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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-QSB

x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2003


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




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Commission File Number 0-21537

Pacific Biometrics, Inc.

(Exact name of registrant as specified in its charter)


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


Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file for
such reports), and (2) has been subject to such filing requirements for the
past 90 days.

Yes x No o

As of October 31, 2003, the issuer had 9,063,053 shares of common stock
outstanding.

Transitional Small Business Disclosure Format:

Yes o No x



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TABLE OF CONTENTS



|                            |                                                                                                |                                                        |  |  |  |  |  | 
|--------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|                            |                                                                                                | CONSOLIDATED BALANCE SHEETS                           
|                            |                                                                                                | CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                            |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                            |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|                            | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                            | ITEM 3. CONTROLS AND PROCEDURES                                                               
|PART II  OTHER INFORMATION
|                            | ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS                                              
|                            | ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                    
|                            | ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K                                                       
|                            | SIGNATURES                                                                                    
|EXHIBIT 31.1               
|EXHIBIT 31.2               
|EXHIBIT 32.1               
|EXHIBIT 32.2               



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PACIFIC BIOMETRICS, INCINDEX TO FORM 10-QSB


PagePART I  FINANCIAL INFORMATIONITEM 1 - FINANCIAL STATEMENTSConsolidated Balance Sheets as of September 30, 2003 (unaudited) and June 30, 2003 (audited)
    
    
    3Consolidated Statements of Operations for the three months ended September 30, 2003 and
2002 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the three months ended September 30,
2003 and 2002 (unaudited)
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3 - CONTROLS AND PROCEDURES
    
    
    18PART II  OTHER INFORMATIONITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    
    18ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
    
    
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PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS
    
    September 30,
    
    June 30,2003
    
    2003(unaudited)
    
    (audited)Current assets:Cash and cash equivalents
    
    $
    844,972
    
    
    $
    440,326Accounts receivable, net of allowance for doubtful accounts of $23,695
at September 30, 2003 and $25,543 at June 30, 2003
    
    
    629,148
    
    
    
    466,608Note receivable from related party
    
    
    
    
    
    
    200,000Inventories
    
    
    
    
    
    
    158,104Prepaid expenses and other assets
    
    
    180,771
    
    
    
    73,176Total current assets
    
    
    1,654,891
    
    
    
    1,338,214Property and equipment, net
    
    
    431,325
    
    
    
    433,060Other assets:Restricted cash
    
    
    71,155
    
    
    
    71,074Technology assets
    
    
    476,874
    
    
    
    476,874Total assets
    
    $
    2,634,245
    
    
    $
    2,319,222LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    1,234,732
    
    
    $
    792,420Accrued liabilities
    
    
    743,020
    
    
    
    563,778Dividends payable
    
    
    3,592
    
    
    
    1,558Advances from customers
    
    
    53,405
    
    
    
    310,948Capital lease obligations  current portion
    
    
    49,807
    
    
    
    58,239Notes payable to related parties  current portion
    
    
    108,044
    
    
    
    123,576Other notes payable  current portion
    
    
    238,023
    
    
    
    172,392Total current liabilities
    
    
    2,430,623
    
    
    
    2,022,911Capital lease obligations  long term portion
    
    
    199,429
    
    
    
    208,717Notes payable to related parties  long term portion
    
    
    
    
    
    
    11,775Other notes payable  long term portion
    
    
    518,115
    
    
    
    470,696Total liabilities
    
    
    3,148,167
    
    
    
    2,714,099Stockholders deficit:Preferred stock, $0.01 par value, 5,000,000 shares authorizedSeries A preferred stock, 1,550,000 shares designated, 1,550,000 shares
issued and outstanding, liquidation preference of $2.00 per share,
aggregating $3,100,000
    
    
    15,500
    
    
    
    15,500Series B preferred stock, 1,666,667 shares designated, 33,666.66 shares
issued and outstanding, liquidation preference of $3.00 per share,
aggregating $101,000
    
    
    337
    
    
    
    337Common stock, $0.01 par value, 30,000,000 shares authorized, 9,063,053 shares
issued and outstanding September 30, 2003 and 9,218,458 issued and
outstanding June 30, 2003
    
    
    262,356
    
    
    
    263,189Additional paid-in capital
    
    
    20,425,640
    
    
    
    20,421,642Accumulated deficit
    
    
    (21,216,332
    )
    
    
    (21,094,843
    )Treasury stock
    
    
    (1,423
    )
    
    
    (702
    )Total stockholders deficit
    
    
    (513,922
    )
    
    
    (394,877
    )Total liabilities and stockholders deficit
    
    $
    2,634,245
    
    
    $
    2,319,222


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

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended September 30,
(unaudited)

2003
    
    2002Revenues
    
    $
    2,300,222
    
    
    $
    894,736Laboratory expenses and cost of sales
    
    
    1,294,103
    
    
    
