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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-QSB

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

| |  |                                                                                         
| |  | ----------------------------------------------------------------------------------------
| |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| |  | For the Transition Period From  to                                                      



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Commission File Number 0-21537

Pacific Biometrics, Inc.

(Exact name of registrant as specified in its charter)


|                                              |  |                                
|--------------------------------------------- |  | -------------------------------
|Delaware                                      |  | 93-1211114                     
|(State or other jurisdiction of incorporation |  | (I.R.S. Employer Identification
|or organization)                              |  | Number)                        
|                                              |  |                                
|220 West Harrison Street                      |  | (206) 298-0068                 
|Seattle, Washington 98119                     |  | (Registrants telephone number,
|(Address of principal executive office)       |  | 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 January 31, 2004, the issuer had 11,155,719 shares of common stock
outstanding.

Transitional Small Business Disclosure Format:
              
              
              
              
Yes  o  No x



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TABLE OF CONTENTS



|                            |                                                                                               |                                            |  |  |  |  |  | 
|--------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                            |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                            |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                            |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                            | ITEM 3. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION
|                            | ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS                                             
|                            | ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K                                                      
|SIGNATURES                 
|Exhibit 10.1               
|Exhibit 31.1               
|Exhibit 31.2               
|Exhibit 32.1               
|Exhibit 32.2               



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PACIFIC BIOMETRICS, INC.

INDEX TO FORM 10-QSB

|                                                                                               |                                                                                                                 |  |      |   | 
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                               |                                                                                                                 |  | Page
|                                                                                               |                                                                                                                 |  |     
|PART I - FINANCIAL INFORMATION                                                                 |                                                                                                                 |  |      |  
|ITEM 1 - FINANCIAL STATEMENTS                                                                  |                                                                                                                 |  |      |  
|                                                                                               | Consolidated Balance Sheets as of December 31, 2003 (unaudited) and June 30, 2003 (audited)                     |  |      | 3 | 
|                                                                                               | Consolidated Statements of Operations for the three and six months ended December 31, 2003 and 2002 (unaudited) |  |      | 4 | 
|                                                                                               | Consolidated Statements of Cash Flows for the three and six months ended December 31, 2003 and 2002 (unaudited) |  |      | 5 | 
|                                                                                               | Notes to Consolidated Financial Statements (unaudited)                                                          |  |      | 6 | 
|ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                                                                 |  | 11   |  
|ITEM 3 - CONTROLS AND PROCEDURES                                                               |                                                                                                                 |  | 22   |  
|PART II - OTHER INFORMATION                                                                    |                                                                                                                 |  |      |  
|ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |                                                                                                                 |  | 22   |  
|ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                                                                                 |  | 23   |  





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PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEETS

|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |             |           |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------ | --------- | --------- | ------- | ----------- | --------- | -
|                                                     |                                                                                                                          |                                                                                                                                                                   |         | December 31, |           | June 30, 
|                                                     |                                                                                                                          |                                                                                                                                                                   |         | 2003         |           | 2003     
|                                                     |                                                                                                                          |                                                                                                                                                                   |         | (unaudited)  |           | (audited)
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |          
|ASSETS                                               |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|Current assets:                                      |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     | Cash and cash equivalents                                                                                                |                                                                                                                                                                   | $       | 668,926      |           |           | $       | 440,326     |          
|                                                     | Accounts receivable, net of allowance for doubtful accounts
of $23,695 at December 31, 2003 and $25,543 at June 30, 2003 |                                                                                                                                                                   |         | 417,224      |           |           |         | 466,608     |          
|                                                     | Note receivable from related party                                                                                       |                                                                                                                                                                   |         |             |           |           |         | 200,000     |          
|                                                     | Inventories                                                                                                              |                                                                                                                                                                   |         |             |           |           |         | 158,104     |          
|                                                     | Prepaid expenses and other assets                                                                                        |                                                                                                                                                                   |         | 145,202      |           |           |         | 73,176      |          
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total current assets                                                                                                                                              |         |              | 1,231,352 |           |         |             | 1,338,214 |  
|Property and equipment, net                          |                                                                                                                          |                                                                                                                                                                   | 403,200 |              |           |           | 433,060 |            
|Other assets:                                        |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     | Restricted cash                                                                                                          |                                                                                                                                                                   |         | 71,236       |           |           |         | 71,074      |          
|                                                     | Technology assets                                                                                                        |                                                                                                                                                                   |         | 476,874      |           |           |         | 476,874     |          
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total assets                                                                                                                                                      |         | $            | 2,182,662 |           |         | $           | 2,319,222 |  
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|LIABILITIES AND STOCKHOLDERS DEFICIT                |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|Current liabilities:                                 |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     | Accounts payable                                                                                                         |                                                                                                                                                                   | $       | 869,653      |           |           | $       | 792,420     |          
|                                                     | Accrued liabilities                                                                                                      |                                                                                                                                                                   |         | 656,749      |           |           |         | 563,778     |          
|                                                     | Dividends payable                                                                                                        |                                                                                                                                                                   |         |             |           |           |         | 1,558       |          
|                                                     | Deferred compensation                                                                                                    |                                                                                                                                                                   |         | 13,774       |           |           |         |            |          
|                                                     | Advances from customers                                                                                                  |                                                                                                                                                                   |         | 78,284       |           |           |         | 310,948     |          
|                                                     | Capital lease obligations - current portion                                                                              |                                                                                                                                                                   |         | 55,736       |           |           |         | 58,239      |          
|                                                     | Notes payable to related parties - current portion                                                                       |                                                                                                                                                                   |         | 79,691       |           |           |         | 123,576     |          
|                                                     | Other notes payable - current portion                                                                                    |                                                                                                                                                                   |         | 238,023      |           |           |         | 172,392     |          
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total current liabilities                                                                                                                                         |         |              | 1,991,910 |           |         |             | 2,022,911 |  
|Capital lease obligations - long term portion        |                                                                                                                          |                                                                                                                                                                   | 181,740 |              |           |           | 208,717 |            
|Notes payable to related parties - long term portion |                                                                                                                          |                                                                                                                                                                   |        |              |           |           | 11,775  |            
|Other notes payable - long term portion              |                                                                                                                          |                                                                                                                                                                   | 574,779 |              |           |           | 470,696 |            
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total liabilities                                                                                                                                                 |         |              | 2,748,429 |           |         |             | 2,714,099 |  
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|Stockholders deficit:                               |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     | Preferred stock, $0.01 par value, 5,000,000 shares authorized                                                            |                                                                                                                                                                   |         |              |           |           |         |             |          
|                                                     |                                                                                                                          | Series 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    |           |         |             | 15,500    |  
|                                                     |                                                                                                                          | Series 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       |           |         |             | 337       |  
|                                                     | Common stock, $0.01 par value, 30,000,000 shares authorized                                                              |                                                                                                                                                                   |         |              |           |           |         |             |          
|                                                     |                                                                                                                          | Issued
and outstanding  9,069,719 shares at December 31, 2003 and 9,218,458
at June 30, 2003                                                                     |         |              | 262,423   |           |         |             | 263,189   |  
|                                                     | Common
stock subscribed  1,566,000 shares at December 31, 2003                                                          |                                                                                                                                                                   |         | 609,860      |           |           |         |            |          
|                                                     | Additional paid-in capital                                                                                               |                                                                                                                                                                   |         | 20,474,472   |           |           |         | 20,421,642  |          
|                                                     | Accumulated deficit                                                                                                      |                                                                                                                                                                   |         | (21,926,936  | )         |           |         | (21,094,843 | )        
|                                                     | Treasury stock                                                                                                           |                                                                                                                                                                   |         | (1,423       | )         |           |         | (702        | )        
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total stockholders deficit                                                                                                                                       |         |              | (565,767  | )         |         |             | (394,877  | )
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            
|                                                     |                                                                                                                          | Total liabilities and stockholders deficit                                                                                                                       |         | $            | 2,182,662 |           |         | $           | 2,319,222 |  
|                                                     |                                                                                                                          |                                                                                                                                                                   |         |              |           |           |         |            

