================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                 --------------

                                   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 March 31, 2007


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

              For the Transition Period From ________ to _________

                                 --------------

                         Commission File Number 0-21537

                            PACIFIC BIOMETRICS, INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                    93-1211114
  (State or other jurisdiction           (I.R.S. Employer Identification Number)
of incorporation or organization)


       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 past 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 [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of May 8, 2007, the issuer had outstanding 18,989,918 shares of common stock.

Transitional Small Business Disclosure Format: Yes [ ] No [X]
================================================================================
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                              INDEX TO FORM 10-QSB

                                                                            PAGE
                                                                            ----
PART I - FINANCIAL INFORMATION

                         ITEM 1 - FINANCIAL STATEMENTS

     Consolidated Balance Sheets as of March 31, 2007 (unaudited)
      and June 30, 2006 (audited)...........................................  3

     Consolidated Statements of Operations for the three- and
      nine-month periods ended March 31, 2007 and March 31, 2006
      (unaudited)...........................................................  4

     Consolidated Statements of Cash Flows for the nine-month
      periods ended March 31, 2007 and March 31, 2006 (unaudited)...........  5

     Condensed Notes to the 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 6 - EXHIBITS........................................................... 23

SIGNATURES.................................................................. 23


<PAGE>

PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
---------------------------------------------------------------------------------------------------------------------

                                                                                         March 31,
                                        ASSETS                                             2007            June 30,
                                                                                       (unaudited)           2006
                                                                                       ------------      ------------
<S>                                                                                   <C>               <C>
Current assets:
    Cash and cash equivalents                                                          $  4,652,492      $  5,497,737
    Accounts receivable                                                                   1,736,386         1,977,589
    Other receivables                                                                       261,753           258,263
    Prepaid expenses and other assets                                                       490,608           363,966
    Deferred financing cost on secured convertible note - current portion                   107,170           107,170
                                                                                       ------------      ------------
          Total current assets                                                            7,248,409         8,204,725

Property and equipment, net                                                                 531,584           693,231

Other assets:
    Deferred financing cost on secured convertible note - long-term portion                  45,239           125,617
                                                                                       ------------      ------------
          Total assets                                                                 $  7,825,232      $  9,023,573
                                                                                       ============      ============

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                                                   $    432,166      $    549,517
    Accrued liabilities                                                                     513,512           499,858
    Advances from customers                                                               1,005,760           966,573
    Capital lease obligation - current portion                                               54,745            51,994
    Secured convertible note - current portion, net of unamortized fair value
       assigned to beneficial conversion feature and warrants of $0 and
       $0 respectively                                                                    1,600,008           923,129
   Compound embedded derivative liability - current  portion                              1,260,304           800,239
    Other notes payable - current portion                                                   108,484            38,148
                                                                                       ------------      ------------
          Total current liabilities                                                       4,974,979         3,829,458

Capital lease obligations - long - term portion                                              12,124            56,500
Secured convertible note - long - term portion, net of unamortized fair value
   assigned to BCF and warrants of $1,069,639 and $2,022,465, respectively                   97,021           718,461
Compound embedded derivative liability - long - term portion                                918,960         1,752,994
Other notes payable - long - term portion                                                   132,689           310,938
                                                                                       ------------      ------------
          Total long - term liabilities                                                   1,160,794         2,838,893
                                                                                       ------------      ------------
          Total liabilities                                                               6,135,773         6,668,351
                                                                                       ------------      ------------

Stockholders' equity:
    Common stock, $0.01 par value, 30,000,000 shares authorized
       issued and outstanding 18,692,918 shares  and 18,880,118, respectively               360,531           355,098
    Additional paid-in capital                                                           28,281,770        27,921,488
    Accumulated deficit                                                                 (26,949,547)      (25,919,941)
    Treasury stock                                                                           (3,295)           (1,423)
                                                                                       ------------      ------------
          Total stockholders' equity                                                      1,689,459         2,355,222
                                                                                       ------------      ------------

          Total liabilities and stockholders' equity                                   $  7,825,232      $  9,023,573
                                                                                       ============      ============

The accompanying condensed notes are an integral part of these consolidated financial statements.
</TABLE>
                                       -3-
<PAGE>
PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE><CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                          Three Months Ended               Nine Months Ended
                                                                              March 31,                         March 31,
                                                                    ---------------------------------------------------------------
                                                                                         2006                              2006
                                                                        2007          (restated)          2007          (restated)
                                                                    ------------     ------------     ------------     ------------
<S>                                                                 <C>              <C>              <C>              <C>
Revenues                                                            $  1,755,363     $  3,109,504     $  6,579,093     $  8,057,194
                                                                    ------------     ------------     ------------     ------------

 Laboratory expenses and cost of sales                                 1,266,014        1,422,991        3,986,128        3,827,921
                                                                    ------------     ------------     ------------     ------------
          Gross Profit                                                   489,349        1,686,513        2,592,965        4,229,273

Operating expenses:
    Research and product development                                        --             12,347             --             33,694
    Selling, general and administrative                                  776,025          918,962        3,039,914        2,590,102
                                                                    ------------     ------------     ------------     ------------

Operating income (loss)                                                 (286,676)         755,204         (446,949)       1,605,477
                                                                    ------------     ------------     ------------     ------------

Other income (expense):
  Interest expense                                                       (91,089)        (104,486)        (291,996)        (300,942)
  Amortization of fair value assigned to beneficial conversion
    feature and warrants                                                (192,857)        (154,026)        (578,572)        (578,572)
  Gain on adjustment of compound embedded derivative to fair
    value                                                                141,147          150,222          373,969          487,121
  Amortization of deferred financing costs                               (26,793)         (26,793)         (80,378)         (80,378)
  Interest income                                                         31,688            1,674           52,087            3,621
  Other income                                                               351            2,748            1,100            6,251
  Stock options and warrant cost                                          (2,955)        (902,258)          (8,865)        (903,490)
  Other expense                                                             --               --            (50,000)            --
          Total other income (expense)                                  (140,508)      (1,032,918)        (582,655)      (1,366,388)

Net earnings (loss) before tax expense                                  (427,184)        (277,714)      (1,029,604)         239,089
                                                                    ------------     ------------     ------------     ------------

Tax expense                                                                 --               --               --               --
                                                                    ------------     ------------     ------------     ------------

Net earnings (loss)                                                 $   (427,184)    $   (277,714)    $ (1,029,604)    $    239,089
                                                                    ============     ============     ============     ============

Net earnings (loss) per share:

  Basic earnings (loss) per share                                   $      (0.02)    $      (0.02)    $      (0.06)    $       0.02
                                                                    ============     ============     ============     ============

  Diluted earnings (loss) per share                                 $      (0.02)    $      (0.02)    $      (0.06)    $       0.01
                                                                    ============     ============     ============     ============

Weighted average common shares outstanding:

  Basic                                                               18,692,918       12,943,183       18,615,728       12,842,893
                                                                    ============     ============     ============     ============

  Diluted                                                             18,692,918       12,943,183       18,615,728       17,006,874
                                                                    ============     ============     ============     ============

The accompanying condensed notes are an integral part of these consolidated financial statements
</TABLE>
                                       -4-
<PAGE>
PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE><CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                            Nine Months Ended
                                                                                                                 March 31
                                                                                                      -----------------------------
                                                                                                                           2006
                                                                                                          2007          (restated)
                                                                                                      ------------     ------------
<S>                                                                                                   <C>              <C>
Cash flows from operating activities:
  Net earnings (loss)                                                                                 $ (1,029,604)    $    239,089