    566,844Gross Margin
    
    
    1,006,119
    
    
    
    327,892Operating expenses:Research and product development
    
    
    38,239
    
    
    
    33,082Selling, general and administrative
    
    
    862,205
    
    
    
    1,064,701Operating income (loss)
    
    
    105,675
    
    
    
    (769,891
    )Other income (expense):Interest expense
    
    
    (31,101
    )
    
    
    (31,605
    )Interest income
    
    
    16,300
    
    
    
    231Other income
    
    
    235
    
    
    
    21,857Loss on settlement of note receivable from related party
    
    
    (72,072
    )
    
    
    (86,638
    )
    
    
    (9,517
    )Net earnings (loss) before tax expense
    
    
    19,037
    
    
    
    (779,408
    )Tax expense
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    19,037
    
    
    $
    (779,408
    )Preferred stock dividend
    
    
    (2,034
    )
    
    
    Net earnings (loss) applicable to common stockholders
    
    $
    17,003
    
    
    $
    (779,408
    )Net earnings (loss) per share:Basic earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.20
    )Diluted earnings (loss) per share
    
    $
    0.00
    
    
    $
    (0.20
    )Weighted average common shares outstanding:Basic
    
    
    8,551,792
    
    
    
    3,815,166Diluted
    
    
    9,575,282
    
    
    
    3,815,166


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

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PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(unaudited)

2003
    
    2002Cash flows from operating activities:Net earnings (loss)
    
    $
    19,037
    
    
    $
    (779,408
    )Reconciliation of net earnings (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    28,452
    
    
    
    17,605Interest income on note receivable from related party settled by common stock
    
    
    (16,218
    )
    
    
    Loss on settlement of note receivable from related party (See Note 6)
    
    
    72,072
    
    
    
    Compensation expense from fair value adjustment to options
    
    
    8,928
    
    
    
    109,941Changes in assets and liabilities:Accounts receivable, net
    
    
    (162,539
    )
    
    
    407,780Inventories
    
    
    158,104
    
    
    
    Prepaid expenses and other assets
    
    
    (108,427
    )
    
    
    51,079Advances from customers
    
    
    (257,543
    )
    
    
    559,862Accounts payable
    
    
    442,312
    
    
    
    (153,280
    )Accrued liabilities
    
    
    179,242
    
    
    
    42,524Net cash provided by operating activities
    
    
    363,420
    
    
    
    256,103Cash flows from investing activities:Purchases of capital equipment
    
    
    (26,717
    )
    
    
    (11,498
    )Net cash used in investing activities
    
    
    (26,717
    )
    
    
    (11,498
    )Cash flows from financing activities:Payments on notes payable
    
    
    (36,949
    )
    
    
    Payments on notes payable to related parties
    
    
    (27,307
    )
    
    
    (9,853
    )Transfer to restricted cash
    
    
    (81
    )
    
    
    (220
    )Net proceeds from loan and security agreement
    
    
    150,000
    
    
    
    Net proceeds from exercise of stock options
    
    
    
    
    
    
    610Payments on capital lease obligation
    
    
    (17,720
    )
    
    
    (9,832
    )Net cash provided by (used in) financing activities
    
    
    67,943
    
    
    
    (19,295
    )Net increase in cash and cash equivalents
    
    
    404,646
    
    
    
    225,310Cash and cash equivalents, beginning of period
    
    
    440,326
    
    
    
    270,951Cash and cash equivalents, end of period
    
    $
    844,972
    
    
    $
    496,261Cash paid during the period for interest
    
    $
    19,758
    
    
    $
    35,634Non-Cash ActivitiesCommon stock issued in exchange for accrued preferred dividends
    
    $
    
    
    
    $
    909,828Warrants and options issued in exchange for deferred compensation and notes payable
    
    $
    
    
    
    $
    933,472Purchase of technology assets and equipment in exchange for common stock
    
    $
    
    
    
    $
    934,207Preferred stock dividends accrued
    
    $
    2,034
    
    
    $
    Note receivable from related party settled in common stock (See Note 6)
    
    $
    200,000
    
    
    $
    Shares released from escrow under restructure agreement with prior landlord
    
    $
    833
    
    
    $
    


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

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PACIFIC BIOMETRICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization and Basis of Presentation

Pacific Biometrics, Inc., a Delaware corporation (PBI or the Company),
provides specialty reference laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business through its wholly owned subsidiaries,
Pacific Biometrics, Inc., a Washington corporation (PBI-WA) and BioQuant,
Inc., a Michigan corporation. All material intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.

