur
significant overtime expenses. As work is completed on the March 2004 clinical
services study, we will review reimplementing the Shared Work Program and other
expense controls that were suspended during the time we were working on the
study. As a further cost reduction, effective February 1, 2004, we changed the prior
salary deferrals, which we had implemented with our senior management and
certain other employees, into salary reductions, and we made one-time grants of
stock options in connection with the reductions. These salary reductions are
continuing, with no further stock options granted in connection with the
reductions, except for three department managers who were restored to full
salary effective March 16, 2004. Effective March 1, 2004, the prior salaries
deferred from December 2003 and January 2004 are being paid pro rata monthly
through June 30, 2004. Also, effective February 1, 2004, we reduced the
management fee payable to Saigene Corporation from $70,000 per month to $40,000
per month. Subsequently, in May 2004, the Company and Saigene agreed
to a further reduction in the management fee to $20,000 per month,
effective June 15, 2004. Even after the steps we have taken to revise our operating and financial plans
and reduce expenses, we still have significant debts and claims that need to be
settled. We will continue to review and revise our operating and financial
plans during the remainder of fiscal 2004 and into fiscal 2005 with the
objective of controlling expenses while minimizing any adverse impact on our
current and future business opportunities. We will also attempt to settle
outstanding debts with cash generated from operations, with stock, and/or with
technology assets. There is no assurance, however, that our efforts to reduce expenses and
generate revenue will be successful. Although we raised approximately $1.7
million in net proceeds from our private placement of common stock that closed
in March 2004, if our revenues do not increase we expect to need to raise
additional capital through equity or debt financing or through the
establishment of other funding facilities in order to continue funding
operations. However, in the current market condition, raising capital has
been, and will continue to be difficult, and there is no assurance that we will
receive sufficient funding. Accordingly, we are also contemplating other
alternatives to enable us to fund continuing operations, including loans from
management or employees, additional salary deferrals and reductions and other
cost cutting mechanisms. We are also exploring strategic alternatives, which
may include a merger, asset sale, joint venture or another comparable
transaction. These potential alternatives may not be open to us, or may only
be available on unfavorable terms. If we are unable to obtain sufficient cash
either to continue to fund operations or to locate a strategic alternative, we
may be forced to seek protection from creditors under the bankruptcy laws or
cease operations. Any inability to obtain additional cash as needed could have
a material adverse effect on our financial position, results of operations and
ability to continue in existence. -11-




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Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and
estimates since the end of our 2003 fiscal year. For detailed information on
our critical accounting policies and estimates, see our financial statements
and notes thereto included in this Report and our Annual Report on Form 10-KSB
for the year ended June 30, 2003. The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including,
among others, those affecting revenues, the allowance for doubtful accounts,
the salability of inventory and the useful lives of tangible and intangible
assets. The discussion below is intended to be a brief discussion of some of
the judgments and uncertainties that can impact the application of these
policies and the specific dollar amounts reported on our financial statements.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form our basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions, or
if management made different judgments or utilized different estimates. Many
of our estimates or judgments are based on anticipated future events or
performance, and as such are forward-looking in nature, and are subject to many
risks and uncertainties, including those discussed below and elsewhere in this
Report. We do not undertake any obligation to update or revise this discussion
to reflect any future events or circumstances. We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is neither a complete list of all of our accounting policies,
nor does it include all the details surrounding the accounting policies we have
identified. There are other accounting policies that are significant to our
company. For a detailed discussion on the application of these and our other
accounting policies, see Note 2 to the Consolidated Financial Statements
included in this Report and Note 2 to Consolidated Financial Statements
included in our Annual Report on Form 10-KSB for the year ended June 30, 2003. Revenue Recognition We recognize revenue in the period that the related services are
performed. Historically, a majority of our revenues have been earned under
contracts which range in duration from six months to eighteen months, but can
extend in duration up to two years or longer. Service contracts generally take
the form of fixed-price arrangements. Under fixed-price contracts, revenue is
recognized as services are performed, with performance generally assessed using
output measures, such as units-of-work performed to date as compared to the
total units-of-work contracted. Changes in the scope of work generally result
in a renegotiation of contract pricing terms. Renegotiated amounts are not
included in net revenues until earned and realization is assured. We also
receive advances from certain customers related to the services to be performed
for them. These advances are deferred and recognized as revenue in the period
the related services are performed. Estimates of costs to complete are made,
as appropriate, to provide for losses expected on contracts. Costs are not
deferred in anticipation of contracts being awarded, but instead are expensed
as incurred. Impairment of Assets Our long-lived assets consist of LIDA and cell viability technologies. We
review our 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 our judgment of our ability to recover the asset from the expected future
undiscounted cash flows of the related operations, as well as our estimate of
the value we could receive from any sale of the assets. Actual future cash
flows and amounts realized from any future asset sale may be greater or less
than estimated. If the sum of expected future cash flows or sale -12-