  Reconciliation of net earnings (loss) to net cash provided by (used in) operating activities:
    Depreciation and amortization                                                                          212,668          184,291
     Amortization of fair value assigned to beneficial conversion feature and warrants                     578,571          578,571
     Amortization of deferred financing costs on secured convertible note                                   80,378           80,377
    Compound embedded derivative liability relating to secured convertible note (BCF)                     (373,969)        (487,121)
    Common stock held in escrow cancelled                                                                     --             (5,833)
    Common stock and APIC addition from options exercised                                                     --                548
    Options and warrant expense                                                                              8,863          903,490
    Compensation expense (income) from fair value adjustment to options                                       --                395
    Compensation expense from restricted shares and options granted                                        554,979             --
    Changes in assets and liabilities:
       Accounts receivable, net                                                                            241,203       (1,375,631)
       Other receivable                                                                                     (3,490)            --
       Prepaid expenses and other assets                                                                  (126,642)         198,050
       Advances from customers                                                                              39,187          248,976
       Accounts payable                                                                                   (117,351)         103,374
       Accrued liabilities                                                                                  13,654         (227,177)
                                                                                                      ------------     ------------
       Net cash  provided by operating activities                                                           78,447          441,398
                                                                                                      ------------     ------------

Cash flows from investing activities:
     Purchases of capital equipment                                                                        (51,021)        (416,943)
     Acquisition of Company common stock                                                                  (200,000)            --
                                                                                                      ------------     ------------
          Net cash used in investing activities                                                           (251,021)        (416,943)
                                                                                                      ------------     ------------

Cash flows from financing activities:
     Payments on notes payable                                                                            (631,046)        (112,460)
     Net proceeds from loan and security agreement                                                            --            150,000
     Payments on capital lease obligations                                                                 (41,625)         (38,629)
     Net proceeds from private placement of common stock                                                      --          3,476,675
                                                                                                      ------------     ------------
          Net cash provided by (used in) financing activities                                             (672,671)       3,475,586
                                                                                                      ------------     ------------

Net increase (decrease) in cash and cash equivalents                                                      (845,245)       3,500,041
                                                                                                      ------------     ------------
Cash and cash equivalents, beginning of period                                                           5,497,737        1,438,543
                                                                                                      ------------     ------------

Cash and cash equivalents, end of period                                                              $  4,652,492     $  4,938,584
                                                                                                      ============     ============

Cash paid during the period for interest                                                              $    300,005     $    225,725
                                                                                                      ============     ============
Cash paid during the period for income taxes                                                                  --               --
                                                                                                      ============     ============
Non-cash investing and financing activities:
          Shares released from escrow under restructure agreement with prior landlord                 $       --       $    542,400
          Cashless exercise of stock options and warrants                                             $       --       $        474
          Warrants issued in consideration of issuance costs for private placement                    $       --       $    300,154
          Warrants issued to private placement investors                                              $       --       $    599,149
          Warrants issued in conjuction with equipment financing                                      $       --       $     34,723
          Common stock issued upon conversion of principal on Laurus convertible note                 $       --       $    646,600
          Restricted shares of common stock issued to management                                      $    537,800     $       --
          Stock options issued to management and employees                                            $     12,468     $       --


The accompanying condensed notes are an integral part of these consolidated financial statements.
</TABLE>
                                       -5-
<PAGE>

                            PACIFIC BIOMETRICS, INC.

        CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc., a Delaware corporation ("PBI" or the "Company"),
provides specialty central laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business primarily through its wholly owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation ("PBI-WA"). The Company's two
other wholly owned subsidiaries are PBI Technology, Inc., a Washington
corporation ("PBI Tech"), and BioQuant, Inc., a Michigan corporation. 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. Operating results for the three- and
nine-month periods ended March 31, 2007 are not necessarily indicative of the
results that may be expected for any future period. The accompanying unaudited
financial statements and related condensed notes should be read in conjunction
with the audited financial statements and notes thereto, for its fiscal year
ended June 30, 2006, as previously reported in the Company's annual report on
Form 10-KSB.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, "Fair Value Measurements" (hereinafter
"SFAS No. 159"). SFAS No. 159 permits companies to choose to measure, on an
instrument-by-instrument basis, financial instruments and certain other items at
fair value that are not currently required to be measured at fair value. The
Company is currently evaluating whether to elect the option provided for in this
standard. If elected, SFAS No. 159 would be effective for Pacific Biometrics as
of January 1, 2008.

STOCK-BASED COMPENSATION

The Company has traditionally applied APB Opinion 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," and related interpretations in accounting for its
stock-based employee compensation plan. Beginning with the quarter ended March
31, 2006, the Company has adopted the provisions of SFAS No. 123(R), "ACCOUNTING
FOR STOCK-BASED COMPENSATION." For the three-month period ended March 31, 2007,
the Company did not grant any additional incentive-based stock options under
incentive compensation plans, but continued to expense a vesting amount of
$4,710. For the nine-month period ended March 31, 2007 incentive-based stock
options and restricted shares were granted and vesting amounts expensed for
$554,979. For prior reporting periods, the Company did not grant any
incentive-based stock options for the three-month period ended March 31, 2006
and granted incentive-based stock options under incentive compensation plans in
the amount of $9,900 for the nine-month period ended March 31, 2006. Had 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 loss
and loss per share would have changed to the pro forma amounts in the table
below for the three- and nine-month periods ended March 31, 2007 and March 31,
2006. The Company will continue to disclose on a pro forma basis according to
SFAS No. 123 during the transition period to accordance with SFAS No. 123(R).



                                       -6-
<PAGE>
<TABLE><CAPTION>
                                                                          Three months                 Nine months
                                                                         ended March 31,             ended March 31,
                                                                   ----------------------------------------------------
                                                                                     2006                        2006
                                                                       2007      (restated)        2007       (restated)
                                                                   ----------------------------------------------------
<S>                                                                <C>           <C>           <C>            <C>
Net income (loss) as reported                                      $ (427,184)   $ (277,714)   $(1,029,604)   $ 239,089

Add:

2006 restricted shares and options, compensation expense
  per SFAS 123 R                                                        4,710           --         554,979          --
Revised net income (loss)                                          $ (422,474)   $ (277,714)    $ (474,624)   $ 239,089

Subtract:

Total stock-based employee compensation awards, net of
  related tax benefit                                                     --            --        (592,661)      (9,900)
Pro forma net income (loss)                                        $ (422,474)   $ (277,714)   $(1,067,285)   $ 229,189
Net loss per share:
          Basic - as reported                                          ($0.02)       ($0.02)        ($0.06)       $0.02
          Diluted - as reported                                        ($0.02)       ($0.02)        ($0.06)       $0.01
          Basic - pro forma                                            ($0.02)       ($0.02)        ($0.06)       $0.02
          Diluted - pro forma                                          ($0.02)       ($0.02)        ($0.06)       $0.01
</TABLE>

To estimate compensation expense, the Company uses the Black-Scholes
option-pricing model and assumptions deemed reasonable by management. The
options are valued as of the date of grant. The following assumptions were used
to compute the fair value of option grants for the three-month periods ended
March 31:

                                                 2007              2006
                                               --------          --------
Expected volatility                             82.83%            90.19%
Expected dividend yield                          0.00%             0.00%
Risk-free interest rate                          4.65%             4.38%
Expected life                                  10 years          10 years


FINANCIAL INSTRUMENTS

The carrying amounts of cash, cash equivalents, and accounts receivable
approximate fair value due to the short-term maturities of these instruments.
The carrying value of the Company's secured convertible note is recorded net of
the unamortized fair value assigned to beneficial conversion feature and
warrants, representing its estimated fair value. The carrying value of the
Company's other debt approximates its estimated fair values due to the rates of
interest on the debt approximating current interest rates for similar
obligations with like maturities.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company generally does not use derivative financial instruments to hedge
exposures to cash flow or market risks. However, certain other financial
instruments, such as the embedded conversion features of debt instruments that
are indexed to the Company's common stock, are classified as liabilities when
either (a) the holder possesses rights to net-cash settlement or (b) physical or
net share settlement is not within the control of the Company. In such
instances, net-cash settlement is assumed for financial accounting and
reporting, even when the terms of the underlying contracts do not provide for
net-cash settlement. Such financial instruments are initially recorded at fair
value and subsequently adjusted to fair value at the close of each reporting
period. Fair value for option based derivative financial instruments is
determined using the Black-Scholes option-pricing model.