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

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |           |           |           | 
|----------------------------------------------------- | -------------------------------------------------------- | ----------------------------------- | ------------ | --------- | ------------------ | ------ | ---------------- | --------- | ------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | 
|                                                      |                                                          |                                     |              |           | Three months ended |        | Six months ended
|                                                      |                                                          |                                     |              |           | December 31,       |        | December 31,    
|                                                      |                                                          |                                     |              |           |                    |        |                 
|                                                      |                                                          |                                     |              |           | 2003               |        | 2002             |           | 2003    |           | 2002     
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |          
|Revenues                                              |                                                          | $                                   | 542,076      |           |                    | $      | 1,668,307        |           |         | $         | 2,842,298 |           |           | $         | 2,563,043 |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Laboratory expenses and cost of sales                 |                                                          |                                     | 449,592      |           |                    |        | 628,898          |           |         |           | 1,743,695 |           |           |           | 1,195,742 |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      |                                                          |                                     | Gross margin |           |                    | 92,484 |                  |           |         | 1,039,409 |           |           |           | 1,098,603 |           |           |           | 1,367,301 | 
|Operating expenses:                                   |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      |                                                          | Research and product development    |              |           | 39,114             |        |                  |           | 36,691  |           |           |           | 77,353    |           |           |           | 69,773    |          
|                                                      |                                                          | Selling, general and administrative |              |           | 734,633            |        |                  |           | 904,909 |           |           |           | 1,596,838 |           |           |           | 1,969,610 |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Operating income (loss)                               |                                                          |                                     | (681,263     | )         |                    |        | 97,809           |           |         |           | (575,588  | )         |           |           | (672,082  | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Other income (expense):                               |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      | Interest expense                                         |                                     |              | (29,847   | )                  |        |                  | (37,017   | )       |           |           | (60,948   | )         |           |           | (68,622   | )        
|                                                      | Interest income                                          |                                     |              | 209       |                    |        |                  | 139       |         |           |           | 16,509    |           |           |           | 370       |          
|                                                      | Other income                                             |                                     |              | 297       |                    |        |                  | 80,303    |         |           |           | 532       |           |           |           | 102,160   |          
|                                                      | Gain on troubled debt restructure                        |                                     |              |          |                    |        |                  | 165,384   |         |           |           |          |           |           |           | 165,384   |          
|                                                      | Loss on settlement of note receivable
from related party |                                     |              |          |                    |        |                  |          |         |           |           | (72,072   | )         |           |           |          |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      |                                                          |                                     | (29,341      | )         |                    |        | 208,809          |           |         |           | (115,979  | )         |           |           | 199,292   |          
|Net earnings (loss) before tax expense                |                                                          |                                     | (710,604     | )         |                    |        | 306,618          |           |         |           | (691,567  | )         |           |           | (472,790  | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Tax expense                                           |                                                          |                                     |             |           |                    |        |                 |           |         |           |          |           |           |           |          |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Net earnings (loss)                                   |                                                          | $                                   | (710,604     | )         |                    | $      | 306,618          |           |         | $         | (691,567  | )         |           | $         | (472,790  | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Preferred stock dividend                              |                                                          |                                     | (2,020       | )         |                    |        |                 |           |         |           | (4,054    | )         |           |           |          |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Net earnings (loss) applicable to
common stockholders |                                                          | $                                   | (712,624     | )         |                    | $      | 306,618          |           |         | $         | (695,621  | )         |           | $         | (472,790  | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Net earnings (loss) per share:                        |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      | Basic earnings (loss) per share                          |                                     | $            | (0.08     | )                  |        | $                | 0.04      |         |           | $         | (0.08     | )         |           | $         | (0.08     | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      | Diluted earnings (loss) per share                        |                                     | $            | (0.08     | )                  |        | $                | 0.04      |         |           | $         | (0.08     | )         |           | $         | (0.08     | )        
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|Weighted average common shares outstanding:           |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      | Basic                                                    |                                     |              | 8,706,089 |                    |        |                  | 8,434,670 |         |           |           | 8,628,941 |           |           |           | 6,127,528 |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          
|                                                      | Diluted                                                  |                                     |              | 8,706,089 |                    |        |                  | 8,633,595 |         |           |           | 8,628,941 |           |           |           | 6,127,528 |          
|                                                      |                                                          |                                     |              |           |                    |        |                  |           |         |           |           |           |           |           |           |          