Unaudited interim financial statements include all adjustments such as normal
recurring accruals that are, in the opinion of management, necessary for a fair
statement of results of interim periods. The accompanying unaudited financial
statements and related notes should be read in conjunction with the audited
financial statements and the Form 10-KSB of Pacific Biometrics, Inc. and notes
thereto, for its fiscal year ended June 30, 2003.

2. Summary of Significant Accounting Policies

Stock-Based Compensation

The Company has a stock-based employee compensation plan. The Company applies
APB Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plan. The Company has adopted the
disclosure-only provisions of SFAS No. 123. Had compensation cost been
determined based on the fair value of stock options granted in a manner
consistent with the method promulgated by SFAS No. 123, the Companys net
earnings (loss) and earnings (loss) per share would have been changed to the
pro forma amounts below for the three months ended September 30:

2003
    
    2002Net earnings (loss) as reported
    
    $
    19,037
    
    
    $
    (779,408
    )Deduct: Total stock-based employee
compensation expense awards, net of
related tax effects
    
    
    
    
    
    
    93,798Pro forma net earnings (loss)
    
    $
    19,037
    
    
    $
    (873,206
    )Net earnings (loss) per share:Basic and diluted  as reported
    
    $
    0.00
    
    
    $
    (0.20
    )Basic and Diluted  pro forma
    
    $
    0.00
    
    
    $
    (0.23
    )


Variable Accounting

On May 3, 2002, the Board of Directors voted to reprice all outstanding options
to purchase Common Stock to the then current market price, which was $0.06 on
that day. As of September 30, 2003, 47,806 of these options remained
outstanding. For the three months ended September 30, 2003, the Company
recognized $8,928 in expense to adjust these options to fair market value. In
the future, the net earnings (loss) of the Company on a quarterly basis may be
affected by fluctuations in the market value of the Companys Common Stock. If
the market price of the Companys Common Stock increases, the Company will
recognize expense for the number of options outstanding times the incremental
increase in per share stock value.

Earnings (Loss) Per Share

Basic earnings (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is computed using
the weighted average number of common shares outstanding plus the effect of
outstanding stock options and warrants using the treasury stock method and
the effect of preferred stock on an as-converted basis. All per share
calculations exclude treasury shares and shares held in an escrow account as
security for a note payable. Net earnings (loss) applicable to common
stockholders includes dividends on the Series B convertible
preferred stock of $2,034 and $0, respectively, for the three months ended
September 30, 2003 and 2002.

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Components of basic and diluted earnings (loss) per share were as follows for
the three months ended September 30:

2003
    
    2002Net earnings (loss) (A)
    
    $
    19,037
    
    
    $
    (779,408
    )Preferred stock dividend
    
    
    (2,034
    )
    
    
    Net earnings (loss) applicable to common stockholders (B)
    
    $
    17,003
    
    
    $
    (779,408
    )Weighted average number of outstanding shares of
common stock (C)
    
    
    8,551,792
    
    
    
    3,815,166Diluted, weighted average number of outstanding shares of
common stock and common stock equivalents (D)
    
    
    9,575,282
    
    
    
    3,815,166Earnings (loss) per share:Basic (B/C)
    
    $
    0.00
    
    
    $
    (0.20
    )Diluted (A/D)
    
    $
    0.00
    
    
    $
    (0.20
    )


As of September 30, 2003, options to purchase 231,723 shares of common stock
and warrants to purchase 357,839 shares of common stock were outstanding, of
which 231,723 and 354,473, respectively, were included in the computation of
diluted earnings per share after giving effect to the treasury stock method.
In addition, 1,550,000 shares of Series A Preferred Stock and 33,666.66 shares
of Series B Preferred Stock convertible into 516,667 and 33,666 shares of
common stock, respectively, were included in the computation of diluted
earnings per share.

As of September 30, 2002, options to purchase 348,306 shares of common stock
and warrants to purchase 53,365 shares of common stock were outstanding, but
were not included in the computation of diluted earnings (loss) per share
because the effect would be anti-dilutive. In addition, 1,550,000 shares of
Series A Preferred Stock convertible into 516,667 shares of common stock were
not included in the computation of diluted earnings (loss) per share because
the effect would be anti-dilutive.

3. Managements Plans

Although the Company had net earnings for the quarter ended September 30, 2003,
it has experienced recurring losses from operations in prior years, expects
further significant losses for the quarter ending December 31, 2003, and has
regularly had cash flow shortages. Additionally, the Company has deficiencies
in working capital and stockholders equity and has significant amounts of past
due debt. These matters raise substantial doubt about the Companys ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term. These steps include expansion of
business development efforts and entering into a Loan and Security Agreement
whereby the Company can borrow up to $250,000 no later than November 15, 2003.
In addition, the Company is continuing to review its operational and financial
requirements. There can be no assurance, however, that the Companys efforts
to monitor expenses and generate revenue will be successful. The Company is
also currently seeking to raise financing to fund operations, however, in the
current market condition, raising capital has been, and will continue to be
difficult.