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value is less than the carrying amount of the asset, a loss is recognized.
During the nine-month period ended March 31, 2004, we did not recognize a loss
on any of our long-lived assets. Operating Expenses We segregate our 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 consist 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 include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of 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 include business development activities, sales and marketing expenses
and related commissions, and laboratory administration expenses. Selling,
general and administrative expenses consist primarily of administrative payroll
and related benefit charges, Saigene management fees, legal and accounting
fees, advertising and promotional expenses, administrative travel and an
allocation of facility charges, information technology costs, and depreciation
and amortization. Research and development expenses consist of direct labor
and related benefits, supplies, legal fees for patent applications, travel
expenses, and depreciation and amortization. We depreciate equipment and computers over three to five years, while
leasehold improvements are depreciated over the remaining life of the lease or
ten years, reflecting managements judgment of reasonable estimated remaining
useful lives. If we were to extend or shorten the estimated useful lives for
any of our assets, the amount of depreciation expense we record in any given
period will correspondingly decrease or increase. Results of Operations for Three and Nine Months Ended March 31, 2004 Revenues: Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeRevenues
    
    $
    548
    
    
    $
    2,088
    
    
    $
    (1,540
    )
    
    
    (74
    )%
    
    $
    3,390
    
    
    $
    4,651
    
    
    $
    (1,261
    )
    
    
    (27
    )%
 Our revenues are generated from clinical trials testing services and diagnostic
services. Our revenues decreased approximately 74% and 27%, respectively,
between the comparable quarters and nine-month periods ended March 31, 2004 and
2003, resulting from a decrease in the size and number of clinical trials
testing services we performed. Except for the March 2004 clinical services
contract we recently entered into and that is expected to be completed by June
2004, these decreases reflect the recent significant decreases in revenues and
open work orders we have been experiencing. For the quarter ended March 31,
2004, we recognized revenues under this new clinical services contract of
approximately $331,000 (or 60% of our total revenues for the quarter). We
expect to recognize the remainder of the revenues under this clinical services
contract in the quarter ending June 30, 2004. Our recent quarterly decreases reflect the fluctuations and reductions in
testing and open work orders with our historically two largest customers.
Combined revenues from these two customers were approximately $400,000 (73% of
our total revenues) for the quarter ended March 31, 2004, compared to a total
of approximately $2.5 million (74% of our total revenues) for the nine months
ended March 31, 2004. The recent decreases in revenues from these customers
was a result of prior work orders having come to completion or the clinical
study having ended or being terminated early, without being replaced with new
work orders for additional testing services. We have historically been
dependent on one or both of these customers for a significant portion of our
revenues, and as such a decline in the volume of services performed for these
customers has a significant impact on our revenues. -13-




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For each of these two customers, we have entered into a master contractor
service agreement (one in February 2002 with an addendum dated March 2004 and
the other in May 2003), under which we perform laboratory research services
based on work orders submitted to us by the customer. There is no guaranteed
minimum number of work orders or revenues to us under either agreement. Each
work order is separately negotiated with the customer and is usually limited to
a specific project with limited duration. During the three-months and nine-months ended March 31, 2004, revenue generated
from clinical trials testing services accounted for approximately 76% and 80%,
respectively, of our total revenues. Revenue generated from the provision of
diagnostic, referral and other services accounted for approximately 24% and
20%, respectively, of our total revenues during the same periods.
Historically, over 90% of our total revenues have been generated from clinical
trials. Although we experienced a decrease in clinical testing services during
the quarter ended March 31, 2004, we expect that clinical trials will continue
to account for a significant portion of our revenues in the future. Except for the new March 2004 clinical services contract we recently entered
into as described above, we do not have significant open or pending work
orders. Although we expect to recognize the remainder of the revenues under
this clinical services contract in the quarter ending June 30, 2004, even with
the resulting improvement to revenues and positive impact on earnings for the
quarter ending June 30, 2004, we expect to incur a net loss for the fiscal year
ending June 30, 2004, and that revenues for fiscal year ending June 30, 2004
will be significantly lower than those in the comparable prior year period. We
are continuing discussions regarding our research and laboratory services with
these two customers as well as several other pharmaceutical companies and other
potential customers. We believe that we have good relations with these two
customers and we expect to receive additional work orders in the future,
although we cannot predict the timing or amount of any such additional work. We have expanded our business development efforts and have continued to submit
bids and proposals to these and other companies for our services. We believe
that we have generated good contacts and that there are a significant number of
potential contracts available to us. While our signed work orders for testing
are often dependent upon the results of the initial testing we perform for
customers, we expect that, despite the lack of need for follow-on testing for
our recent testing services, we will be successful in obtaining new work orders
from our prior and current customers and from new customers. Even with the new
clinical services contract we recently entered into in March 2004, if we are
unsuccessful in our sales and business development efforts, our revenues for
the remainder of the 2004 fiscal year will be less than revenues in the
comparable prior period. Unless revenues otherwise increase, we will also
likely continue to experience significant losses and our cash and working
capital position will continue to be adversely impacted into fiscal 2005. Laboratory Expenses and Cost of Goods Sold: Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeLaboratory Expenses
and Cost of Goods Sold
    