BENEFICIAL CONVERSION FEATURE AND WARRANTS

Embedded beneficial conversion features that meet the definition of derivative
financial instruments have, where applicable, been bifurcated from host
instruments (Laurus secured convertible notes, Note 4. Restatement) and, in all

                                       -7-
<PAGE>

instances derivative financial instruments have been recorded as assets or
liabilities and are carried at fair value, using the Black-Scholes pricing
model. The Company records the value allocated to warrants issued with the
convertible instruments, measured at fair value, using the Black-Scholes pricing
model and recognized by allocating a portion of the proceeds to a derivative
liability with an offset to discount on the convertible instrument. The recorded
discount is amortized as interest expense using the straight-line interest
method over the life of the debt.

REVENUE RECOGNITION

The Company recognizes revenue in the period that the related services are
performed and collectibility is reasonably assured. Currently, the Company
derives substantially all of its revenues from laboratory services. Service
contracts generally take the form of fixed-price contracts. Changes in the scope
of work generally result in a renegotiation of contract pricing terms and/or a
contract amendment. Renegotiated amounts are not included in net revenues until
earned, and realization is assured. Advance payments on service contracts are
treated as a deposit and applied to periodic billing during the contract period.
Setup and administrative fees are billed upon contract approval. Revenues from
setup and administrative fees are amortized over the life of the contract.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus the effect of
outstanding in-the-money stock options that have vested or will vest within 60
days of March 31, 2007 (or May 30, 2007) and in-the-money warrants using the
"treasury stock" method and the effect of preferred stock on an as-converted
basis. Diluted loss per share is computed on the basis of the weighted average
number of common shares outstanding and does not include the effect of dilution
from outstanding in-the-money stock options that have vested or will vest within
60 days of March 31, 2007 and in-the-money warrants using the "treasury stock"
method and the effect of preferred stock on an as-converted basis. All per share
calculations exclude treasury shares.

Due to the Company's net loss per share for three- and nine-month periods ended
March 31, 2007 and for the three-month period ended March 31, 2006, common stock
equivalents were not used because the effect would be anti-dilutive. As of March
31, 2007, the Company's common stock equivalents included: a) in-the-money,
vested options to purchase 1,155,704 shares of common stock; and b) in-the-money
warrants to purchase 730,727 shares of common stock. As of March 31, 2006, the
Company's common stock equivalents included: a) in-the-money, vested options to
purchase 1,157,951 shares of common stock; b) in-the-money warrants to purchase
2,489,363 shares of common stock; and c) 1,550,000 shares of Series A preferred
stock convertible into 1,791,907 shares of common stock. Conversion of Series A
preferred stock shares to common stock shares was completed during April, 2006.

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

                                      -8-
<PAGE>
<TABLE><CAPTION>
                                                                   Three months ended            Nine months ended
                                                                        March 31,                    March 31,
                                                                -----------------------------------------------------
                                                                                 2006                         2006
                                                                   2007       (restated)        2007       (restated)
                                                                -----------------------------------------------------
<S>                                                   <C>      <C>           <C>           <C>            <C>
Net income (loss)                                     (A)       $ (427,184)   $ (277,714)   $(1,029,604)   $  239,089

Net income (loss) applicable to common stockholders   (B)       $ (427,184)   $ (277,714)   $(1,029,604)   $  239,089
                                                                ==========    ==========    ===========    ==========

Weighted average number of outstanding
shares of common stock                                (C)       18,692,918    12,943,183     18,615,728    12,842,893
                                                                ==========    ==========    ===========    ==========

Weighted average number of outstanding
shares of common stock and common stock equivalents   (D)       18,692,918    12,943,183     18,615,728    17,006,874
                                                                ==========    ==========    ===========    ==========

Income (loss) per share:

          Basic                                      (B/C)      $    (0.02)   $    (0.02)    $    (0.06)   $     0.02
                                                                ==========    ==========    ===========    ==========
          Diluted                                    (A/D)      $    (0.02)   $    (0.02)    $    (0.06)   $     0.01
                                                                ==========    ==========    ===========    ==========
</TABLE>

DEFERRED FINANCE COSTS

In conjunction with the Company's $2.5 million and $1.5 million secured
convertible note financings that closed on May 28, 2004 and January 31, 2005,
respectively, with Laurus Master Fund, Ltd., a New York City based investment
fund ("Laurus"), the Company paid various fees and expenses totaling $461,500,
which are being amortized to other expenses at the rate of $26,793 per quarter
over the 48-month life of the notes. As of March 31, 2007 and March 31, 2006,
there were unamortized balances of $152,409 and $259,580, respectively.

3. CONCENTRATION OF SALES AND CREDIT RISK

The Company's largest client in the quarter ended March 31, 2007 individually
accounted for approximately 25% and 44% of the Company's total revenues in
quarters ended March 31, 2007 and March 31, 2006, respectively. Revenues from
the Company's five largest clients in the quarter ended March 31, 2007,
represented approximately 80% and 85% of total revenues in the quarters ended
March 31, 2007 and March 31, 2006, respectively. As of March 31, 2007 and March
31, 2006, approximately 32% and 58% of the Company's accounts receivable balance
were from the two largest clients at that time.

Clients of the Company represent many Fortune 500 pharmaceutical companies. The
revenues from several pharmaceutical company divisions are aggregated as a
single client for the Company's revenue calculations. 19% of the Company's
revenue is derived from Fortune 500 clients for the quarter ended March 31,
2007. The percentage of revenue increases to 44% using the Fortune Global 500
list. The Company's exposure to concentration of credit risk is reduced
considering the financial strength of the Company's clients.

The Company maintains its cash in three commercial accounts at major financial
institutions. Although the financial institutions are considered creditworthy
and have not experienced any losses on their deposits, at March 31, 2007, the
Company's cash balance exceeded Federal Deposit Insurance Corporation (FDIC)
limits by $4,452,492.

4. RESTATEMENT

FINANCIAL DERIVATIVES

At the end of the fiscal year ended June 30, 2006, the Company corrected its
accounting for derivative financial instruments to conform to the requirements
of Statements of Accounting Standards No. 133, as amended, and Financial
Accounting Standards Board Emerging Issues Task Force (EITF) No. 00-19. The
Company previously accounted for these instruments under EITF 00-27 and EITF
98-5. Embedded beneficial conversion features that meet the definition of
derivative financial instruments have, where applicable, been bifurcated from
host instruments (Laurus secured convertible notes) and, in all instances
derivative financial instruments have been recorded as assets

                                       -9-
<PAGE>

or liabilities and are carried at fair value. The Company restated prior fiscal
years results to conform to the requirements of the Statement of Financial
Accounting Standards No. 154, "Accounting Changes and Error Corrections". Net
fair value adjustments included in earnings (loss) related to these instruments
amounted to $298,616 and ($265,928) for the fiscal year ended June 30, 2006 and
2005, respectively. Accordingly, the balances for the quarter ended March 31,
2006 have been restated.