Even after the steps the Company has taken to revise its operating and
financial requirements, the Company still has significant debts and claims that
need to be settled. The Company will continue to review its operating and
financial requirements with the objective of controlling expenses while
minimizing any adverse impact on its future business opportunities, and attempt
to settle outstanding debts with cash generated from its operations, with
stock, and/or with technology assets. However, there can be no assurance that
the Company will raise sufficient financing from any equity or debt financing
to help fund operations during the near term. Accordingly, management will
need to contemplate other alternatives to enable the Company to fund continuing
operations, including, but not limited to, exploring strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction, loans from management or employees, salary deferrals or other cost
cutting mechanisms, or raising additional capital by private placements of
equity or debt securities or through the establishment of other funding
facilities. None of these potential

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alternatives may be available to the Company, or may only be available on
unfavorable terms. If the Company is unable to obtain sufficient cash to
continue to fund operations, it may be forced to seek protection from creditors
under the bankruptcy laws and/or cease operations. Any inability to obtain
additional cash as needed could have a material adverse effect on the Companys
financial position, results of operations and ability to continue in existence.

4. Notes Payable

On August 5, 2003, the Company entered into a Loan and Security Agreement (the
Loan Agreement) whereby the Company can borrow up to $250,000 no later than
November 15, 2003. Amounts borrowed under the Loan Agreement bear interest at
17.64% and are amortized over 36 months, with a final balloon payment due at
maturity on August 5, 2006. The Loan Agreement is secured by specific
equipment, and provides for warrants to purchase common stock to the lender
(priced as of the date of borrowing) at the rate of 5,000 per $50,000 borrowed.
As of September 30, 2003, the Company had borrowed $150,000 under this Loan
Agreement, and the lender was entitled to warrants to purchase common stock of
5,000 at $1.10 per share, 5,000 at $0.95 per share, and 5,000 at $1.00 per
share. Subsequent to September 30, 2003, on November 1, 2003, the Company
borrowed an additional $50,000 under this Loan Agreement, and the lender was
entitled to warrants to purchase 5,000 shares of common stock at $0.95 per
share.

5. Stock Option Plan

On September 17, 2003, the Companys Board of Directors approved an amendment
to the Companys 1996 Stock Incentive Plan (the Plan) to increase the number
of shares of common stock authorized for issuance under the Plan to 1,800,000
shares (the Amendment), subject to stockholder approval. On September 25,
2003, the holder of a majority of the voting rights represented by the
Companys outstanding common stock executed a written consent approving the
Amendment.

6. Related Party Transactions

On September 30, 2003, the Companys $200,000 note receivable from Saigene,
along with accrued interest of $16,218, was settled by tender of 72,072 shares
of the Companys common stock and $2 in cash. The Company recorded a $72,072
loss on settlement of the note plus accrued interest, representing the
difference between the carrying value as based on the attributed $3.00 per
share value of the stock at the December 19, 2002 date of the note, and the
$2.00 per share trading price of the stock at September 30, 2003. In
accordance with the par value method, additional paid-in capital was reduced by
$2,897, the original amount recorded for the shares, and treasury stock was
valued at the par value of $.01 per share or $721 for the 72,072 shares. The
excess amount of $140,526 was recorded against accumulated deficit as required
by the par value method.

7. Subsequent Events

Director Compensation

In November 2003, the Compensation Committee of the Board of Directors
recommended and the Board of Directors ratified a compensation program for
outside Directors of the Company (the Director Compensation Program) covering
the period from August 2002 to September 30, 2003. Pursuant to the Director
Compensation Program, each outside director will receive an annual retainer of
$18,000, with an additional retainer of $10,000 for the Chair of each of the
audit and compensation committees. In addition, outside Directors are
reimbursed their expenses associated with attending Board meetings, and receive
a fee for participation in meetings as follows, with a reduced fee provided for
committee meetings that occur concurrent with a Board meeting:

Separate MeetingConcurrentIn-Person
    
    Telephonic
    
    MeetingBoard
    
    $
    1,000
    
    
    $
    500
    
    
    
    n/aAudit Committee
    
    
    750
    
    
    
    750
    
    
    $
    500Compensation Committee
    
    
    750
    
    
    
    750
    
    
    
    500


Outside Directors also each receive option grants of 6,000 shares at initial
election to the Board, and a quarterly option grant of 1,000 shares. In
accordance with the Director Compensation Program, the Company recorded Board
fees of $73,500 in the quarter ended September 30, 2003 which, when combined
with the estimated accrual for such expenses of $50,000 recorded as of June 30,
2003, total $123,500 for the period from August 2002 to September 2003. Board
members may elect to receive payment of their fees in cash, stock of the
Company, stock options, or by promissory note.