    $
    432
    
    
    $
    915
    
    
    $
    (483
    )
    
    
    (53
    )%
    
    $
    2,176
    
    
    $
    2,111
    
    
    $
    65
    
    
    
    3
    %Percentage of
Revenues
    
    
    79
    %
    
    
    44
    %
    
    
    
    
    
    
    
    
    
    
    64
    %
    
    
    45
    %
 Laboratory expenses and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical
trial samples, the cost of supplies for analysis of clinical trial samples,
payments to subcontractors of laboratory services, and other expenses such as
business and occupation taxes, postage and shipping. For the comparable quarters ended March 31, 2004 and 2003, laboratory expenses
and cost of goods sold decreased approximately 53%, and as a percentage of
revenue increased to approximately 79% from approximately 44%. The expense
reduction was primarily attributable to decreased expenses
incurred in meeting the decreased size and number of clinical trials testing
services we performed during the comparable quarters. The relative -14-




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increase as a percentage of revenue was as a result of salaries and related
benefits of laboratory personnel decreasing approximately 30%, while revenues
decreased approximately 74% over the same time periods. For the three-month
periods ended March 31, 2004 and 2003, respectively, salaries and related
benefits decreased 30% to approximately $198,000 from $284,000, lab supplies
decreased 57% to approximately $92,000 from $215,000, and outside services
decreased 95% to approximately $13,000 from $246,000. The decreases in lab
supplies and outside services between the comparable quarters was due to the
reduction in supplies and services needed to support the commensurate decrease
in revenues. For the comparable nine-month periods ended March 31, 2004 and 2003,
laboratory expenses and cost of goods sold increased approximately 3%, and as
a percentage of revenue increased to approximately 64% from approximately 45%.
A significant component of this increased expense was our costs for outside
services during the quarter ended September 30, 2003. Specifically, for the
three months ended September 30, 2003, we paid $508,000 for outside services,
compared to approximately $64,000 in the comparable prior year period. The
increase in outside services was due to our outsourcing of testing on a
third-party proprietary assay to the company that performs the testing. For
the nine-month periods ended March 31, 2004 and 2003, respectively, salaries
and related benefits decreased 8% to approximately $723,000 from $786,000, lab
supplies decreased 11% to approximately $471,000 from $527,000, and outside
services increased 50% to approximately $538,000 from $357,000. The changes
in the components of expenses between the comparable periods were
primarily attributable to the decreased supplies needed to support the
commensurate decrease in revenues, partially offset by the increased outside
services incurred primarily in the quarter ended September 30, 2003. Through December 31, 2003, as part of our efforts to reduce expenses, with
respect to our laboratory operations, quality assurance, client services and
information technology employees, we terminated employment of five employees,
had one employee participate in the salary deferral program, and enrolled the
remaining 18 employees in the Shared Work Program. Effective mid-March 2004
for an anticipated 8 to 10 week period, we began ramping up to work on the
March 2004 clinical services contract. We anticipate that most of our
management employees who currently participate in the salary deferral /
reduction program will continue to do so, except for three department managers
who have been restored to full salary effective March 16, 2004. For the
duration of this clinical services study, we also expect to pull our other
laboratory operations, quality assurance, client services and information
technology employees out of the Shared Work Program, and we will likely incur
significant overtime expense. Research and Product Development: Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to
nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeResearch and Product
Development
    
    $
    17
    
    
    $
    55
    
    
    $
    (38
    )
    
    
    (69
    )%
    
    $
    95
    
    
    $
    124
    
    
    $
    (29
    )
    
    
    (23
    )%Percentage of
Revenues
    
    
    3
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    3
    %
 Research and development expenses consist mainly of our expenditures incurred
in connection with development of the LIDA and cell viability technology we
acquired from Saigene Corporation in August 2002. For the comparable quarters ended March 31, 2004 and 2003, research and product
development expenses decreased 69% to approximately $17,000 from $55,000. For
the comparable nine-month periods, research and product development expenses
decreased 23% to approximately $95,000 from approximately $124,000. The
decrease in each period was primarily the result of decreased compensation
expense as a result of fewer employees in research and product development in
the current year period over the comparable prior year period. For the
nine-month periods ended March 31, 2004 and 2003, the decrease was partially
offset by increased patent related legal expenses, incurred primarily in the
first half of the respective fiscal year periods. Also, in November 2003, as
part of our efforts to reduce expenses, we enrolled our one employee in
research and development in the Shared Work Program, and in February 2004, this
employee was terminated, further reducing our compensation expense in this
area. -15-