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

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |          |          |         |          |  
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | -------- | ---------------- | -------- | -------- | -------- | -------- | ------- | -------- | -------- | -------- | -------- | ------- | -------- | -
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         | Three
months ended |          | Six
months ended
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         | December 31,       |          | December 31,    
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                 
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         | 2003               |          | 2002             |          | 2003     |          | 2002    
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |         
|Cash flows from operating activities:                |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     | Net earnings (loss)                                                                           |                                                                               | $                                                                                   | (710,604                                            | )       |                    | $        | 306,618          |          |          | $        | (691,567 | )       |          | $        | (472,790 | )       
|                                                     | Reconciliation of net earnings (loss) to net cash provided by (used in) operating activities: |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |          |         
|                                                     |                                                                                               | Depreciation and amortization                                                 |                                                                                     |                                                     | 28,125  |                    |          |                  | 18,837   |          |          |          | 56,577  |          |          |          | 36,442   |        
|                                                     |                                                                                               | Interest income on note receivable from related party settled by common stock |                                                                                     |                                                     |        |                    |          |                  |         |          |          |          | (16,218 | )        |          |          |         |        
|                                                     |                                                                                               | Board compensation settled by stock options                                   |                                                                                     |                                                     | 24,840  |                    |          |                  |         |          |          |          | 24,840  |          |          |          |         |        
|                                                     |                                                                                               | Loss on settlement of note receivable from related party                      |                                                                                     |                                                     |        |                    |          |                  |         |          |          |          | 72,072  |          |          |          |         |        
|                                                     |                                                                                               | Gain on restructuring of capital leases                                       |                                                                                     |                                                     |        |                    |          |                  | (165,384 | )        |          |          |        |          |          |          | (165,384 | )      
|                                                     |                                                                                               | Compensation expense (income) from fair value adjustment to options           |                                                                                     |                                                     | (54,977 | )                  |          |                  | (38,856  | )        |          |          | (46,049 | )        |          |          | 71,085   |        
|                                                     |                                                                                               | Changes in assets and liabilities:                                            |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |          |          |        
|                                                     |                                                                                               |                                                                               | Accounts receivable, net                                                            |                                                     |         | 211,924            |          |                  |          | (139,866 | )        |          |         | 49,385   |          |          |          | 267,914 |         
|                                                     |                                                                                               |                                                                               | Inventories                                                                         |                                                     |         |                   |          |                  |          |         |          |          |         | 158,104  |          |          |          |        |         
|                                                     |                                                                                               |                                                                               | Prepaid expenses and other assets                                                   |                                                     |         | 35,641             |          |                  |          | (38,375  | )        |          |         | (72,786  | )        |          |          | 12,704  |         
|                                                     |                                                                                               |                                                                               | Advances from customers                                                             |                                                     |         | 24,879             |          |                  |          | (304,793 | )        |          |         | (232,664 | )        |          |          | 255,069 |         
|                                                     |                                                                                               |                                                                               | Accounts payable                                                                    |                                                     |         | (365,079           | )        |                  |          | 136,763  |          |          |         | 77,233   |          |          |          | (16,516 | )       
|                                                     |                                                                                               |                                                                               | Accrued liabilities                                                                 |                                                     |         | (86,271            | )        |                  |          | 60,547   |          |          |         | 92,971   |          |          |          | 76,423  |         
|                                                     |                                                                                               |                                                                               | Deferred compensation                                                               |                                                     |         | 13,774             |          |                  |          |         |          |          |         | 13,774   |          |          |          |        |         
|                                                     |                                                                                               |                                                                               | Stock options granted at less than fair market value                                |                                                     |         | 2,583              |          |                  |          |         |          |          |         | 2,583    |          |          |          |        |         
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     |                                                                                               |                                                                               |                                                                                     | Net cash provided by (used in) operating activities |         |                    | (875,165 | )                |          |          | (164,509 | )        |         |          | (511,745 | )        |          |         | 64,947   |  
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|Cash flows from investing activities:                |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     | Purchases of capital equipment                                                                |                                                                               |                                                                                     |                                                    |         |                    |          | (23,017          | )        |          |          | (26,717  | )       |          |          | (34,515  | )       
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     |                                                                                               |                                                                               |                                                                                     | Net cash used in investing activities               |         |                    |         |                  |          |          | (23,017  | )        |         |          | (26,717  | )        |          |         | (34,515  | )
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|Cash flows from financing activities:                |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     | Payments on notes payable                                                                     |                                                                               |                                                                                     | (43,336                                             | )       |                    |          | (79,810          | )        |          |          | (80,286  | )       |          |          | (67,547  | )       
|                                                     | Payments on notes payable to related parties                                                  |                                                                               |                                                                                     | (28,353                                             | )       |                    |          | (25,895          | )        |          |          | (55,660  | )       |          |          | (35,748  | )       
|                                                     | Transfer to restricted cash                                                                   |                                                                               |                                                                                     | (81                                                 | )       |                    |          | (130             | )        |          |          | (161     | )       |          |          | (350     | )       
|                                                     | Net proceeds from loan and security agreement                                                 |                                                                               |                                                                                     | 100,000                                             |         |                    |          |                 |          |          |          | 250,000  |         |          |          |         |         
|                                                     | Payments on capital lease obligations                                                         |                                                                               |                                                                                     | (11,760                                             | )       |                    |          | (6,170           | )        |          |          | (29,480  | )       |          |          | (1,618   | )       
|                                                     | Payment of cash dividends                                                                     |                                                                               |                                                                                     | (5,684                                              | )       |                    |          |                 |          |          |          | (5,684   | )       |          |          |         |         
|                                                     | Net proceeds from exercise of stock options                                                   |                                                                               |                                                                                     | 400                                                 |         |                    |          |                 |          |          |          | 400      |         |          |          | 610      |         
|                                                     | Net proceeds from private placement of common stock                                           |                                                                               |                                                                                     | 687,933                                             |         |                    |          |                 |          |          |          | 687,933  |         |          |          |         |         
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     |                                                                                               |                                                                               |                                                                                     | Net cash provided by (used in) financing activities |         |                    | 699,119  |                  |          |          | (112,005 | )        |         |          | 767,062  |          |          |         | (104,653 | )
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|Net increase (decrease) in cash and cash equivalents |                                                                                               |                                                                               | (176,046                                                                            | )                                                   |         |                    | (299,531 | )                |          |          | 228,600  |          |         |          | (74,221  | )       
|Cash and cash equivalents, beginning of period       |                                                                                               |                                                                               | 844,972                                                                             |                                                     |         |                    | 496,261  |                  |          |          | 440,326  |          |         |          | 270,951  |         
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|Cash and cash equivalents, end of period             |                                                                                               | $                                                                             | 668,926                                                                             |                                                     |         | $                  | 196,730  |                  |          | $        | 668,926  |          |         | $        | 196,730  |         
|                                                     |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|Cash paid during the period for interest             |                                                                                               | $                                                                             | 20,103                                                                              |                                                     |         | $                  | 7,379    |                  |          | $        | 39,861   |          |         | $        | 10,937   |         
|Non-Cash Activities                                  |                                                                                               |                                                                               |                                                                                     |                                                     |         |                    |          |                  |          |          |          |          |         |          |          |         
|                                                     |                                                                                               |                                                                               | Donated equipment                                                                   |                                                     | $       |                   |          |                  | $        | 70,766   |          |          | $       |         |          |          | $        | 70,766  |         
|                                                     |                                                                                               |                                                                               | Note payable issued in exchange for capital lease obligation                        |                                                     | $       |                   |          |                  | $        | 245,000  |          |          | $       |         |          |          | $        | 245,000 |         
|                                                     |                                                                                               |                                                                               | Common stock issued in exchange for accrued preferred dividends                     |                                                     | $       |                   |          |                  | $        |         |          |          | $       |         |          |          | $        | 909,828 |         
|                                                     |                                                                                               |                                                                               | Warrants and options issued in exchange for deferred compensation and notes payable |                                                     | $       |                   |          |                  | $        |         |          |          | $       |         |          |          | $        | 933,472 |         
|                                                     |                                                                                               |                                                                               | Purchase of technology assets and equipment in exchange for common stock            |                                                     | $       |                   |          |                  | $        |         |          |          | $       |         |          |          | $        | 934,207 |         
|                                                     |                                                                                               |                                                                               | Contribution toward development and commercialization of technology assets          |                                                     | $       |                   |          |                  | $        | 429,533  |          |          | $       |         |          |          | $        | 429,533 |         
|                                                     |                                                                                               |                                                                               | Preferred stock dividends accrued                                                   |                                                     | $       | 2,020              |          |                  | $        |         |          |          | $       | 4,054    |          |          | $        |        |         
|                                                     |                                                                                               |                                                                               | Note receivable from related party settled by common stock                          |                                                     | $       |                   |          |                  | $        | 200,000  |          |          | $       |         |          |          | $        | 200,000 |         
|                                                     |                                                                                               |                                                                               | Shares released from escrow under restructure agreement with prior landlord         |                                                     | $       |                   |          |                  | $        |         |          |          | $       | 833      |          |          | $        |        |         
|                                                     |                                                                                               |                                                                               | Warrants
issued in consideration of issuance costs for private placement            |                                                     | $       | 78,073             |          |                  | $        |         |          |          | $       | 78,073   |          |          | $        |        |         