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As of September 30, 2003, the Company had made payments of $35,000 against the
$123,500 owed to the outside Directors.

The Board of Directors has not yet approved a compensation program covering the
period subsequent to September 30, 2003.

Private Placement of Common Stock

In November 2003, the Company initiated a best efforts private placement of
unregistered common stock.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

You should read the following discussion and analysis in conjunction with our
consolidated financial statements and related notes in this Form 10-QSB and in
conjunction with our audited financial statements and related notes for the
year ended June 30, 2003, included in our Annual Report on Form 10-KSB. Except
for historical information, the following discussion contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995.

We desire to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. This Quarterly Report on Form 10-QSB
contains a number of forward-looking statements that reflect managements
current views and expectations with respect to our business, strategies,
products, future results and events and financial performance. All statements
other than statements of historical fact, including future results of
operations or financial position, made in this Quarterly Report on Form 10-QSB
are forward looking. In particular, the words expect, anticipate,
estimate,desire, goal,  believe, may, will, should, expect,
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 critical accounting policies, our estimates for future revenues and cost
of revenues, our expectations regarding future expenses, including research and
development and sales and marketing expenses, our estimates regarding the
adequacy of our capital resources, our capital requirements and our needs for
additional financing, planned capital expenditures, use of our working capital,
sources of revenue and anticipated revenue, including licenses of intellectual
property, technology development and service contracts, our business
development efforts, future acquisitions or investments, the impact of economic
and industry conditions on us and our customers, the anticipated growth of our
business, our ability to attract clients, expectations regarding competition
and the impact of recent accounting pronouncements.

The forward-looking statements contained in this Report are subject to risks
and uncertainties, including those discussed below, and in our Annual Report on
Form 10-KSB for the year ended June 30, 2003, that could cause actual results
to differ materially from those projected. These risks and uncertainties
include, but are not limited to, the concentration of business with large
clients, the ability to develop new technology and introduce new products,
competition, fluctuations in general economic conditions, the risk of
bankruptcy, and changes in policies by regulatory agencies. For additional
factors that can affect these forward-looking statements, see the Risk
Factors section within the Companys Annual Report on Form 10-KSB for the year
ending June 30, 2003. The forward-looking statements contained in this Report
speak only as of the date hereof. The Company cautions readers not to place
undue reliance on any such forward-looking statements. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.

Overview

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and development efforts. Our clients include a number of
the worlds largest multi-national pharmaceutical, biotechnology and diagnostic
companies. Our well-recognized specialty areas include cardiovascular disease
(dyslipidemia, atherosclerosis, and coronary heart disease), diabetes (and
obesity), and bone and joint diseases (osteoporosis and arthritis). Coupled
with our specialty testing, we also have central laboratory capability and
provide full-service central laboratory support for multi-center clinical
trials, including routine safety lab tests (general chemistry, hematology, and
urinalysis). Our company is a Delaware corporation, incorporated in May 1996,
and we conduct our operations primarily through our wholly-owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation.

For a more complete description of our business, including the risk factors
affecting our business, see ITEM 1. DESCRIPTION OF BUSINESS in our Report on
Form 10-KSB for the year ended June 30, 2003.

Critical Accounting Policies and Estimates

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There have been no material changes to our critical accounting policies and
estimates since June 30, 2003. For detailed information on our critical
accounting policies and estimates, see our Annual Report on Form 10-KSB for the
year ended June 30, 2003.

Results of Operations for Three Months Ended September 30, 2003

Revenues:

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeRevenues
    
    $
    2,300
    
    
    $
    895
    
    
    $
    1,405
    
    
    
    157
    %


Our revenues consist of revenues generated from clinical trials testing
services and revenues generated from the provision of diagnostic services. The
approximately 157% increase in revenues during the three-months ended September
30, 2003 over the comparable period ended September 30, 2002 was primarily
attributable to an increase in the size and number of clinical trials testing
services we performed. More specifically, revenues for the three months ended
September 30, 2003 included over $1.8 million from sample processing under a
new master contractor service agreement dated May 2003 with a pharmaceutical
company representing a new customer to us. As described in further detail
below, we expect our revenues to decrease in the quarter ending December 31,
2003.

During the three-months ended September 30, 2003, revenue generated from
clinical trials testing services accounted for approximately 93% of our total
revenues. Revenue generated from the provision of diagnostic, referral and
other services accounted for approximately 7% of our total revenues during the
same period. Historically, over 90% of our total revenues have been generated
from clinical trials. We expect that clinical trials will continue to account
for a significant portion of our revenues in the future.