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We anticipate that we will continue to incur research and development expenses
related to the technology acquired from Saigene. However, if we are unable to
increase revenues or raise additional funding to continue to fund our existing
research and development efforts, we will seek to further reduce our research
and development efforts and expenses. Selling, General and Administrative Expense: Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeSelling, General and
Administrative
Expense
    
    $
    750
    
    
    $
    960
    
    
    $
    (210
    )
    
    
    (22
    )%
    
    $
    2,346
    
    
    $
    2,930
    
    
    $
    (584
    )
    
    
    (20
    )%Percentage of
Revenues
    
    
    137
    %
    
    
    46
    %
    
    
    
    
    
    
    
    
    
    
    69
    %
    
    
    63
    %
 Our selling, general and administrative expense consists primarily of
management fees paid to Saigene, compensation for our executive officers, board
members and other selling, general and administrative personnel, compensation
expense on our stock options, legal and accounting fees, and payments under
consulting arrangements. Selling, general and administrative expense decreased 22% for the comparable
quarters to approximately $750,000 from $960,000, and decreased 20% for the
comparable nine-month periods to approximately $2,346,000 from $2,930,000. As
a percentage of revenue, selling, general and administrative expenses were 137%
and 46%, respectively, for the comparable quarters ended March 31, 2004 and
2003, and were 69% and 63%, respectively, for the comparable nine-month periods
ended March 31, 2004 and 2003. The reduction in our selling, general and administrative expenses for the
comparable periods is due in large part to decreased management fees we paid to
Saigene under the terms of the amended and restated management agreement. This
reflects the reduction in monthly management fees, effective July 1, 2003, to
$70,000 from $90,000 and the further reduction of the management fees to
$40,000 per month from $70,000 per month effective February 1, 2004. For the
comparable quarters ended March 31, 2004 and 2003, respectively, management
fees decreased 44% to approximately $150,000 from $270,000, and for the
comparable nine months ended March 31, 2004 and 2003, respectively, management
fees decreased 42% to approximately $570,000 from $985,000. Excluding Saigene management fees, selling, general and administrative expenses
were approximately $600,000 and $690,000 (approximately 109% and 33% as a
percentage of revenue), respectively, for the comparable quarters ended March
31, 2004 and 2003, and were approximately $1,776,000 and $1,945,000
(approximately 52% and 42% as a percentage of revenue), respectively, for the
comparable nine-month periods ended March 31, 2004 and 2003. For the quarter and nine months ended March 31, 2003, our selling, general and
administrative expenses included contract labor costs for services provided by
our current Chief Executive Officer under a management agreement with Saigene
before he became our employee, and for contract accounting and contract chief
financial officer services. In calendar year 2003 we hired our Chief Executive
Officer and Chief Financial Officer, resulting in decreased needs for contract
labor services. Accordingly, for the comparable quarter and nine month periods
ended March 31, 2004 and 2003, respectively, our contract labor costs decreased
approximately $16,000 and $74,000. In addition, in the quarter and nine months
ended March 31, 2003, we also incurred recruiting and relocation expenses of
approximately $0 and $115,000, respectively, relating to our Chief Medical
Officer and a Business Development Representative, where we had no comparable
expenses in the periods ended March 31, 2004. In addition to the decrease in
contract labor services, we recognized decreased salaries and benefits of
approximately $14,000 between the comparable quarters ended March 31, 2004 and
2003, and increased salaries and benefits of approximately $219,000 between the
comparable nine month periods ended March 31, 2004 and 2003. The change in
salaries and wages was due primarily to the hiring of our Chief Executive
Officer, Chief Financial Officer and a business -16-