The adjustments for the fiscal year ended June 30, 2005, the quarters ended
September 30, 2005; December 31, 2005; and March 31, 2006 are listed in the
following table:

CONSOLIDATED BALANCE SHEETS - Summary of Adjustments for Derivative Liabilities
<TABLE><CAPTION>

                                                             June 30,     September 30,  December 31,     March 31,
                  ASSETS                                       2005           2005           2005           2006         March 31,
                                              March 31,       Adjust         Adjust         Adjust         Adjust          2006
                                                2006        Derivative     Derivative     Derivative     Derivative     (unaudited)
                                             (unaudited)    Liability      Liability      Liability      Liability      (restated)
                                            ------------   ------------   ------------   ------------   ------------   ------------
<S>                                         <C>            <C>            <C>            <C>            <C>            <C>
TOTAL ASSETS                                $  8,257,165                                                               $  8,257,165
                                            ============                                                               ============

LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
-----------------------------------------------------------------------------------------------------------------------------------
Compound embedded derivative liability -
current portion                             $        --         327,110        (67,000)       270,767       (118,907)  $    411,970
-----------------------------------------------------------------------------------------------------------------------------------

          Total current liabilities            2,820,985        327,110        (67,000)       270,767       (118,907)     3,232,955



Capital lease obligations - long term
portion                                           69,864            --             --             --             --          69,864
-----------------------------------------------------------------------------------------------------------------------------------
Secured convertible note - long-term
portion                                          694,205        239,644        (19,811)       (19,810)       (18,626)       875,602
-----------------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------------
Compound embedded derivative liability -
long-term                                            --       2,524,739        (14,583)      (326,138)      (231,260)     1,952,758
-----------------------------------------------------------------------------------------------------------------------------------

Other notes payable - long term portion          332,228            --             --             --             --         332,228

          Total liabilities                    3,917,282      3,091,493       (101,394)       (75,181)      (368,793)     6,463,407


STOCKHOLDERS' EQUITY (DEFICIT)
    Preferred stock                               15,500            --             --             --             --          15,500

    Common stock                                 333,474            --             --             --             --         333,474
-----------------------------------------------------------------------------------------------------------------------------------

    Additional paid-in capital                30,410,600     (3,104,438)           --             --          12,944     27,319,106
-----------------------------------------------------------------------------------------------------------------------------------

    Accumulated deficit                      (26,418,269)        12,944        101,394         75,181        355,849    (25,872,901)
-----------------------------------------------------------------------------------------------------------------------------------

   Treasury stock                                 (1,423)                                                                    (1,423)
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                     4,339,882                                                                  1,793,756
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY                                      $  8,257,165                                                               $  8,257,165
===================================================================================================================================
</TABLE>
                                      -10-
<PAGE>

5. COMMON STOCK PURCHASES

On August 25, 2006, the Company's board of directors authorized the purchase of
shares of common stock of the Company up to an aggregate value of $500,000 for
shares at a maximum price of $1.17 per share. The terms of the repurchase plan
allow purchases through August 31, 2007 unless terminated earlier. $200,000 was
paid in cash and $1,544 accrued for shares purchased through December 31, 2006.
No additional purchases of shares of common stock were made during the quarter
ended March 31, 2007. Shares purchased through March 31, 2007 are represented in
the following table:

                                      Total number   Average price   Total value
                                        of shares       paid per      of shares
        Period                          purchased        share        purchased

August 25, 2006 - October 31, 2006           --            --               --

November 1, 2006 - November 30, 2006      59,900         $1.12          $67,032
                                                         =====

December 1, 2006 - December 31, 2006     127,300         $1.06         $134,512
                                                         =====

January 1, 2007 - March 31, 2007             --            --               --

                        Total              187,200                     $201,544
                                           =======                     ========

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 CONDENSED NOTES IN THIS FORM
10-QSB, OUR FORM 10-QSB FOR THE PERIODS ENDED DECEMBER 31, 2006, SEPTEMBER 30,
2006 AND OUR AUDITED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE FISCAL YEAR
ENDED JUNE 30, 2006, INCLUDED IN OUR ANNUAL REPORT ON FORM 10-KSB.

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 CLIENTS, 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 AS DISCUSSED IN OUR ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 2006, 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 FISCAL YEAR ENDED JUNE
30, 2006, AND IN OUR REGISTRATION STATEMENTS ON FORM SB-2. THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS REPORT SPEAK ONLY AS OF THE DATE HEREOF. WE CAUTION

                                      -11-
<PAGE>

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 IN THIS REPORT 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
laboratory diagnostic manufacturers in the conduct of human clinical research,
for use in their drug and diagnostic product 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 as well as osteo and rheumatoid 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and
estimates since the end of our 2006 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, 2006.

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 of America. 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, and the
useful lives of tangible and intangible assets. The discussion below is intended
to be a brief discussion of some of the judgments and uncertainties that can
impact the application of these policies and the specific dollar amounts
reported on our financial statements. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form our basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, or if management made
different judgments or utilized different estimates. Many of our estimates or
judgments are based on anticipated future events or performance, and as such are
forward-looking in nature, and are subject to many risks and uncertainties,
including those discussed below and elsewhere in this Report. We do not
undertake any obligation to update or revise this discussion to reflect any
future events or circumstances.

We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is neither a complete list of all of our accounting policies,
nor does it include all the details surrounding the accounting policies we have
identified. There are other accounting policies that are significant to our
company. For a more 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, 2006.

REVENUE RECOGNITION

We recognize revenue in the period that the related services are performed.
Historically, a majority of our net revenue has 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. Our

                                      -12-
<PAGE>

client contracts may be delayed or cancelled at anytime. Uncertainty surrounding
continuation of existing revenues during any period is high. Under fixed-price
contracts, we recognize revenue as services are performed, with performance
generally assessed using output measures, such as units-of-work performed to
date compared to the total units-of-work contracted. We believe that recognizing
revenue as services are performed is the most appropriate method for our
business as it directly reflects services performed in the laboratory. We would
expect material differences in reporting of our revenues to occur if we changed
our assumptions for revenue recognition from services performed to other methods
such as percent complete or completed contract methods. While both other methods
are allowed under GAAP, they would introduce more variables and estimates into
our revenue recognition process. The percent complete method introduces
estimated costs early in the process that may drive revenues higher in early
periods. The completed contract method may recognize revenues in future contract
periods, such as the first quarter after a fiscal year close and subsequent to
completion of the services rendered. Changes in the scope of work generally
result in a renegotiation of contract pricing terms. Renegotiated amounts are
not included in net revenue until earned and realization is assured. We also
receive advances from certain clients 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. All out-of-pocket costs are included in total revenue and expenses.

FINANCIAL DERIVATIVES - BENEFICIAL CONVERSION FEATURE AND WARRANTS

Embedded beneficial conversion features that meet the definition of derivative
financial instruments have, where applicable, been bifurcated from host
instruments (see Note 2. Summary of Significant Accounting Policies and Note 4.
Restatement) and, in all instances derivative financial instruments have been
recorded as assets or liabilities and are carried at fair value, using the
Black-Scholes pricing model. We record the value allocated to warrants issued
with the convertible instruments, measured at fair value, using the
Black-Scholes pricing model and recognized by allocating a portion of the
proceeds to a derivative liability with an offset to discount on the convertible
instrument. The recorded discount is amortized as interest expense using the
straight-line interest method over the life of the debt.