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

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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 quarter ended 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 six months ended December 31:

|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |       |  
|----------------------------------------------------------------------------------- | --------------------- | - | ------------------ | ----- | ---------------- | - | ------- | ---- | ---- | - | -------- | ----- | - | - | -------- | ----- | -
|                                                                                    |                       |   | Three months ended |       | Six months ended
|                                                                                    |                       |   | December 31,       |       | December 31,    
|                                                                                    |                       |   |                    |       |                 
|                                                                                    |                       |   | 2003               |       | 2002             |   | 2003    |      | 2002
|                                                                                    |                       |   |                    |       |                  |   |         |      |     
|Net earnings (loss) as reported                                                     |                       | $ | (710,604           | )     |                  | $ | 306,618 |      |      | $ | (691,567 | )     |   | $ | (472,790 | )    
|Deduct: Total stock-based employee compensation
awards, net of related tax benefits |                       |   | 64,679             |       |                  |   |        |      |      |   | 64,679   |       |   |   | 93,798   |      
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|Pro forma net earnings (loss)                                                       |                       | $ | (775,283           | )     |                  | $ | 306,618 |      |      | $ | (756,246 | )     |   | $ | (566,588 | )    
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|Net earnings (loss) per share:                                                      |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|                                                                                    | Basic
 as reported   |   | $                  | (0.08 | )                |   | $       | 0.04 |      |   | $        | (0.08 | ) |   | $        | (0.08 | )
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|                                                                                    | Diluted  as reported |   | $                  | (0.08 | )                |   | $       | 0.04 |      |   | $        | (0.08 | ) |   | $        | (0.08 | )
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|                                                                                    | Basic
 pro forma     |   | $                  | (0.09 | )                |   | $       | 0.04 |      |   | $        | (0.09 | ) |   | $        | (0.09 | )
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      
|                                                                                    | Diluted  pro forma   |   | $                  | (0.09 | )                |   | $       | 0.04 |      |   | $        | (0.09 | ) |   | $        | (0.09 | )
|                                                                                    |                       |   |                    |       |                  |   |         |      |      |   |          |       |   |   |          |      

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 December 31, 2003, 41,140 of these options remained
outstanding. For the three and six month periods ended December 31, 2003, the
Company recognized $54,977 and $46,049, respectively, in income to adjust these
options to fair market value. For the three and six month periods ended
December 31, 2002, the Company recognized $38,856 in income and $71,085 in
expense, respectively, 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

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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 actively 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 $4,054, respectively, for the three and six months ended December
31, 2003, and $0 for the comparable periods of 2002.

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

|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |       |  
|---------------------------------------------------------------------------------------------- | ------------- | - | ------------------ | ----- | ---------------- | - | --------- | ---- | ---- | - | --------- | ----- | - | - | --------- | ----- | -
|                                                                                               |               |   | Three months ended |       | Six months ended
|                                                                                               |               |   | December 31,       |       | December 31,    
|                                                                                               |               |   |                    |       |                 
|                                                                                               |               |   | 2003               |       | 2002             |   | 2003      |      | 2002
|                                                                                               |               |   |                    |       |                  |   |           |      |     
|Net earnings (loss) (A)                                                                        |               | $ | (710,604           | )     |                  | $ | 306,618   |      |      | $ | (691,567  | )     |   | $ | (472,790  | )    
|Preferred stock dividend                                                                       |               |   | (2,020             | )     |                  |   |          |      |      |   | (4,054    | )     |   |   |          |      
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|Net earnings (loss) applicable to common
stockholders (B)                                      |               | $ | (712,624           | )     |                  | $ | 306,618   |      |      | $ | (695,621  | )     |   | $ | (472,790  | )    
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|Weighted average number of outstanding shares
of common stock (C)                              |               |   | 8,706,089          |       |                  |   | 8,434,670 |      |      |   | 8,628,941 |       |   |   | 6,127,528 |      
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|Weighted average number of outstanding shares
of common stock and common stock
equivalents (D) |               |   | 8,706,089          |       |                  |   | 8,633,595 |      |      |   | 8,628,941 |       |   |   | 6,127,528 |      
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|Earnings (loss) per share:                                                                     |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|                                                                                               | Basic (B/C)   |   | $                  | (0.08 | )                |   | $         | 0.04 |      |   | $         | (0.08 | ) |   | $         | (0.08 | )
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      
|                                                                                               | Diluted (A/D) |   | $                  | (0.08 | )                |   | $         | 0.04 |      |   | $         | (0.08 | ) |   | $         | (0.08 | )
|                                                                                               |               |   |                    |       |                  |   |           |      |      |   |           |       |   |   |           |      

As of December 31, 2003, options to purchase 294,818 shares of common stock and
warrants to purchase 524,439 shares of common stock (including the 156,600
warrants discussed in Note 5 below) were outstanding, but were not

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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 six month
periods ended December 31, 2003, 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 December 31, 2002, options to purchase 647,103 shares of common stock and
warrants to purchase 1,267,665 shares of common stock were outstanding. For
the three months ended December 31, 2002, 38,567 and 160,358 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 six months ended December 31, 2002, 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 both the three and
six month periods ended December 31, 2002, 1,550,000 shares of Series A
Preferred Stock convertible into 516,667 shares of common stock were not
included in the computation of diluted 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 December 31, 2003, experienced
recurring losses from operations in prior years, expects further significant
losses for the quarter ending March 31, 2004, and has regularly had cash flow
shortages. 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 initiation of a best efforts 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.

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 additional
cost reductions and deferrals. In addition to the best efforts private
placement of unregistered common stock through registered broker-dealers, the
Company is also currently seeking to raise other financing to fund operations,
however, in the current market condition, raising capital has been, and will
continue to be difficult.

Even after the steps the Company has taken to revise 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

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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. |  | Notes Payable
|-- |  | -------------

On August 5, 2003, the Company entered into a Loan and Security Agreement (the
Loan Agreement) under which the Company 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,
the Company 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.



|5. |  | 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 December
31, 2003, the Company had sold 1,566,000 shares of unregistered common stock
and received gross proceeds of $783,000. 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 receive a warrant covering one share of unregistered common
stock at $0.60 per share expiring on December 31, 2006. Accordingly, as of
December 31, 2003, the Company recorded broker dealer commissions of $78,300
and warrants covering 156,600 shares of unregistered common stock at $0.60 per
share. As of December 31, 2003, the Company had incurred $16,767 of legal
expenses related to the private placement, which have been netted against gross
proceeds of the private placement. In addition, as of
December 31, 2003, the Company recorded $78,073 of issuance
costs (non-cash) related to the fair value of 156,600 broker
warrants, as calculated using the Black-Scholes model, which have
also been netted against gross proceeds of the private placement.

The private placement terminates on
February 15, 2004, unless extended by the
Companys Board of Directors. Through February 11, 2004, the Company received
gross proceeds of $1,533,000 from the sale of a total of 3,066,000 shares, and
recorded aggregate commissions of $153,300 and warrants covering 306,600 shares
of unregistered common stock at $0.60 per share.



|6. |  | Subsequent Events
|-- |  | -----------------

Management Agreement

In January 2004, the Company and Saigene executed Amendment No. 2 to Amended
and Restated Management Agreement, by and among the Company, Saigene, and
PBI-WA, dated January 30, 2004 (Amendment No. 2). Under terms of Amendment
No. 2, the management fee paid to Saigene will be reduced from $70,000 to
$40,000 per month, effective February 1, 2004.

Director Compensation

In January 2004, the Compensation Committee of the Board of Directors
recommended and the Board of Directors ratified a compensation program for
outside Directors of the Company (the Director Compensation Program) covering
the period subsequent to September 30, 2003. Pursuant to the Director
Compensation Program, each outside director will receive an annual retainer of
$10,000, with an additional retainer of $10,000 for the Chair of the audit
committee and $5,000 for the Chair of the compensation committee. In addition,
outside Directors are reimbursed their expenses associated with attending Board
meetings, and receive a fee for participation in meetings as follows:

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|                       |  |           |       |            |  |   |     | 
|---------------------- |  | --------- | ----- | ---------- |  | - | --- | 
|                       |  | In-Person |       | Telephonic
|                       |  |           |       |           
|Board                  |  | $         | 1,500 |            |  | $ | 750 | 
|Audit Committee        |  |           | 1,500 |            |  |   | 750 | 
|Compensation Committee |  |           | 1,000 |            |  |   | 500 | 

Each outside Director also receives common stock option grants consisting of
6,000 shares upon initial election to the Board, 1,000 shares upon re-election
to the Board, and 1,000 shares for each fiscal quarter of service. As of
November 12, 2003, for past due option awards due through September 30, 2003,
the Company granted to each of its three outside Directors stock options for
10,000 shares of common stock at an exercise price of $0.8075 per share and
stock options for 2,000 shares at $1.75 per share. In addition, as of December
24, 2003, the Company granted to each of its three outside Directors a
quarterly stock option covering 1,000 shares of common stock at $0.90 per
share.