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##### Table of Contents



development representative during calendar year 2003, partially offset by
salary reductions of 15% to 20% implemented beginning February 1, 2004. Selling, general and administrative expenses for the three and nine-month
periods ended March 31, 2004 included approximately $22,000 and $118,000 in
Board of Director compensation, whereas we paid no Board compensation in the
prior comparable fiscal periods. In addition, under the terms of consulting
agreements dated August 28, 2002 with two of our directors, Terry Giles and
Paul Kanan, we recorded aggregate consulting expenses of $39,000 in each of the
comparable quarters of fiscal 2004 and 2003, and aggregate consulting expenses
of $117,000 and $91,000, respectively, in the comparable nine-month periods of
fiscal 2004 and 2003. Selling, general and administrative expenses also include compensation income
(expense) resulting from the May 2002 repricing of all outstanding stock
options to the then-current market price of $0.06. For the comparable quarters
ended March 31, 2004 and 2003, we recognized expense of approximately $2,000
and $81,000, respectively, to adjust these options to fair market value.
However, for the comparable nine-month periods ended March 31, 2004 and 2003,
respectively, we recognized approximately $44,000 in income and $152,000 in
expense. As of March 31, 2004, 39,473 repriced options remained outstanding,
and as a result we will continue to recognize compensation income (expense)
from the repricing in future periods. The amount of compensation expense we
recognize in the future will fluctuate based on the value of our common stock
and the number of options that are outstanding as of each valuation date. (See
Note 11 to Notes to Consolidated Financial Statements in our Report on Form
10-KSB for the year ended June 30, 2003). Further changes in our selling, general and administrative expenses include an
increase in legal and accounting expenses of approximately $51,000 between the
respective quarters ended March 31, 2004 and 2003 to $113,000
from $62,000.
For the respective nine-month periods ended March 31, 2004 and 2003, legal and
accounting expenses decreased approximately $46,000, to $237,000 from $282,000.
These changes in legal and accounting expenses are primarily the result of
legal and accounting expenses incurred in conjunction with the Saigene purchase
transaction in the early part of fiscal 2003, and in conjunction with the
filing of our resale registration statement in March 2004. Through December 31, 2003, as part of our ongoing effort to reduce expenses,
with respect to our selling, general and administrative employees, we
terminated employment of two employees, had eight employees participate in the
salary deferral / reduction program, had one hourly employee agreeing to
reduce her hours worked, and enrolled one employee in the Shared Work Program.
Effective mid-March 2004 for an anticipated 8 to 10 week period, we began
ramping up to work on the March 2004 clinical services contract. We
anticipate that most of our management employees who currently participate in
the salary deferral / reduction program will continue to do so, except for
three department managers who have been restored to full salary effective
March 16, 2004. For the duration of this clinical services study, the one
selling, general and administrative employee who had been enrolled in the
Shared Work Program will return to full-time. We expect overall selling, general and administrative expenses for the fourth
quarter of fiscal 2004 as well as the full fiscal year ending June 30, 2004 to
decrease as compared to the prior fiscal periods, primarily given the decreased
management fees payable to Saigene and the cost-cutting measures described
above. These expense decreases will be offset by increases in fiscal 2004 over
fiscal 2003 in Board compensation and anticipated full year compensation
expense from the hiring of our Chief Executive Officer, Chief Medical Officer,
and Chief Financial Officer and a business development representative during
fiscal 2003. -17-




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##### Table of Contents



Other Income (Expense): Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeOther Income
(Expense)
    
    $
    12
    
    
    $
    142
    
    
    $
    (130
    )
    
    
    (92
    )%
    
    $
    (104
    )
    
    $
    341
    
    
    $
    (445
    )
    
    
    (130
    )%Percentage of
Revenues
    
    
    2
    %
    
    
    7
    %
    
    
    
    
    
    
    
    
    
    
    (3
    )%
    
    
    7
    %
 Total other income (expense) decreased approximately $130,000 in the quarter
ended March 31, 2004 over the comparable quarter ended March 31, 2003. We had
net other income of approximately $12,000 for the quarter ended March 31, 2004,
including approximately $42,000 in Washington state sales and business and
occupation tax refunds from a review of past years tax remittances, and
approximately $30,000 of interest expense on notes payable and lease
obligations. For the quarter ended March 31, 2003, we had net
other income of
approximately $142,000, including approximately $20,000 of interest expense on
notes payable and lease obligations, approximately $4,000 in gain on troubled
debt restructuring, and approximately $158,000 of other income, primarily from
reassessment of then existing liabilities, whereby we wrote off some of our old
accounts payable and an old lease obligation during fiscal 2003. Between the comparable nine months ended March 31, 2004 and 2003, total other
income (expense) decreased approximately $445,000. For the nine months ended
March 31, 2004, we had net other expense of approximately $104,000, including
approximately $91,000 of interest expense on notes payable and lease
obligations, approximately $17,000 in interest and other income, approximately
$42,000 in Washington state sales and business and occupation tax refunds from
a review of past years tax remittances, and approximately $72,000 from a loss
on the receipt of common stock instead of cash in payment of a $200,000 note
receivable and approximately $16,000 in accrued interest income from a related
party (Saigene). For the nine months ended March 31, 2003, we
had net other income
of approximately $341,000, including approximately $89,000 of interest expense
on notes payable and lease obligations, approximately $1,000 of interest
income, approximately $169,000 in gain on troubled debt restructuring, and
approximately $260,000 of other income, primarily from reassessment of then
existing liabilities, whereby we wrote off some of our old accounts payable and
an old lease obligation during fiscal 2003 and, to a lesser amount, we had rent
and fees paid to us by Saigene prior to the August 28, 2002 Saigene asset
purchase agreement. Net Earnings (Loss): Three Months Ended
    