BAD DEBT ALLOWANCE

We endeavor to assess and monitor the creditworthiness of our clients to which
we grant credit terms in the ordinary course of business. We maintain a
provision for doubtful accounts to provide for the possibility that amounts due
to us may not be collected. As of March 31, 2007, the allowance for bad debt was
approximately 2% of our total accounts receivable or $32,100. We generally have
a high collectibility rate on our accounts receivable, and our allowance for
doubtful accounts is reasonable based on our past experience. While the company
has historically experienced very low levels of bad debt, we constantly monitor
our current accounts receivable for past due accounts adjust the allowance as
circumstances warrant. As the recorded bad debt provision is based upon
management's judgment, actual bad debt write-offs may be greater or less than
the amount recorded. If we have specific knowledge of a current account that may
be uncollectible, we will add that amount to our allowance for doubtful
accounts. We are susceptible to changes in the pharmaceutical market as well as
changes in the overall economy. A downturn in the market or cost reductions and
consolidation such as the market is currently experiencing, may change how we
estimate our allowance. Based on the current changes in our marketplace, we may
need to increase our bad debt allowance in future periods which would reduce our
operating and net profits.

STOCK-BASED COMPENSATION EXPENSE

We offer stock-based compensation to our employees, senior management and board
of directors at the direction of our compensation committee and subject to
approval of our board of directors. Our policy is to grant stock options to
employees based on years of service and position within the company. Our senior
management group and board of directors are compensated with incentive-based
restricted shares of common stock. The Company has adopted the provisions of
SFAS No.123(R), and share-based compensation is expensed on a quarterly basis,
at fair value, using Black-Scholes valuation method to estimate the fair value
of stock options granted.

                                      -13-
<PAGE>

OPERATING EXPENSES

Historically, we have segregated 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 amounts necessary to complete the revenue and
earnings process, and includes direct labor and related benefits, other direct
costs, and an allocation of facility charges and information technology costs,
and depreciation and amortization. Also, laboratory expenses and cost of goods
sold include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenue,
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, legal and
accounting fees, advertising and promotional expenses, administrative travel and
an allocation of facility charges, information technology costs, and
depreciation and amortization.

Research and development expenses consist of salaries 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.
This estimate of a three to five-year useful life on equipment and computers and
a useful life based on the remaining years left on the building lease for
leasehold improvements reflects management's judgment that these useful life
periods reflect a reasonable estimate of the life over which the equipment,
computers and leasehold improvements will be used by us. However, the amount of
depreciation expense we record in any given period will change if our estimates
of the useful life of our equipment, computers or leasehold interests were to
increase or decrease.

RESULTS OF OPERATIONS FOR THREE-MONTH AND NINE-MONTH PERIODS ENDED MARCH 31,
2007 AND MARCH 31, 2006

REVENUE:
<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
Revenue                  1,755      3,110     (1,355)    (44)     6,579      8,057     (1,478)    (18)
--------------------------------------------------------------------------------------------------------
</TABLE>

Our revenue is generated from clinical trials and diagnostic testing services.
Between comparable quarters ended March 31, 2007 and March 31, 2006,
respectively, our revenue decreased approximately 44% from $3,110,000 to
$1,755,000. This decrease was the result of a decrease in the size and number of
clinical trials testing services we performed. This decrease also reflects the
culmination of a string of significant increases in revenue and open work orders
we had experienced over five of the past seven quarters. For the comparable nine
months ended March 31, 2007 and March 31, 2006, our revenue decreased 18% from
$8,057,000 to $6,579,000. This also was the result of a decrease in the size and
number of clinical trials testing services we performed. Our referral lab
partners have advised us of a shift in clinical trial revenues to emerging
geographies located outside of the United States. Additionally they advise of,
slow enrollment in Phase II trials and delays from projected clinical trial time
frames, where we derive significant portions of our revenue, has shifted revenue
to future periods. We have high uncertainty surrounding continuation of existing
revenues and estimates of future revenues, during any period. Studies that we
bid on are uncertain until we have a signed contract. Once work on a study
commences, there is no guarantee that it will not be cancelled at some time
during the testing phase. Drug development activities by pharmaceutical
companies in the lipid / cholesterol market in general, representing a major
portion of our revenues, are unclear.

                                      -14-
<PAGE>

Several factors may adversely affect our future revenues, including the recent
announcements by Pfizer of plans for cost reductions and layoffs and other large
pharmaceutical companies' cost reduction announcements.

The recent decreases in our revenues are the result of changes to the size and
quantities of current studies requested by our clients. Despite our
diversification efforts over the last two years, some of our quarterly
fluctuations in total revenue are explained by changes in the testing and open
work orders from our historically largest clients. In particular, some of our
recent decreases in revenue can be partially explained by lack of open work
orders of our top five clients. For the three- and nine-month periods ended
March 31, 2007, our current top five clients accounted for approximately
$1,425,000 and $4,190,000, respectively of our total revenue, compared to
approximately $2,637,000 and $5,324,000, respectively, for the three- and
nine-month periods ended March 31, 2006. We have been making efforts to
diversify our client base, however, we expect to remain substantially dependent
on our top five clients for a significant portion of our revenue, and as such, a
decline or increase in the volume of services performed for any one or more of
these clients will continue to have a significant impact on our revenue. The
concentration of credit risk is described above in Note 3 to our unaudited
consolidated financial statements.

During the quarter and nine-months ended March 31, 2007, revenue generated from
clinical trials testing services accounted for approximately 59% and 64%,
respectively of our total revenue as compared to 56% and 65%, respectively,
during the quarter and nine months ended March 31, 2006. During the quarter and
nine-month periods ended March 31, 2007, revenue generated from diagnostic
services accounted for approximately 4% and 4%, respectively, of our total
revenue as compared to 5% and 5%, respectively, during the quarter and nine
months ended March 31, 2006. During the three- and nine-month periods ended
March 31, 2007, revenue generated from referral sources accounted for
approximately 37% or $662,000 and 32% or $2,060,000, respectively of our total
revenues as compared to 39% or $1,217,000 and 30% or $2,429,000, respectively,
during the quarter and nine months ended March 31, 2006. While our overall
percentage of referral revenue is down for the quarter, for the year to date the
total dollars of referral business have declined at a slightly higher rate
compared with our other revenue sources.

LABORATORY EXPENSE AND COST OF GOODS SOLD:

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
Laboratory Expenses
and Cost of Goods
Sold                    1,266       1,423     (157)      (11)     3,986      3,828      158        4
--------------------------------------------------------------------------------------------------------
Percentage of Revenue     72%         46%                           61%        48%
--------------------------------------------------------------------------------------------------------
</TABLE>


Laboratory expense and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical trial
samples and the cost of reagents and supplies for analysis of clinical trial
samples, and secondarily, of payments to subcontractors of laboratory services,
and other expenses such as rent, insurance, business and occupation taxes.

For the comparable quarters ended March 31, 2007 and March 31, 2006, laboratory
expenses and cost of goods sold decreased approximately 11% to $1,266,000 from
$1,423,000, respectively, and as a percentage of revenue, increased to
approximately 72% from approximately 46%. The relative increase in laboratory
expense and cost of goods sold as a percentage of revenue was primarily the
result of the significant decrease in revenue over the comparable period and the
fixed components of laboratory expense and cost of goods sold.

For the comparable nine-month periods ended March 31, 2007 and March 31, 2006,
laboratory expenses and cost of goods sold increased approximately 4% to
$3,986,000 from $3,828,000, respectively, and as a percentage of revenue,
increased to approximately 61% from approximately 48%. The relative increase in
laboratory expense and cost of goods sold as a percentage of revenue was
primarily the result of the significant decrease in revenue over the comparable
period and the fixed components of laboratory expense and cost of goods sold.
Our fixed and variable expenses were approximately 9% or $360,000 and 91% or
$3,626,000, respectively for the nine months ended March 31, 2007. We also had a
significant amount of central laboratory business that increased our outside

                                      -15-
<PAGE>

laboratory service costs. For the comparable nine-month periods ended March 31,
2007 and March 31, 2006, outside laboratory services increased approximately 5%
to $418,000 from $398,000, respectively.