In addition, as of September 30, 2003, the Company had accrued $123,500 in past
due cash compensation payable to the outside Directors for prior periods. For
the past due amounts owed the directors through September 30, 2003, the Board
extended the outside Directors the right to elect to receive payment of their
past due compensation in cash, restricted stock of the Company, stock options,
or by promissory note. As of November 12, 2003, of the total $123,500 owed,
$24,840 was elected to be paid in the form of options for 30,761 shares of
common stock at $0.8075 per share, with the $98,660 balance to be paid in cash.
As of December 31, 2003, the Company had made cash payments of $35,000 leaving
a $63,660 cash balance owing to the outside Directors for their service prior
to September 30, 2003.

The Company recorded compensation
expense of $2,583 in the quarter ended
December 31, 2003, reflecting the difference between the closing market value
of the Companys common stock of $0.85 per share (as of November 12, 2003) and
the $0.8075 per share exercise price of the 60,761 stock options noted above
which were granted for past due amounts.

As of December 31, 2003, in accordance with the Director Compensation Program,
the Company recorded estimated Board fees for the period subsequent to
September 30, 2003 of $22,125.

Option Grants

In January 2004, under the Companys 1996 Stock Incentive Plan, the
Compensation Committee of the Board of Directors recommended and the Board of
Directors ratified the granting of stock options to the Companys management
and employees for an aggregate of up to 996,400 shares of common stock, and
further approved the granting of stock options for approximately 15,000 shares
of common stock to management and employees in connection with the February
2004 salary reductions discussed in Note 3.

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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-QSB for the period ended 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. 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 in May 1996,
and we conduct our operations primarily through our wholly-owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation.

For the quarter ended December 31, 2003, we experienced a significant reduction
in revenues compared to our revenues in the quarter ended September 30, 2003
and in each of our prior quarters of our fiscal year ended June 30, 2003, and
we had a large net loss. We expect that revenues for the quarter ending March
31, 2004 will also be

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significantly less than revenues in comparable prior periods, and may be less
than our revenues for the second fiscal quarter ended December 31, 2003. We
regularly have had cash flow shortages and deficiencies in working capital, and
have significant amounts of past due debt.

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. Also,
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 November and December 2003, and will have a greater
impact beginning in the next quarter ending March 31, 2004, when they will have
been in effect from the beginning of the period. We plan to implement further
cost reductions, including additional headcount reductions, beginning in
February 2004. 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. Also, effective February 1, 2004, we
reduced the management fee payable to Saigene from $70,000 per month to $40,000
per month.

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 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 have been able to raise
approximately $1,533,000 through February 11, 2004 from our private placement
of common stock, 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 keep 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.

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 as a brief discussion of some of the
judgments and uncertainties that can impact the application of these policies
and the specific dollar amounts reported on our financial statements. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form our
basis for making judgments about the

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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 value is less
than the carrying amount of the asset, a loss is recognized. During the
six-month period ended December 31, 2003, 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 includes 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

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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 Six Months Ended December 31, 2003

Revenues:

|                      |  |                    |     |      |  |        |       |              |  |      |        |                  |  |        |     |        |  |   |       |  |  |   |       |  |  |   |     |  |  |  |    |  
|--------------------- |  | ------------------ | --- | ---- |  | ------ | ----- | ------------ |  | ---- | ------ | ---------------- |  | ------ | --- | ------ |  | - | ----- |  |  | - | ----- |  |  | - | --- |  |  |  | -- | -
|                      |  | Three Months Ended |     |      |  |        |       |              |  |      |        | Six Months Ended |  |        |     |        |  |   |       | 
|Dollars in thousands, |  | December 31,       |     | $    |  | %      |       | December 31, |  | $    |        | %               
|rounded to nearest    |  |                    |     |      |  |        |       |              |  |      |        |                 
|thousand              |  | 2003               |     | 2002 |  | Change |       | Change       |  | 2003 |        | 2002             |  | Change |     | Change
|                      |  |                    |     |      |  |        |       |              |  |      |        |                  |  |        |     |       
|Revenues              |  | $                  | 542 |      |  | $      | 1,668 |              |  | $    | (1,126 | )                |  |        | (68 | )%     |  | $ | 2,842 |  |  | $ | 2,563 |  |  | $ | 279 |  |  |  | 11 | %

Our revenues are generated from clinical trials testing services and diagnostic
services. Our revenues decreased approximately 68% between the comparable
quarters of fiscal 2004 and 2003, resulting from a decrease in the size and
number of clinical trials testing services we performed. Although our
aggregate revenues increased by 11% for the comparable six-month periods, that
overall increase is not reflective of the recent significant decreases in
revenues and open work orders.

More specifically, our recent quarterly decrease reflects the fluctuations and
reductions in testing and open work orders with our historically two largest
customers. Combined revenues from these two customers were $40,000 (7%) of our
total revenues for the quarter ended December 31, 2003. In contrast, for the
prior quarter ended September 30, 2003, these two customers accounted for
approximately $2,064,000 (89.7%) of our total revenues. The decrease in
revenues from these customers in the past quarter 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. The following table shows the fluctuations in our revenues
(both in dollars and as a percentage of total revenue) from these two customers
over the past two fiscal years:

|                    |                |         |            |           |            |         |  |         |   |  |   |           |  |  |  |      |  
|------------------- | -------------- | ------- | ---------- | --------- | ---------- | ------- |  | ------- | - |  | - | --------- |  |  |  | ---- | -
|                    |                |         | Customer A |           | Customer B
|(Dollars rounded to |                |         |            |          
|nearest thousand)   |                | Revenue |            | Percent   |            | Revenue |  | Percent
|                    |                |         |            |           |            |         |  |        
|Fiscal 2003:        |                |         |            |           |            |         |  |         |   |  |   |           |  |  |  |     
|                    | First Quarter  |         | $          | 391,000   |            |         |  | 43.7    | % |  |   |          |  |  |  |     |  
|                    | Second Quarter |         | $          | 1,472,000 |            |         |  | 88.2    | % |  |   |          |  |  |  |     |  
|                    | Third Quarter  |         | $          | 1,901,000 |            |         |  | 91.0    | % |  |   |          |  |  |  |     |  
|                    | Fourth Quarter |         | $          | 633,000   |            |         |  | 56.8    | % |  | $ | 155,000   |  |  |  | 13.9 | %
|Fiscal 2004:        |                |         |            |           |            |         |  |         |   |  |   |           |  |  |  |     
|                    | First Quarter  |         | $          | 184,000   |            |         |  | 8.0     | % |  | $ | 1,880,000 |  |  |  | 81.7 | %
|                    | Second Quarter |         | $          | 40,000    |            |         |  | 7.4     | % |  |   |          |  |  |  |     |  

For each of these two customers, we have entered into a master contractor
service agreement (one in February 2002 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.