In February 2002, we entered into a master services agreement with a large
pharmaceutical company to provide laboratory research services from time to
time based on specifications to be included in one or more work orders
submitted by the pharmaceutical company. There are no guaranteed minimum
number of work orders or revenues to us under this agreement. Each work order
is separately negotiated with the pharmaceutical company and is usually limited
to a specific project with limited duration. For the three-months ended
September 30, 2003 and 2002, we provided services through work orders under
this agreement aggregating approximately $184,000 and $391,000, respectively.
Services provided to this customer accounted for approximately 12% of our
outstanding accounts receivable balance of approximately $629,000 as of
September 30, 2003. This customer accounted for approximately 8% and 44% of
the revenues for the three-months ended September 30, 2003 and 2002,
respectively. We do not currently have a significant backlog with this
customer, and for fiscal 2004 we expect aggregate revenues from this customer
to decrease on both an absolute and percentage basis.

In May 2003, we entered into a master contractor service agreement with another
large pharmaceutical company to provide laboratory research services from time
to time based on specifications to be included in one or more work orders
submitted by the pharmaceutical company. There are no guaranteed minimum
number of work orders or revenues to us under this agreement. Each work order
is separately negotiated with the pharmaceutical company and is usually limited
to a specific project with limited duration. We began work under this
agreement in June 2003 on a work order estimated to provide services of
approximately $1,829,000 through September 30, 2003. For the three-months
ended September 30, 2003, we provided services under this agreement aggregating
approximately $1,880,000. Services provided to this customer accounted for
approximately 61% of our outstanding accounts receivable balance of
approximately $629,000 as of September 30, 2003. This customer accounted for
approximately 82% of the revenues for the three-months ended September 30,
2003, whereas we received no revenue from this customer during the three months
ended September 30, 2002.

We do not currently have significant signed work orders from either of the
large pharmaceutical companies discussed above or any other companies. In as
much, we expect that revenues in the quarter ending December 31, 2003 will be
significantly lower than those in the current quarter. We are continuing
discussions regarding our research services with these pharmaceutical companies
as well as several other pharmaceutical companies and other potential
customers. Both

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pharmaceutical companies referred to above have expressed a high level of
satisfaction with our work and both have indicated that they expect to send
additional studies to us. We are continuing to submit bids and proposals, and
have a significant amount of potential contracts that have resulted from our
sales and business development efforts. While our signed work orders for
testing are often dependent upon the results of the initial testing we perform
for customers, we continue to believe that, despite the lack of need for
follow-on testing for our recent testing services, we will be successful in
obtaining new work orders from our prior, current and new customers. If we
are unsuccessful in our sales and business development efforts, our revenues
for each quarter for the remainder of the 2004 fiscal year will fall
significantly below the results for the quarter ended September 30, 2003.

We generally do not have any long-term contracts or agreements with our
customers. Each contract is negotiated separately with the pharmaceutical
manufacturer or research organization and is usually limited to a specific
project with limited duration. The cancellation of any contracts with existing
customers or the failure to replace such contracts upon expiration or
termination could have a material adverse effect on our laboratory operations.

Laboratory Expenses and Cost of Goods Sold:

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %Rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeLaboratory Expenses and
Cost of Sales
    
    $
    1,294
    
    
    $
    567
    
    
    $
    727
    
    
    
    128
    %Percentage of Revenues
    
    
    56
    %
    
    
    63
    %


Laboratory expenses and cost of goods sold in actual dollar amounts during the
three-months ended September 30, 2003 increased approximately 128% over the
comparable period ended September 30, 2002. The increase was primarily
attributable to increased expenses incurred in meeting the increased demand in
the size and number of clinical trials testing services we performed during
the period. As a percentage of revenue, laboratory expenses and cost of goods
sold for the three-month period ended September 30, 2003 decreased to
approximately 56% from approximately 63% for the comparable period in fiscal
2003. The relative decrease is primarily attributable to salaries and related
benefits remaining relatively consistent at approximately $275,000 and
$271,000 for the quarters ended September 30, 2003 and 2002, respectively,
while revenues increased approximately 157% over the same time periods.

Laboratory expenses and cost of goods sold consisted primarily of payment of
salaries and related benefits to employees performing analysis of clinical
trial samples, the cost of supplies for analysis of clinical trial samples,
payments to subcontractors of laboratory services, and other expenses such as
business and occupation taxes, postage and shipping and other. During the
three month periods ended September 30, 2003 and 2002, respectively, salaries
and related benefits accounted for approximately $275,000 (or 21%) and $271,000
(or 48%) of total cost of sales, lab supplies were approximately $325,000 (or
25%) and $120,000 (or 21%), and outside services were approximately $508,000
(or 39%) and $64,000 (or 11%). The increase in lab supplies between the
comparable periods was primarily attributable to the increased supplies needed
to support the commensurate increase in revenues. The increase in outside
services was primarily attributable to the cost of a proprietary assay that was
outsourced to the company that performs the testing.