One of the major components in laboratory expense and costs of goods sold was
the 24% decrease in lab supplies to approximately $384,000 from $502,000 for the
quarters ended March 31, 2007 and March 31, 2006, respectively. Lab supplies
represented approximately 30% and 35% of laboratory expense and cost of goods
sold for the quarters ended March 31, 2007 and March 31, 2006, respectively. Lab
supplies expense decreased 14% to approximately $1,252,000 from $1,459,000 for
the nine-month period ended March 31, 2007 and March 31, 2006. Lab supplies
represented approximately 31% and 38% of laboratory expense and cost of goods
sold for the nine-month period ended March 31, 2007 and March 31, 2006,
respectively. The decrease in lab supplies between the comparable quarters is
the result of the decrease in clinical and diagnostic testing services we
provided to our clients and a shift to outside service expense for central lab
testing services in the current quarter.

The largest component in laboratory expense and costs of goods sold was salaries
and related benefits for our employees performing analysis of clinical trials
and diagnostic samples which decreased 3% to approximately $508,000 from
$522,000 for the quarters ended March 31, 2007 and March 31, 2006, respectively.
Salaries and related benefits accounted for approximately 40% and 37% of total
laboratory expense and cost of goods sold for the quarters ended March 31, 2007
and March 31, 2006, respectively. The significant increase in salaries and
benefits is due to increased hiring of laboratory personnel related to the
increase in our business activity in the previous fiscal year. In addition, our
increased diversity of clients and studies has required additional staff. On
March 31, 2007 we had 39 FTE in our laboratory services, unchanged from December
31, 2006. This compares to 33 FTE on March 31, 2006. Salaries and related
benefits rose 21% to approximately $1,562,000 from $1,287,000 for the nine-month
period ended March 31, 2007 and March 31, 2006, respectively. Salaries and
related benefits accounted for approximately 39% and 34% of total laboratory
expense and cost of goods sold for the nine-month periods ended March 31, 2007
and March 31, 2006, respectively

The following table illustrates the cost detail of fixed and variable cost of
goods sold:
<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
              Fixed and Variable Cost detail of Cost of Goods Sold
--------------------------------------------------------------------------------------------------------
                                   three months ended March 31           nine months ended March 31
--------------------------------------------------------------------------------------------------------
                                 2007               2006               2007               2006
--------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>     <C>       <C>      <C>        <C>    <C>         <C>
       Fixed costs:             113,752     9%     102,879    7%      359,914     9%     286,477     7%
--------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------
      Variable costs:
--------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------
Wages, taxes, benefits          508,259            478,786          1,561,626          1,287,491
--------------------------------------------------------------------------------------------------------
Reagent chemicals               384,150            508,247          1,252,368          1,449,162
--------------------------------------------------------------------------------------------------------
Outside Services                126,056            185,368            417,837            398,199
--------------------------------------------------------------------------------------------------------
Other variable costs            133,797            147,711            394,383            406,592
--------------------------------------------------------------------------------------------------------
     Total variable costs     1,152,262    91%   1,320,112    93%   3,626,214    91%   3,541,444    93%
--------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------
Total cost of goods sold      1,266,014   100%   1,422,991   100%   3,986,128   100%   3,827,921   100%
--------------------------------------------------------------------------------------------------------
</TABLE>
                                      -16-
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
Selling, General and
Administrative Expense   776        919       (143)      (16)     3,040      2,590      450        17
--------------------------------------------------------------------------------------------------------
Percentage of Revenue    44%        30%                             46%        32%
--------------------------------------------------------------------------------------------------------
</TABLE>

Our selling, general and administrative expense consists primarily of
compensation for our executive officers, board members and other selling,
general and administrative personnel, legal and accounting fees, and public
company expense. Selling, general and administrative expense decreased 16% to
approximately $776,000 from $919,000 for the quarters ended March 31, 2007 and
March 31, 2006, respectively. As a percentage of revenue, selling, general and
administrative expense was 44% and 30%, respectively, for the quarters ended
March 31, 2007 and March 31, 2006. This is primarily due to the decrease in
revenue we experienced in the quarter ended March 31, 2007 compared to the
quarter ended March 31, 2006.

The 16% decrease in selling, general and administrative expense was primarily
the result of management's plan to reduce costs for insurance, legal, public
company and other expense in response to the decrease in revenue in fiscal 2007.
We have reduced our total costs for insurance, legal, public company expenses
such as investor relations, filing fees and printing and other expense to
approximately $84,000 from $214,000 for the quarters ended March 31, 2007 and
March 31, 2006.

Selling, general and administrative expense increased 17% to approximately
$3,040,000 from $2,590,000 for the nine-month periods ended March 31, 2007 and
March 31, 2006, respectively. As a percentage of revenue, selling, general and
administrative expense was 46% and 32%, respectively, for the nine-month periods
ended March 31, 2007 and March 31, 2006. This percentage increase reflects the
significant revenue decrease between comparable quarters and the significant
share-based compensation paid in the first quarter of the fiscal year of
approximately $546,000, included in the total for the nine months ended March
31, 2007.

RESEARCH AND PRODUCT DEVELOPMENT:

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
Research and Product
Development                 --         12       (12)     (100)      --          34      (34)      ($100)
--------------------------------------------------------------------------------------------------------
Percentage of Revenue       0%         0%                           0%          0%
--------------------------------------------------------------------------------------------------------
</TABLE>

Research and product development expenses consist mainly of our expenditures
incurred in connection with development of our OsteoPatch, SalivaSac, LIDA and
cell viability technology held in our subsidiary PBI Technology. During the
first nine months of 2007, we did not incur any research and development
expense. We anticipate during the remainder of 2007 that we will not incur any
research and development expenses.

                                      -17-
<PAGE>

OTHER EXPENSE:

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
Other Expense            (141)     (1,033)      892      (86)     (583)    (1,366)      783       (57)
--------------------------------------------------------------------------------------------------------
Percentage of Revenue     (8)%       (33)%                         (9)%      (17)%
--------------------------------------------------------------------------------------------------------
</TABLE>

Total other expense decreased 86% or approximately $892,000 to $141,000 from
$1,033,000 during the quarters ended March 31, 2007 and March 31, 2006,
respectively. Total other expense decreased 57% or approximately $784,000 to
$583,000 from $1,366,000 during the nine months ended March 31, 2007 and March
31, 2006, respectively.

The major component of other expense in the three- and nine-months ended March
31, 2006 was approximately $902,000 for warrant compensation expense associated
with our private placement of common stock and warrants. We had no comparable
expense in the quarter and nine months ended March 31, 2007.

Another component of other expense in the quarter and nine-months ended March
31, 2007 was approximately $32,000 and $52,000, respectively of interest income
from the investment of excess cash compared to approximately $2,000 and $4,000,
respectively of interest income in the quarter and nine-months ended March 31,
2006. We also incurred approximately $193,000 and $154,000, respectively, of
non-cash interest expense that represented the amortization of the intrinsic
value of the beneficial conversion features and fair market value allocated to
$2,207,905 warrants related to the two secured convertible notes. As of March
31, 2007, $1,069,639 remained unamortized and will be amortized, using the
straight-line interest method, over the remaining lives of the Notes, or upon
their earlier conversion. (See "Note 9 to Notes to Consolidated Financial
Statements" in our Report on Form 10-KSB for the year ended June 30, 2006). For
the quarter and six-months ended March 31, 2007, and March 31, 2006,
respectively, we incurred no change in the expense related to the amortization
of our deferred finance cost associated with both Notes.