Currently, we do not have significant open or pending work orders with either
of these two customers, or any other pharmaceutical companies. In as much, we
expect that revenues in the quarter ending March 31, 2004 will continue

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to be significantly lower than those in the comparable prior year period, and
could be lower than our revenues in the quarter ended December 31, 2003. 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. If we are
unsuccessful in our sales and business development efforts, our revenues for
each quarter for the remainder of the 2004 fiscal year will continue to fall
significantly below the results for the quarter ended September 30, 2003, and
the comparable quarters of our 2003 fiscal year.

During the three-months and six months ended December 31, 2003, revenue
generated from clinical trials testing services accounted for approximately 29%
and 81%, respectively, of our total revenues. Revenue generated from the
provision of diagnostic, referral and other services accounted for
approximately 71% and 19%, 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 December 31, 2003, we expect that clinical
trials will continue to account for a significant portion of our revenues in
the future.

Laboratory Expenses and Cost of Goods Sold:

|                                           |  |                    |     |      |  |        |     |              |  |      |      |                  |  |        |     |        |  |   |       |   |  |   |       |   |  |   |     |  |  |  |    |  
|------------------------------------------ |  | ------------------ | --- | ---- |  | ------ | --- | ------------ |  | ---- | ---- | ---------------- |  | ------ | --- | ------ |  | - | ----- | - |  | - | ----- | - |  | - | --- |  |  |  | -- | -
|                                           |  | Three Months Ended |     |      |  |        |     |              |  |      |      | Six Months Ended |  |        |     |        |  |   |       |  
|Dollars in thousands,                      |  | December 31,       |     | $    |  | %      |     | December 31, |  | $    |      | %               
|rounded to nearest                         |  |                    |     |      |  |        |     |              |  |      |      |                 
|thousand                                   |  | 2003               |     | 2002 |  | Change |     | Change       |  | 2003 |      | 2002             |  | Change |     | Change
|                                           |  |                    |     |      |  |        |     |              |  |      |      |                  |  |        |     |       
|Laboratory Expenses
and Cost of Goods
Sold |  | $                  | 450 |      |  | $      | 629 |              |  | $    | (179 | )                |  |        | (28 | )%     |  | $ | 1,744 |   |  | $ | 1,196 |   |  | $ | 548 |  |  |  | 46 | %
|Percentage of
Revenues                     |  |                    | 83  | %    |  |        | 38  | %            |  |      |      |                  |  |        |     |        |  |   | 61    | % |  |   | 47    | % |  |   |     |  |  |  |    |  

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 December 31, 2003 and December 31, 2002,
laboratory expenses and cost of goods sold decreased approximately 28%, and as
a percentage of revenue increased to approximately 83% from approximately 38%.
The expense reduction was primarily attributable to decreased lab supplies
expense incurred in meeting the decreased size and number of clinical trials
testing services we performed during the comparable quarters. The relative
increase as a percentage of revenue was as result of salaries and related
benefits of laboratory personnel remaining relatively consistent, while
revenues decreased approximately 68% over the same time periods. For the
three-month periods ended December 31, 2003 and 2002, respectively, salaries
and related benefits increased 8% to approximately $250,000 from $231,000, lab
supplies decreased 78% to approximately $54,000 from $192,000, and outside
services decreased 65% to approximately $17,000 from $48,000. 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 six-month periods ended December 31, 2003 and December 31,
2002, laboratory expenses and cost of goods sold increased approximately 46%,
and as a percentage of revenue increased to approximately 61% from
approximately 47%. 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

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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 six-month periods ended December 31, 2003 and
2002, respectively, salaries and related benefits increased 5% to
approximately $525,000 from $501,000, lab supplies increased 12% to
approximately $379,000 from $313,000, and outside services increased 468% to
approximately $525,000 from $112,000. The increase in lab supplies between
the comparable periods was primarily attributable to the increased supplies
needed to support the commensurate increase in revenues.

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. All of these employees are at will
employees, and there is a risk that they could terminate with us and seek
employment elsewhere. In the event we need to quickly ramp back up our
laboratory service capacity, such as due to new large work orders, we believe
that we will have sufficient qualified personnel available to us.

Research and Product Development:

|                                 |  |                    |    |      |  |        |    |              |  |      |   |                  |  |        |   |        |  |   |    |   |  |   |    |   |  |   |   |  |  |  |    |  
|-------------------------------- |  | ------------------ | -- | ---- |  | ------ | -- | ------------ |  | ---- | - | ---------------- |  | ------ | - | ------ |  | - | -- | - |  | - | -- | - |  | - | - |  |  |  | -- | -
|                                 |  | Three Months Ended |    |      |  |        |    |              |  |      |   | Six Months Ended |  |        |   |        |  |   |    |  
|Dollars in thousands,            |  | December 31,       |    | $    |  | %      |    | December 31, |  | $    |   | %                | 
|rounded to nearest               |  |                    |    |      |  |        |    |              |  |      |   |                 
|thousand                         |  | 2003               |    | 2002 |  | Change |    | Change       |  | 2003 |   | 2002             |  | Change |   | Change
|                                 |  |                    |    |      |  |        |    |              |  |      |   |                  |  |        |   |       
|Research and Product
Development |  | $                  | 39 |      |  | $      | 37 |              |  | $    | 2 |                  |  |        | 5 | %      |  | $ | 77 |   |  | $ | 70 |   |  | $ | 7 |  |  |  | 10 | %
|Percentage of
Revenues           |  |                    | 7  | %    |  |        | 2  | %            |  |      |   |                  |  |        |   |        |  |   | 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 December 31, 2003 and 2002, research and
product development expenses increased 5% to approximately $39,000 from
$37,000. For the comparable six-month periods, research and product
development expenses increased 10% to approximately $77,000 from approximately
$70,000. The increase in each period was primarily the result of increased
patent related legal expenses, partially offset by a decrease in compensation
expense as a result of fewer employees in research and product development in
the current year period over the comparable prior year period. 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, which further
helped reduce our compensation expense in this area.

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 |     |      |  |        |     |              |  |      |      | Six Months Ended |  |        |     |        |  |   |       |  
|Dollars in thousands,                       |  | December 31,       |     | $    |  | %      |     | December 31, |  | $    |      | %               
|rounded to nearest                          |  |                    |     |      |  |        |     |              |  |      |      |                 
|thousand                                    |  | 2003               |     | 2002 |  | Change |     | Change       |  | 2003 |      | 2002             |  | Change |     | Change
|                                            |  |                    |     |      |  |        |     |              |  |      |      |                  |  |        |     |       
|Selling, General and
Administrative
Expense |  | $                  | 735 |      |  | $      | 905 |              |  | $    | (170 | )                |  |        | (19 | )%     |  | $ | 1,597 |   |  | $ | 1,970 |   |  | $ | (373 | ) |  |  | (19 | )%
|Percentage of
Revenues                      |  |                    | 136 | %    |  |        | 54  | %            |  |      |      |                  |  |        |     |        |  |   | 56    | % |  |   | 77    | % |  |   |      |   |  |  |     |   

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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 19% for the comparable
quarters to approximately $732,000 from $905,000, and also decreased 19% for
the comparable six-month periods to approximately $1,594,000 from $1,970,000.
As a percentage of revenue, selling, general and administrative expenses were
136% and 54%, respectively, for the comparable quarters ended December 31, 2003
and 2002, and were 56% and 77%, respectively, for the comparable six-month
periods ended December 31, 2003 and 2002.

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. For the comparable quarters ended December 31, 2003 and
2002, respectively, management fees decreased 24% to approximately $210,000
from $276,000, and for the comparable six months ended December 31, 2003 and
2002, respectively, management fees decreased 41% to approximately $420,000
from $715,000. For the third and fourth quarters of fiscal 2004, we expect
management fees to be lower, due our recent amendment of the management
agreement, effective February 1, 2004, further reducing the monthly fees
payable to Saigene from $70,000 to $40,000 per month.