    
    
    
    
    
    
    
    
    Nine Months EndedDollars in thousands,rounded to nearest
    
    March 31,
    
    $
    
    %
    
    March 31,
    
    $
    
    %thousand
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeNet Earnings (Loss)
    
    $
    (639
    )
    
    $
    300
    
    
    $
    (939
    )
    
    
    (313
    )%
    
    $
    (1,331
    )
    
    $
    (173
    )
    
    $
    (1,158
    )
    
    
    (669
    )%Percentage of
Revenues
    
    
    (117
    )%
    
    
    14
    %
    
    
    
    
    
    
    
    
    
    
    (39
    )%
    
    
    (4
    )%
 We had a net loss of approximately $639,000 for the three months ended March
31, 2004 compared to net earnings of approximately $300,000 for the three
months ended March 31, 2003, representing a decrease of approximately $939,000
between the comparable periods. The decrease in net earnings is primarily
attributable to our significantly decreased revenues in the year over year
quarters, partially offset by decreases in laboratory expenses and cost of
sales and selling, general and administrative expenses, and research and
product development expenses discussed above. For the nine months ended March 31, 2004, we had net loss of approximately
$1,331,000 compared to a net loss of approximately $173,000 for the nine months
ended March 31, 2003, representing an increased loss of approximately -18-




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$1,158,000 between the comparable nine-month periods. The worsening of our net
loss for the comparable nine months is primarily attributable to our
significantly decreased revenues and resulting net losses for the quarters
ended December 31, 2003 and March 31, 2004 discussed above and in our Form
10QSB for the period ended December 31, 2003. Our net loss for the nine months
ended March 31, 2004 is partially offset by our approximately $19,000 net
earnings for the quarter ended September 30, 2003. Changes in laboratory
expenses and cost of sales as well as selling, general and administrative
expense, research and product development expenses, and other income (expense)
as discussed above will also continue to impact our net earnings (loss),
however, the primary driver of our net losses is currently our significant
decrease in revenues. Liquidity and Capital Resources: We had significant net operating losses for the quarter and nine months ended
March 31, 2004. We expect that revenues for the quarter ending June 30, 2004
will be improved over the most recent two quarters as a result of a March 2004
clinical services contract we recently entered into with a pharmaceutical
company for a study with anticipated revenues of approximately $1.4 million.
Revenues under this new clinical services contract commenced in March 2004, and
accounted for approximately $331,000 or 60% of our total revenues for the
quarter just ended. We expect to recognize the remainder of the revenues from
this clinical services contract in the quarter ending June 30, 2004. Even with
the improvement to revenues and positive impact on earnings expected in the
quarter ending June 30, 2004 resulting from the March 2004 clinical services
contract, we expect to incur a net loss for the fiscal year ending June 30,
2004 and that revenues for fiscal year ending June 30, 2004 will be
significantly lower than those in the comparable prior year period. Our operations historically have primarily been funded through revenues
generated from operations and from the sale and issuance of our common stock
and preferred stock from time to time. At March 31, 2004, our cash and cash equivalents were approximately $975,000,
compared to approximately $440,000 at June 30, 2003. We had approximately
$481,000 in accounts receivable as of March 31, 2004, compared approximately
$467,000 as of June 30, 2003, reflecting the timing of revenues billed and
collected. Total liabilities as of March 31, 2004 were approximately
$2,816,000 compared to approximately $2,714,000 as of June 30, 2003. The
improvement in our cash and cash equivalents is primarily attributable to
proceeds from our private placement and our borrowings under our credit
facility, and to a lesser degree from increased advances from our customers and
increased accrued liabilities. As of March 31, 2004 and June 30, 2003, we also
had restricted cash of approximately $71,000 which represents a security
deposit in connection with our office lease in Seattle, Washington which
expires in July 2007. We are obligated to maintain the restricted cash
security deposit through the term of the lease. As of March 31, 2004, we had a working capital deficit of approximately
$407,000, compared to a working capital deficit of approximately $685,000 at
June 30, 2003. The approximately $278,000 increase in working capital is
attributable to several changes in the components of working capital. Changes
providing favorable impact include increases in cash, accounts receivable and
prepaid expenses and other assets, and decreases in accounts payable, and,
except for additional borrowings of $250,000 under a new loan and security
agreement, decreases in our current notes payable and lease obligations.
Changes negatively impacting our working capital since June 30, 2003 include
decreases in our $200,000 note receivable from Saigene (through receipt of
payment in the form of our common stock), decreased inventories since June 30,
2003, increases in accrued liabilities, dividends payable, advances from
customers and deferred compensation, and the current portion of the new
$250,000 loan and security agreement. Net cash used in operating activities was approximately $1,092,000 for the nine
months ended March 31, 2004, primarily to fund our loss from operations and
changes in our working capital, and included the effect of approximately
$16,000 in interest income on a note receivable from Saigene that was paid to
us using our common stock. Our investing activities used approximately $74,000
for the nine months ended March 31, 2004 primarily for the purchase of capital
equipment. Cash flows provided by financing activities was approximately
$1,701,000 for the nine months ended March 31, 2004, consisting primarily of
approximately $1,711,000 in net proceeds from our private placement of
unregistered common stock, approximately $250,000 in proceeds of borrowings
under our credit facility and approximately $2,000 in proceeds from exercise of
stock options, offset by approximately -19-