As discussed above, we expect our revenues for the quarter ending December 31,
2003 will be significantly lower than those in the current quarter. In
response to such decreased revenues, the Company intends to actively seek to
decrease its fixed expenses and other fixed costs of sales with the objective
of controlling expenses while minimizing any adverse impact on its future
business opportunities.

Research and Product Development:

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeResearch and Product
Development
    
    $
    38
    
    
    $
    33
    
    
    $
    5
    
    
    
    15
    %Percentage of Revenues
    
    
    2
    %
    
    
    4
    %


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Research and product development expenses in actual dollar amounts increased to
approximately $38,000 for the three months ended September 30, 2003 from
approximately $33,000 for the three months ended September 30, 2002, reflecting
an increase of approximately $5,000 or 15%, quarter over quarter. The increase
was primarily the result of increased supplies expense.

Research and development expenses consist mainly of expenditures we made in
developing technology acquired from Saigene in August 2002. Compensation
expense accounted for approximately 67% and 84% of the total research and
development expenses for the three months ended September 30, 2003 and 2002,
respectively. We anticipate that we will continue to incur research and
development expenses related to the technology acquired from Saigene. However,
if we are unable to increase revenues or raise additional funding to continue
to fund our existing research and development efforts, we will seek to reduce
our research and development efforts and expenses.

Selling, General and Administrative Expense:

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeSelling, General and
Administrative Expense
    
    $
    862
    
    
    $
    1,065
    
    
    $
    (203
    )
    
    
    (19
    )%Percentage of Revenues
    
    
    37
    %
    
    
    119
    %


Selling, general and administrative expense in actual dollar amounts decreased
by approximately 19% between the comparable three-month periods ended September
30, 2003 and 2002. Selling, general and administrative expenses as percentage
of revenue represented 37% for the three-month period ended September 30, 2003,
compared to 119% for the comparable period ended September 30, 2002. Included
in selling, general and administrative expenses are management fees paid to
Saigene under the terms of the amended and restated management agreement of
approximately $210,000 and $439,000 for the quarters ended September 30, 2003
and 2002, respectively. The $210,000 expense for the quarter ended September
30, 2003 represents the $70,000 monthly management fee. The $439,000 for the
quarter ended September 30, 2003 included September 2003 management fees of
$90,000 and settlement of management fees through August 28, 2002, the date of
the Saigene asset purchase transaction.

Excluding Saigene management fees, selling, general and administrative expense
was approximately $652,000 and $626,000, and as a percentage of revenue,
represented approximately 28% and 70% of revenues for the quarters ended
September 30, 2003 and 2002, respectively. The $26,000 net increase included
an approximately $155,000 increase in compensation expense resulting primarily
from the hiring of our Chief Executive, Chief Medical, and Chief Financial
Officers and a Business Development Representative during fiscal 2003 and
approximately $94,000 in recruiting expenses incurred in the three-months ended
September 30, 2002 of which there was none in the three-months ended September
30, 2003. Compensation expense also included approximately $9,000 for the
quarter ended September 30, 2003 compared to approximately $110,000 for the
quarter ended September 30, 2002 stemming from the May 2002 stock option
repricing discussed below. The increase in selling, general and administrative
expense also included approximately $74,000 in Board of Director compensation
which, when taken with the $50,000 accrued in the quarter ended June 30, 2003,
represented inception to date compensation for our current Board members
through September 30, 2003. Under the terms of consulting agreements dated
August 28, 2002, the quarter ended September 30, 2003 also included three
months of consulting expenses for Terry Giles (a director of the Company) and
Paul Kanan (a director of the Company) at $10,000 and $3,000 per month,
respectively, compared to one month of consulting expense for the quarter ended
September 30, 2002.

On May 3, 2002, our Board of Directors voted to reprice all outstanding options
to purchase common stock to the then current market price, which was $0.06 on
that day. As of September 30, 2003, 47,806 of these options remained
outstanding. For the quarter ended September 30, 2003, we recognized
approximately $9,000 in compensation expense

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to adjust these options to fair market value, compared to approximately
$110,000 for the quarter ended September 30, 2002. In the future, the amount
of compensation expense we recognize will fluctuate based on the value of our
common stock and the number of options that are outstanding as of each
valuation date. (See Note 11 to Notes to Consolidated Financial Statements in
our Report on Form 10-KSB for the year ended June 30, 2003).

As discussed above, we expect our revenues for the quarter ending December 31,
2003 will be significantly lower than those in the current quarter. In
response to such decreased revenues, the Company will be actively seeking to
decrease its selling, general and administrative expenses with the objective of
controlling expenses while minimizing any adverse impact on its future business
opportunities.