Excluding Saigene management fees, selling, general and administrative expenses
were approximately $525,000 and $629,000 (approximately 97% and 38% as a
percentage of revenue), respectively, for the comparable quarters ended
December 31, 2003 and 2002, and were approximately $1,177,000 and $1,255,000
(approximately 41% and 49% as a percentage of revenue), respectively, for the
comparable six-month periods ended December 31, 2003 and 2002. The decreases
in selling, general and administrative expenses reflect reduced costs for
contract labor, legal and accounting services and net compensation income for
certain repriced stock options, partially offset by increased costs for
compensation to our executive officers and Board compensation.

For the quarter and six months ended December 31, 2002, 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 quarters and six
months ended December 31, 2003 and 2002, respectively, our contract labor costs
decreased approximately $47,000 and $81,000. In addition, in the quarter and
six months ended December 31, 2002, we also incurred relocation expenses of
approximately $21,000 and $115,000, respectively, relating to our Chief Medical
Officer, where we had no comparable expenses in the periods ended December 31,
2003. With the decrease in contract labor services, we recognized increased
compensation expense in salaries and benefits by approximately $70,000 and
$233,000, respectively, between the comparable three and six months ended
December 31, 2003 and 2002, due primarily to the hiring of our Chief Executive
Officer, Chief Financial Officer and a business development representative
during calendar year 2003.

Selling, general and administrative expenses for the three and six-month
periods ended December 31, 2003 included approximately $25,000 and $100,000 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 paid aggregate consulting expenses of $39,000 and $49,000,
respectively, in the comparable quarters of fiscal 2004 and 2003, and aggregate
consulting expenses of $78,000 and $52,000, respectively, in the comparable
six-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 December 31, 2003 and 2002, we recognized income of approximately $55,000
and $39,000, respectively, to adjust these options to fair market value.
However, for the comparable six-month periods, we recognized $46,000 in income
in fiscal 2004 but $70,000 in expense in fiscal 2003. As of December 31, 2003,
41,140 repriced options remained outstanding, and as a result we will continue
to recognize compensation income

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(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 decreases in our selling, general and administrative expenses for the
comparable periods of fiscal 2004 and 2003 include reductions in legal and
accounting expenses (of $37,000 and $68,000 between the comparable quarters and
six-month periods, respectively) and reduced commission payments (of $19,000
and $42,000 between the comparable quarters and six-month periods,
respectively).

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 program, had
one hourly employee agreeing to reduce her hours worked, and enrolled one
employee in the Shared Work Program.

We expect overall selling, general and administrative expenses for the third
and fourth quarters of fiscal 2004 to decrease as compared to the current
quarter as well as the prior fiscal periods, given the decreased management
fees payable to Saigene and the cost-cutting measures described above, as well
as the non-recurring expenses related to the Saigene transaction incurred in
fiscal 2003. 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, Chief Medical, and
Chief Financial Officers and a business development representative during
fiscal 2003.

Other Income (Expense):

|                       |  |                    |     |      |  |        |     |              |  |      |      |                  |  |        |      |        |  |   |      |    |  |   |     |   |  |   |      |   |  |  |      |   
|---------------------- |  | ------------------ | --- | ---- |  | ------ | --- | ------------ |  | ---- | ---- | ---------------- |  | ------ | ---- | ------ |  | - | ---- | -- |  | - | --- | - |  | - | ---- | - |  |  | ---- | --
|                       |  | Three Months Ended |     |      |  |        |     |              |  |      |      | Six Months Ended |  |        |      |        |  |   |      |   
|Dollars in thousands,  |  | December 31,       |     | $    |  | %      |     | December 31, |  | $    |      | %               
|rounded to nearest     |  |                    |     |      |  |        |     |              |  |      |      |                 
|thousand               |  | 2003               |     | 2002 |  | Change |     | Change       |  | 2003 |      | 2002             |  | Change |      | Change
|                       |  |                    |     |      |  |        |     |              |  |      |      |                  |  |        |      |       
|Other Income
(Expense) |  | $                  | (29 | )    |  | $      | 209 |              |  | $    | (238 | )                |  |        | (139 | )%     |  | $ | (116 | )  |  | $ | 199 |   |  | $ | (315 | ) |  |  | (158 | )%
|Percentage of
Revenues |  |                    | (5  | )%   |  |        | 13  | %            |  |      |      |                  |  |        |      |        |  |   | (4   | )% |  |   | 8   | % |  |   |      |   |  |  |      |   

Total other income (expense) decreased approximately $238,000 in the quarter
ended December 31, 2003 over the comparable quarter ended December 31, 2002.
Other expense for the quarter ended December 31, 2003 was a net expense of
approximately $29,000 and included approximately $30,000 of interest expense on
notes payable and lease obligations and approximately $1,000 in interest and
other income. Other income for the quarter ended December 31, 2002 was net
income of approximately $209,000, and included approximately $37,000 of
interest expense on notes payable and lease obligations, approximately $165,000
in gain on troubled debt restructuring, and approximately $80,000 of other
income, primarily from reassessment of then existing liabilities, whereby
beginning in the quarter ended December 31, 2002, we wrote off some of our old
accounts payable and an old lease obligation during fiscal 2003.

Between the comparable six months ended December 31, 2003 and 2002, total other
income (expense) decreased approximately $315,000. Other expense for the six
months ended December 31, 2003 was a net expense of approximately $116,000 and
included approximately $61,000 of interest expense on notes payable and lease
obligations, approximately $17,000 in interest and other income, 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). Other income for the
six months ended December 31, 2002 was net income of approximately $199,000,
and included approximately $69,000 of interest expense on notes payable and
lease obligations, approximately $165,000 in gain on troubled debt
restructuring, and approximately $103,000 of other income, primarily from
reassessment of then existing liabilities, whereby beginning in the quarter
ended December 31, 2002, we wrote off some of our old accounts payable and an
old lease obligation during fiscal

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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 |      |      |  |        |     |              |  |      |        | Six Months Ended |  |        |      |        |  |   |      |   
|Dollars in thousands,  |  | December 31,       |      | $    |  | %      |     | December 31, |  | $    |        | %               
|rounded to nearest     |  |                    |      |      |  |        |     |              |  |      |        |                 
|thousand               |  | 2003               |      | 2002 |  | Change |     | Change       |  | 2003 |        | 2002             |  | Change |      | Change
|                       |  |                    |      |      |  |        |     |              |  |      |        |                  |  |        |      |       
|Net Earnings (Loss)    |  | $                  | (711 | )    |  | $      | 307 |              |  | $    | (1,018 | )                |  |        | (332 | )%     |  | $ | (692 | )  |  | $ | (473 | )  |  | $ | (219 | ) |  |  | (46 | )%
|Percentage of
Revenues |  |                    | (131 | )%   |  |        | 18  | %            |  |      |        |                  |  |        |      |        |  |   | (24  | )% |  |   | (18  | )% |  |   |      |   |  |  |     |   

We had a net loss of approximately $711,000 for the three months ended December
31, 2003 compared to net earnings of approximately $307,000 for the three
months ended December 31, 2002, representing a decrease of approximately
$1,018,000 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 expense discussed above. Other
items having a lesser impact on the change in net earnings (loss) include the
increased research and product development expenses and the decrease in other
income (expense) in the three months ended December 31, 2003 over the
comparable period ended December 31, 2002.