NET LOSS:

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
Net Income (Loss)         (427)    (278)      (149)       54     (1,030)     239       (1,269)    (531)
--------------------------------------------------------------------------------------------------------
Percentage of Revenue     (24)%     (9)%                           (16)%      3%
--------------------------------------------------------------------------------------------------------
</TABLE>


We had a net loss of approximately $427,000 for the quarter ended March 31, 2007
compared to a net loss of approximately $278,000 for the quarter ended March 31,
2006. This difference between the net losses was primarily attributable to our
significantly decreased revenue and percentage of gross profit in the comparable
three-month periods. Increases in salary and benefits expense due to staffing
increases, additional costs outside services for central lab studies also added
to the loss for the three-month period ended March 31, 2007.

We had a net loss of approximately $1,030,000 for the nine-month period ended
March 31, 2007 compared to a net loss of approximately $239,000 for the
nine-month period ended March 31, 2006. This difference between the net losses
was primarily attributable to our significantly decreased revenue and percentage
of gross profit in the comparable nine-month periods. Increases in salary and
benefits expense due to staffing increases, share-based compensation costs and
additional costs for outside services related to central lab studies also added
to the loss for the nine-month period ended March 31, 2007.

                                      -18-
<PAGE>

We realized an operating loss of approximately $287,000 and $447,000,
respectively for the quarter and nine months ended March 31, 2007, as compared
to an operating income of approximately $755,000 and $1,605,000 for the three-
and nine-month periods ended March 31, 2006. This difference between the net
losses was primarily attributable to our significantly decreased revenue and
percentage of gross profit. In addition, increases in salary and benefits
expense due to staffing increases, additional costs for outside services for
central lab studies also added to the operating loss. Our gross profit is
affected mainly by the level of revenue, the types of studies in progress, and
components of cost of goods sold.

EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA):

<TABLE><CAPTION>
--------------------------------------------------------------------------------------------------------
                         Three Months Ended                       Nine Months Ended
  Dollars in                 March 31,           $         %          March 31,           $         %
  thousands,           ---------------------------------------------------------------------------------
  rounded to                         2006                                    2006
nearest thousand          2007    (restated)  Change    Change     2007   (restated)   Change    Change
--------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>        <C>     <C>        <C>        <C>        <C>
--------------------------------------------------------------------------------------------------------
EBITDA                    (43)       978      (1,021)    (104)      143      2,287     (2,144)    (94)
--------------------------------------------------------------------------------------------------------
Percentage of Revenue     (2)%       31%                             2%        28%
--------------------------------------------------------------------------------------------------------
</TABLE>


EBITDA is an alternative view of earnings performance used by management, which
is a non-GAAP (generally accepted accounting principles) financial measure.
EBITDA provides a view of a company's operations without including certain
non-cash charges and certain expenses, specifically reflecting earnings before
interest, taxes, depreciation and amortization. We added the EBITDA metric to
our financial reporting beginning in fiscal 2006 because we believe this metric
more clearly illustrates company operating performance and we use it for
internal reporting and budgeting, as well as for reviewing competitors'
performance. We believe that investors' understanding of our company performance
is enhanced by disclosing this metric. In particular, EBITDA eliminates the
charge to net income due to the beneficial conversion feature on the Laurus
convertible debt, as well as amortized warrant costs from our Franklin Funding
equipment financing for the fiscal years 2007 and 2006. These non-cash,
non-operating charges have varied significantly from year to year, making
comparisons of our operating performance more difficult. The EBITDA measure is
not a substitute for GAAP Net Income, and should not be viewed as such.

For the quarter ended March 31, 2007, we had negative EBITDA of approximately
$43,000 compared to positive EBITDA $978,000 for the quarter ended March 31,
2006. In addition, for the nine-months ended March 31, 2007, we had positive
EBITDA of approximately $143,000 compared to $1,809,000 for the nine-months
ended March 31, 2006. This significant improvement in EBITDA income (loss) over
GAAP Net Income (loss) is primarily the result of the significant amount of
interest expense, amortization expense related to our secured convertible notes
during comparable periods. For the quarter and nine months ended March 31, 2006,
warrant expense from our private placement of common stock provided a
significant improvement in EBITDA income. We had no comparable amortized expense
item for the quarter and nine months ended March 31, 2006. A reconciliation of
EBITDA income (loss) and GAAP Net Income (loss) is provided below.

                                      -19-
<PAGE>

RECONCILIATION OF EBITDA INCOME (LOSS) TO GAAP NET INCOME (LOSS):
<TABLE><CAPTION>
------------------------------------------------------------------------------------------------
                                             Three Months Ended             Nine Months Ended
   Dollars in                                     March 31,                     March 31,
   thousands,                              -----------------------------------------------------
   rounded to                                               2006                         2006
 nearest thousand                             2007       (restated)       2007        (restated)
------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>            <C>
GAAP Net Income (loss)                      $ (427)       $ (278)       $(1,030)       $  239

Interest expense                                91           104            292           301
Interest expense from amortization
  of beneficial conversion feature
  and warrants                                 193           154            579           579
Amortized finance costs                         27            27             80            80
Depreciation and amortization                   71            68            213           184
Amortized options & warrants                     3           902              9           903

EBITDA                                      $  (43)       $  978        $   143       $ 2,287
------------------------------------------------------------------------------------------------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES:

We had net losses for the three- and nine-month periods ended March 31, 2007 and
a small amount of net income for the fiscal year ended June 30, 2006. Revenue
for the quarter and nine-month periods ended March 31, 2007 was significantly
lower than revenue in the comparable prior fiscal periods. Although we saw
improvement in revenue during the first quarter of the 2007 fiscal year that has
not continued during the second and third quarters and for the first nine months
of the 2007 fiscal year. Should revenue continue to decrease, we will not be
able to avoid our previous experience of significant losses and adverse effects
on our cash and working capital positions. Our operations historically have been
funded through revenue generated from operations and from the sale and issuance
of our common stock, preferred stock and debt.

At March 31, 2007, our cash and cash equivalents were approximately $4,652,000,
compared to approximately $5,498,000 at June 30, 2006. We currently expect that
our current cash, current assets and any cash flows from operations will be
sufficient to fund operations through fiscal 2008. However, any future decreases
in revenue could adversely affect our financial condition. In addition, at March
31, 2007, we had working capital of approximately $2,273,000, compared to
working capital of approximately $4,375,000 at June 30, 2006. The decreases in
cash, cash equivalents and working capital are attributable to several changes
in the balance sheet components. The decrease in our working capital is
primarily attributable to the increase in the current portion of our secured
convertible notes, derivative liability related to the secured convertible notes
and other notes payable secured convertible notes, which offset increases in
prepaid expenses and decreases in accounts payable. The decreases in cash and
cash equivalents were due to certain payments made on our notes payable, and
purchases of capital equipment. Changes providing favorable impact to cash and
cash equivalents include accounts receivable and advances from customers.
Changes providing favorable impact to working capital include increases in other
receivable and prepaid expenses and decreases in accounts payable. Changes
providing unfavorable impact on our working capital include decreases to cash
and cash equivalents, decreases to accounts receivable, increases in accrued
liabilities, advances from customers, capital lease, current portion and
derivative liability of the secured convertible notes.