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##### Table of Contents



$255,000 in payments on notes payable, notes payable to related parties, and
payments on capital lease obligations, and payment of approximately $6,000 in
dividends on our Series B preferred stock. During the nine months ended March 31, 2004, within the quarter ended September
30, 2003, we received 72,072 shares of our common stock as payment on a
$200,000 note receivable and accrued interest from Saigene, and accrued
approximately $2,000 in dividends on our Series B preferred stock. The payment
on the Saigene note in common stock was made in accordance with the terms of
the note, and resulted in elimination of the note receivable but without a
corresponding increase in our cash position. During the nine months ended
March 31, 2004, we also reversed approximately $1,000 previously recorded to
our common stock and prepaid financing expense accounts, reflecting the return
and cancellation of 83,333 shares of our common stock that had been held in
escrow under an agreement with our prior landlord. Under the terms of the
escrow agreement, 583,333 shares of our common stock remain in escrow. As described above, we experienced a significant decrease in revenues in the
quarters ended March 31, 2004 and December 31, 2003, as well as significant
losses and degradation of our cash and working capital position from
operations. We expect these trends will continue into fiscal 2005. To improve
our cash position, we are actively seeking to increase revenues, raise debt or
equity financing and cut expenses significantly. There can be no assurance
that our efforts to reduce expenses, generate revenue and raise sufficient
capital will be successful. In the current market conditions, raising capital from equity financing has
been, and will continue to be difficult. We did not raise sufficient financing
from our Series B preferred stock private placement in the spring / summer of
2003. Beginning in November 2003, we initiated a best efforts private
placement through the sale of unregistered shares of common stock at $0.50 per
share. Through the closing of the private placement in March 2004, we sold
3,846,000 shares of common stock and received approximately $1,711,000 in net
proceeds. In connection with that private placement, as of March 31, 2004, we
had recorded cash commissions to the broker dealer of $192,300 and incurred
$19,587 of legal expenses. On August 5, 2003, we entered into a loan and security agreement with our
lender, Franklin Funding, Inc. Under this agreement, we borrowed $250,000
during the first and second quarters of fiscal 2004. Amounts borrowed under
the loan agreement bear interest at 17.64% and are amortized over 36 months,
with monthly payments beginning September 2003 and a final balloon payment due
at maturity on August 5, 2006, and are secured by specific equipment. In the
event of default, among other remedies, the lender may declare the entire
amount under the loan agreement to be immediately due and payable, and may take
possession of the equipment provided as security. Pursuant to the terms of the
loan agreement, we granted to the lender warrants to purchase 25,000 shares of
common stock (at the rate of 5,000 per $50,000 borrowed, with exercise prices
as of the date of borrowing), consisting of warrants for 5,000 shares at $1.10
per share, 5,000 shares at $1.00 per share, 10,000 shares at $0.95 per share,
and 5,000 shares at $0.85 per share. No additional amounts are available to us
under this credit facility, and we do not have any other credit facility in
place. Despite these recent cash infusions from the private placement and our credit
facility with Franklin Funding, we expect to need additional capital to help
fund operations through the balance of fiscal 2004 and into fiscal 2005. There
can be no assurance that we will be able to raise sufficient financing.
Accordingly, management is contemplating other alternatives to enable us to
fund continuing operations, including loans from management or employees,
salary deferrals and reductions and other cost cutting mechanisms, and raising
additional capital by private placements of equity or debt securities or
through the establishment of other funding facilities. In addition, we are
exploring strategic alternatives, which may include a merger, asset sale, joint
venture or another comparable transaction. None of these potential
alternatives may be available to us, or may only be available on unfavorable
terms. If we are unable to obtain sufficient cash to continue to fund
operations or if we are unable to locate a strategic partner, we may be forced
to seek protection from creditors under the bankruptcy laws or cease
operations. Any inability to obtain additional cash as needed could have a
material adverse effect on our financial position, results of operations and
our ability to continue in existence. Our auditors added an explanatory
paragraph to their opinion on our fiscal 2003 financial statements stating that
there was substantial doubt about our ability to continue as a going concern,
and we expect a similar going-concern opinion on our financial statements for
the fiscal year ending June 30, 2004. There can be no assurance that our
efforts to reduce expenses and generate revenue will be successful. -20-