For the six months ended December 31, 2003, we had net loss of approximately
$692,000 compared to a net loss of approximately $473,000 for the six months
ended December 31, 2002, representing an increased loss of approximately
$219,000 between the comparable six-month periods. Even though our total
revenues increased for the comparable six-month periods, the worsening of our
net loss for the comparable six months is primarily attributable to our
significantly decreased revenues and resulting net loss for the quarter ended
December 31, 2003 discussed above. Our net loss for the six months ended
December 31, 2003 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.

As a result of the significant decrease in revenues in the quarter ended
December 31, 2003, and the continuing significant decrease in revenues expected
in the quarter ended March 31, 2004, even if selling, general and
administrative expenses and cost of sales can be reduced by a significant
degree, we anticipate that we will experience continuing losses.

Liquidity and Capital Resources:

We had significant net operating losses for the quarter and six months ended
December 31, 2003, and we expect that we will have net losses for the quarter
ended March 31, 2004 and for our fiscal year ending June 30, 2004.

We experienced a significant decrease in revenues in the quarter ended 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
the third quarter of fiscal 2004, and that revenues for the third quarter will
be significantly less than revenues in comparable prior periods, and may be
less than our revenues for the second quarter. We also expect that we will
continue to have significant losses and degradation of our cash and working
capital position. 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.

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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. In November 2003, we initiated a best efforts private placement to raise
up to $1,500,000 through the sale of 3,000,000 shares of common stock at $0.50
per share, with up to a 10% overallotment option. As of December 31, 2003, we
received net proceeds of approximately $688,000, after payment of private
placement expenses and 10% cash commissions to our registered
broker-dealers (approximately $610,000 net also of the approximately
$78,000 fair value expense (non-cash) recorded for the warrants
issued to the broker-dealers).
In January 2004, our Board of Directors approved an increase in the size of the
private placement to up to $2,000,000 (4,000,000 shares). As of December 31,
2003, we incurred $16,767 of legal expenses related to the private placement,
which were netted against gross proceeds. The private placement terminates on
February 15, 2004, unless extended by our Board of Directors.
Through February 11, 2004, we received gross proceeds of $1,533,000 from the sale of a total of
3,066,000 shares, and recorded aggregate commissions of $153,300 and warrants
covering 306,600 shares of unregistered common stock at $0.60 per share.

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 fiscal 2004, and there can be no assurance that we will
be able to raise sufficient financing from our current private placement or
from any further equity or debt 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 and/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. There can be no assurance that our efforts to
reduce expenses and generate revenue will be successful.

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 December 31, 2003, our cash and cash equivalents were approximately
$669,000, compared to approximately $440,000 at June 30, 2003. Our cash at
December 31, 2003 included $783,000 in gross proceeds from our private
placement through December 31, 2003, less payments of approximately $45,000 in
commissions, with the balance of the approximately $33,000 in accrued
commissions included in accrued liabilities. We had approximately $417,000 in
accounts receivable as of December 31, 2003, compared approximately $467,000 as
of June 30, 2003. Total liabilities as of December 31, 2003 were approximately
$2,748,000 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 by collections on our accounts receivable and
increased accounts payable and accrued expenses. As of December 31, 2003 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.

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As of December 31, 2003, we had a working capital deficit of approximately
$761,000, compared to a working capital deficit of approximately $685,000 at
June 30, 2003. The approximately $76,000 decline in working capital is
attributable to several changes in the components of working capital. Changes
providing favorable impact include increases in cash and prepaid expenses and
other assets, and decreases in advances from customers, dividends 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 accounts receivable, receipt of payment (in the form of our
common stock) on our $200,000 note receivable from Saigene, use of our
inventories during the quarter, increases in accounts payable and accrued
liabilities, an increase in deferred compensation and, the current portion of
the new loan and security agreement, under which we borrowed $250,000 during
the six-month period.

Net cash used in operating activities was approximately $512,000 for the six
months ended December 31, 2003, 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 $27,000
for the six months ended December 31, 2003 primarily for the purchase of
capital equipment. Cash flow provided by financing activities was
approximately $767,000 for the six months ended December 31, 2003, consisting
primarily of approximately $688,000 in net proceeds from our private placement
of unregistered common stock and approximately $250,000 in proceeds of
borrowings under our credit facility, offset by approximately $165,000 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 six months ended December 31, 2003, 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 last six months, 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.

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 actively 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;

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| |  |  | 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.




PART II  OTHER INFORMATION




ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

During the quarter ended December 31, 2003, we granted to our lender, Franklin
Funding, Inc., warrants to purchase 10,000 shares of common stock, with 5,000
shares priced at $0.95 per share, and 5,000 at $0.85 per share. During the
prior quarter we also granted to our lender warrants to purchase an aggregate
of 15,000 shares of common stock, with 5,000 shares priced at $1.10 per share,
5,000 at $0.95 per share, and 5,000 at $1.00 per share. All of these warrants
were granted pursuant to the terms of our Loan and Security Agreement with
Franklin Funding dated August 5, 2003. The warrants were granted in reliance
on the statutory exemption from registration provided by Section 4(2) of the
Securities Act.

In November 2003, we initiated a best efforts private placement of unregistered
common stock through registered broker-dealers, for the sale of up to 3,000,000
shares of common stock at a purchase price of $0.50 per share, with up to a 10%
overallotment option. In connection with the private placement, we engaged
Source Capital Group, Inc. and Basic Investors, Inc. as non-exclusive placement
agents to offer the common stock on a best efforts basis. As compensation for
the placement agents services, we agreed to pay aggregate cash commissions of
10% of the gross proceeds received and to issue stock purchase warrants to
purchase one share of common stock for each 10 shares of common stock sold.
The warrants have an exercise price of $0.60 per share and expire on December
31, 2006. The private placement shares are 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. The private placement
terminates on February 15, 2004, unless extended by our Board of Directors.
Through February 11, 2004, we received gross proceeds of $1,533,000 from the
sale of a total of 3,066,000 shares, and recorded aggregate commissions of
$153,300 and warrants covering 306,600 shares of unregistered common stock at
$0.60 per share, expiring December 31, 2006.

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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

|    |  |                                                                                       |  |                                                                                                                                                                                              
|--- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits:                                                                            
|    |  |                                                                                       |  |                                                                                                                                                                                              
|    |  | 10.1                                                                                  |  | Amendment No. 2 to Management Agreement, dated
February 1, 2004, between Saigene Corporation and Pacific
Biometrics, Inc.                                                                    
|    |  |                                                                                       |  |                                                                                                                                                                                              
|    |  | 31.1                                                                                  |  | Certification of Ronald R. Helm, Chief Executive
Officer                                                                                                                                     
|    |  |                                                                                       |  |                                                                                                                                                                                              
|    |  | 31.2                                                                                  |  | Certification of Michael P. Carrosino, Chief
Financial Officer                                                                                                                               
|    |  |                                                                                       |  |                                                                                                                                                                                              
|    |  | 32.1                                                                                  |  | 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) |  | No current reports on Form 8-K were filed during the quarter ended
December 31, 2003.




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: February 13, 2004

| |  |  |  |                              
| |  |  |  | -----------------------------
| |  |  |  | /s/ Ronald R. Helm           
| |  |  |  |                              
| |  |  |  | Ronald R. Helm               
| |  |  |  | Chief Executive Officer      
| |  |  |  | (principal executive officer)
| |  |  |  |                              
| |  |  |  | /s/ Michael P. Carrosino     
| |  |  |  |                              
| |  |  |  | Michael P. Carrosino         
| |  |  |  | Chief Financial Officer      
| |  |  |  | (principal financial officer)

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