At March 31, 2007, we had approximately $1,736,000 in accounts receivable,
compared to approximately $1,978,000 as of June 30, 2006, reflecting reduced
revenues in the current period and the timing of revenues billed and collected.
We generally have a high collectibility rate on our accounts receivable, and our
allowance for doubtful accounts is only $32,100 which we believe is reasonable
at 2% of revenue for the quarter ended March 31, 2007, based on our past
experience. If we have specific knowledge of a current account that may be
uncollectible, we will add that amount to our allowance for doubtful accounts.
We are susceptible to changes in the pharmaceutical market as well as changes in
the overall economy. A downturn in the market or cost reductions and

                                      -20-
<PAGE>

consolidation such as the market is currently experiencing, may change how we
estimate our allowance. Our accounts receivable generally reflect our billings,
and may include one or several individually large client receivables from time
to time. We had one clinical service client that represented 17% or
approximately $293,000 of our accounts receivable balance as of March 31, 2007.
Additionally, given the significant decrease in our revenue for the nine-month
period ended March 31, 2007 compared to the nine-month period ended March 31,
2006, accounts receivable increased as a percentage of revenue as of March 31,
2007 to approximately 26% as compared to 25% as of March 31, 2006. This increase
reflects a number of receivables from our larger clients that have subsequently
been paid.

Total liabilities recorded on our balance sheet as of March 31, 2007 were
approximately $6,136,000 compared to approximately $6,668,000 as of June 30,
2006. The decrease in liabilities was the primarily the result of a decrease in
secured convertible note, long-term portion, derivative liability relating to
secured convertible note, and a decrease in other notes payable. A significant
component of our liabilities are represented by the 2004 and 2005 Notes with
Laurus (See "BUSINESS -- Laurus Debt Investment" in our Annual Report on Form
10-KSB for the fiscal year ended June 30, 2006). As required by U.S. generally
accepted accounting principles, the liability we recorded for the 2004 and 2005
Notes reflected an aggregate discount from the face value of the notes by
approximately $1,070,000, related to the valuation of the beneficial conversion
feature and the warrants. During the nine-month period ended March 31, 2007, we
paid approximately $350,000 of the principal amount due on the 2005 note and
$123,000 on the 2004 note. We will pay approximately $133,000 per month through
July 2008, $94,000 in August 2008, reduced to $50,000 per month through until
both notes are paid at June 2009. We expect to have sufficient cash generated
from operations and cash reserves to make all required payments on both notes.
As of March 31, 2007 the remaining aggregate principal balance on the 2004 and
2005 Notes was approximately $2,767,000. Accordingly, if the discount to face
value is disregarded, our total liabilities as of March 31, 2007 and June 30,
2006, respectively, would be approximately $7,398,000 and $8,317,000.

Net cash provided by operating activities was approximately $78,000 for the
nine-month period ended March 31, 2007. Net cash provided by operating
activities was approximately $441,000 for the nine-month period ended March 31,
2006. For the nine-month period ended March 31, 2007, net cash provided by
operations included the effect of approximately $213,000 in depreciation and
amortization, approximately $555,000 of compensation expense from share-based
compensation and approximately $579,000 of amortization related to the 2004 and
2005 Notes. Cash used in financing activities included approximately $673,000
for the nine-month period ended March 31, 2007 primarily payments on notes
payable. Our investing activities consisted of purchases of capital equipment
for approximately $51,000 and repurchases of common stock for $200,000.

As described above, we experienced a significant decrease in revenues for the
three- and nine-month periods ended March 31, 2007 and we incurred significant
negative impact to operating income and show net losses overall. Our cash and
working capital positions have declined for the three- and nine-month periods
ended March 31, 2007 as the decrease in revenues has had an overall negative
impact on operations. In response to the reduction in revenues we have made
additional efforts to control expenses for insurance, legal, and additional
public company expenses such as investor relations, filing fees and printing and
other miscellaneous expense. However, in an effort to improve our competitive
position in the marketplace and to increase revenue, we intend to continue to
actively increase our business development activities, and make additional
revenue-driven investments in our technology infrastructure, operations and
other areas of our business. These efforts will use significant amounts of time,
effort and funding.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet financing arrangements.

RECENT CHANGES IN OUR MARKETPLACE

Management has reviewed recent developments in the dyslipidemia drug development
market that provides a substantial portion of our revenues. These changes -
specifically, the late-stage withdrawal of the HDL-raising drug torcetrapib by
Pfizer in December 2006 - have the potential to significantly impact our future
revenues. While these developments have not significantly impacted our current
revenues for the period ended March 31, 2007, a limited number of current
studies have been postponed, suspended or terminated. Because of current
uncertainty about the

                                      -21-
<PAGE>

significance of these developments, the potential effects on our future business
and revenues, as well as on drug development activities by other pharmaceutical
companies in the lipid / cholesterol market in general, are unclear. While we
remain involved with many top pharmaceutical companies in providing testing
services for drugs related to but distinct from the CETP inhibitors, there is no
assurance that testing services revenue for these drugs will offset the impact
on revenues caused by the withdrawal of torceptrapib.

Several factors may adversely affect our future revenues, including the recent
announcements by Pfizer to halt further testing of torcetrapib, the lead
compound in the CETP inhibitor drug class, due to specific safety issues,
Pfizer's plans for cost reductions and layoffs and other large pharmaceutical
companies' cost reduction announcements. We are not certain how the current
issues will affect the clinical development of CETP inhibitors at other
pharmaceutical companies, or the effect on other drug classes currently being
evaluated for their favorable effects on HDL ("good") cholesterol levels and on
reverse cholesterol transport. In a recent press release (April 20, 2007) Pfizer
announced that it is putting a hold on all drugs in the same class as
torcetrapib. There have been no public announcement by other major
pharmaceutical companies about discontinuing development of related drugs, but
we intend to monitor the situation and assess any potential impacts should they
arise.

FACTORS THAT MAY AFFECT OPERATING RESULTS

Our operating results and financial condition will likely fluctuate due to a
number of factors, including, but not limited to, the following factors:

     o    Our business development and marketing efforts and our ability to
          enter into, build and maintain relationships with new clients, and
          obtain additional projects from existing clients;
     o    The timing and number of clinical trials by clients, the number of
          samples submitted to us for testing, and the amount of revenues
          generated from these tests;
     o    Our ability to participate in and win bids from RFPs (requests for
          proposals) for clinical tests; o Our ability to manage our cash flow,
          including managing or reducing our expenses; o Capital expenditure
          requirements, including for research and development efforts,
          upgrading or replacing laboratory equipment and making investments in
          information technology;
     o    Decreases in work submitted to us from our clients, including any
          delays in undertaking clinical studies or submitting samples for
          testing services, early termination or reductions in work orders or
          clinical studies, or decreases in the volume or timing of new work
          orders; and
     o    We generally do not have long-term contracts with clients for our
          services; any project we undertake may generally be terminated at any
          time by the client on short notice.

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 adversely affect our
business and operating results materially for one quarter or a series of
quarters.

ITEM 3. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is (a) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and (b) accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. As of the end of the period covered by this Report on Form
10-QSB, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and
Controller, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, management and our Chief Executive Officer and Controller concluded
that our disclosure controls and procedures are effective.

                                      -22-
<PAGE>

A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues if
any, within a company have been detected.

During the quarterly period covered by this report, there have been no
significant changes in our internal controls or in other factors that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting. In response to the Sarbanes-Oxley Act of
2002, we are continuing a comprehensive review of our disclosure procedures and
internal controls and expect to make minor modifications and enhancements to
these controls and procedures.

PART II - OTHER INFORMATION

ITEM 6 EXHIBITS

    31.1  Certification of Ronald R. Helm, Chief Executive Officer
    31.2  Certification of John P. Jensen, Controller
    32.1  Certification of Ronald R. Helm, Chief Executive Officer and John P.
          Jensen, Controller, of Pacific Biometrics, Inc., pursuant to 18
          U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.


                                   SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: May 14, 2007

                                    /s/ Ronald R. Helm
                                    ----------------------------------
                                    Ronald R. Helm
                                    Chief Executive Officer
                                    (principal executive officer)


                                    /s/ John P. Jensen
                                    ----------------------------------
                                    John P. Jensen
                                    Controller
                                    (principal financial and accounting officer)


                                      -23-