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##### Table of Contents



With respect to our research and development activities, Saigene has informed
us that in order to develop and commercialize the technology that we acquired
from Saigene in August 2002, we would likely require in the near term a capital
infusion in excess of $5 million. Moreover, management believes that an
additional $15 million over the next two years would be required to achieve
regulatory approval and commercialization of the technologies acquired from
Saigene in August 2002, as well as the additional technologies that may be
acquired under the option agreement with Saigene. Due to our current working
capital position, we are not actively pursuing these research and development
efforts. Although, in the future we do intend to seek suitable financing to
continue research and development efforts, commence the regulatory approval
process and commercialization of the technologies, but there can be no
assurance that we will be able to obtain such financing, on favorable terms or
at all. We also intend to continue to explore strategic alternatives for our
technology assets, which, in addition to further development, may include sale,
partnership, joint venture, licensing or other means of developing or otherwise
realizing the value of these assets. Factors That May Affect Operating Results Our operating results and financial condition will fluctuate due to a number of
factors, including, but not limited to, the following factors:  
    
    our ability to raise money from debt or equity financing to fund
negative cash flows;
    
    our marketing efforts and our ability to enter into and build
relationships with new customers, and obtain additional projects from
existing customers;
    
    the timing and number of clinical trials by customers, the number
of samples submitted to us for testing, and the amount of revenues
generated from these tests;
    
    our ability to participate in and win bids from RFPs (requests for proposals) for clinical tests;
    
    our ability to manage our cash flow, including by managing or reducing our expenses;
    
    capital expenditure requirements, including for research and
development efforts, upgrading or replacing laboratory equipment and
making investments in information technology;
    
    our ability to motivate and retain our existing employees; and
    
    plans to pursue alternative business strategies, which may include
entering into a joint venture, asset sale or merger. Many of the above factors are outside of our control, and all of the above
factors are difficult for us to forecast. These factors can materially
adversely affect our business and operating results for one quarter or a series
of quarters. 
 ITEM 3. CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this quarterly report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this quarterly report, the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known
to them in a timely fashion. There were no changes in internal controls over financial reporting that
occurred during the period covered by this report that have materially
affected, or are likely to materially affect, our internal control over
financial reporting. -21-




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In November 2003, we initiated a best efforts private placement of unregistered
common stock through registered broker-dealers, for the sale of unregistered
common stock at a purchase price of $0.50 per share. In connection with the
private placement, we engaged Source Capital Group, Inc. and Basic Investors,
Inc. as non-exclusive placement agents. Through closing of the private
placement in March 2004, we received gross proceeds of $1,923,000 from the sale
of a total of 3,846,000 shares, and recorded aggregate cash commissions to the
placement agents of $192,300. We also issued to the placement agents warrants
covering 384,600 shares of unregistered common stock at an exercise price of
$0.60 per share, expiring December 31, 2006. The private placement shares were
offered and sold solely to accredited investors in reliance on the exemption
from registration provided by Rule 506 of Regulation D under the Securities
Act. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)
    
    Exhibits:10.1
    
    
    Amendment No. 3, dated
May 11, 2004, to Amended and Restated Management Agreement,
between Saigene Corporation and Pacific Biometrics, Inc.21.1
    
    
    Subsidiaries of Pacific Biometrics, Inc.31.1
    
    
    Certification of Ronald R. Helm, Chief Executive Officer31.2
    
    
    Certification of Michael P. Carrosino, Chief Financial Officer32.1
    
    
    Certification of Ronald R. Helm, Chief Executive
Officer of Pacific Biometrics, Inc., pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    
    Certification of Michael P. Carrosino, Chief
Financial Officer 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)
    
    Reports on Form 8-K
 We filed a Current Report on Form 8-K on December 21, 2003 reporting
our agreement with Nordic Bioscience Diagnostics A/S, whereby we were named
the exclusive testing site in North America for the proprietary arthritis
marker CartiLaps®. We filed a Current Report on Form 8-K on February 23, 2004 reporting
closing of our Private Placement of common stock. We filed a Current Report on Form 8-K on March 4, 2004 reporting that
we had entered into a new clinical research contract. We filed a Current Report on Form 8-K on March 22, 2004 reporting a
subsequent closing of our Private Placement of common stock. 
 SIGNATURES In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. Dated: May 14, 2004
    
    /s/ Ronald R. HelmRonald R. Helm, Chief Executive
Officer(principal executive officer)/s/ Michael P. Carrosino

Michael P. Carrosino, Chief
Financial Officer(principal financial and accounting
officer)
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