We expect overall selling, general and administrative expense for fiscal 2004
to decrease, given the cost-cutting measures described above as well as the
non-recurring expenses related to the Saigene transaction incurred in fiscal
2003. Notably also, effective on July 1, 2003, we entered into an amendment to
the management agreement with Saigene to reduce the monthly fees payable to
Saigene from $90,000 to $70,000 per month. This expense decrease will be
offset by increases over fiscal 2003 in Board compensation and anticipated full
year compensation expense resulting from the hiring of our Chief Executive,
Chief Medical, and Chief Financial Officers and a Business Development
Representative during fiscal 2003 discussed above.

Other Expense:

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeOther Expense
    
    $
    (87
    )
    
    $
    (10
    )
    
    $
    (77
    )
    
    
    (770
    )%Percentage of Revenues
    
    
    (4
    )%
    
    
    (1
    )%


Total other expense in actual dollar amounts increased approximately $77,000 in
the quarter ended September 30, 2003 over the comparable ended September 30,
2002. Other expense for the quarter ended September 30, 2003 included
approximately $72,000 from a loss on the receipt of common stock instead of
cash in payment of a $200,000 note receivable and approximately $16,000 in
accrued interest income from a related party (Saigene). See Note 6 to Notes
to Consolidated Financial Statements  Related Party Transactions in this
Report on Form 10-QSB. Other expense also included approximately $31,000 of
interest expense on notes payable and lease obligations in the quarter ended
September 30, 2003, compared to approximately $32,000 in the quarter ended
September 30, 2002. The three months ended September 30, 2003 also included
approximately $16,000 in interest income, primarily recorded on the note
receivable from related party. The three months ended September 30, 2002
included approximately $22,000 of other income, primarily from rent and fees
paid to us by Saigene prior to the August 28, 2002 Saigene asset purchase
transaction.

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Net Earnings (Loss):

Three Months EndedSeptember 30,Dollars in thousands,
    
    
    
    $
    
    %rounded to nearest thousand
    
    2003
    
    2002
    
    Change
    
    ChangeNet Earnings (Loss)
    
    $
    19
    
    
    $
    (779
    )
    
    $
    798
    
    
    
    n/aPercentage of Revenues
    
    
    1
    %
    
    
    (87
    )%


Net earnings in actual dollar amounts was approximately $19,000 for the three
months ended September 30, 2003 compared to a net loss of approximately
$779,000 for the three months ended September 30, 2002, representing an
increase of approximately $798,000 between the comparable periods. The
improvement in net earnings (loss) is primarily attributable to our increased
revenues in the year over year quarters, partially offset by the increases in
laboratory expenses and cost of sales and changes in selling, general and
administrative expense discussed above. Other items having a lesser impact on
the change in net earnings (loss) include the increased research and product
development expenses in the three months ended September 30, 2003 over the
comparable period ended September 30, 2002.

As a result of the significant decrease in revenues expected in the quarter
ended December 31, 2003, even if selling, general and administrative expenses
and cost of sales can be reduced by a significant degree, it is likely that we
will experience losses in the three months ended December 31, 2003 rather than
the net earnings that we experienced in the current quarter.

Liquidity and Capital Resources:

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

As of September 30, 2003, our cash and cash equivalents were approximately
$845,000 and we had approximately $629,000 in accounts receivable, compared to
cash and cash equivalents of approximately $440,000 and approximately $467,000
in accounts receivable as of June 30, 2003. Total liabilities as of September
30, 2003 were approximately $3,148,000 compared to approximately $2,714,000 as
of June 30, 2003. The improvement in our cash and cash equivalents is
primarily attributable to collections on our accounts receivable, increases in
accounts payable and accrued expenses, use of our inventory and, to a lesser
extent, our net earnings (loss) from operations, offset by purchases of
equipment and laboratory supplies, and payments on notes payable. As of
September 30, 2003 and June 30, 2003, we also had restricted cash of
approximately $71,000 which represents a security deposit in connection with
our office lease in Seattle, Washington which expires in July 2007, and we are
obligated to maintain the restricted cash security deposit through the term of
the lease.

As a result of the significant decrease in revenues expected in the quarter
ended December 31, 2003, we will likely experience significant losses and our
cash and working capital position will be adversely impacted in such quarter.
To improve our cash position, we are actively seeking to (i) increase revenues;
(ii) raise debt or equity financing; (iii) cut expenses significantly; or (iv)
a combination of the above. There can be no assurance that our efforts to
monitor expenses and generate revenue will be successful. We are currently
seeking to raise financing to fund operations. However, in the current market
condition, raising capital has been, and will continue to be difficult. There
can be no assurance that we will raise sufficient financing from any equity or
debt financing to help fund operations during the near term. Accordingly,
management will need to contemplate other alternatives to enable us to fund
continuing operations, including, but not limited to, exploring strategic
alternatives, which may include a merger, asset sale, joint venture or another
comparable transaction, loans from management or employees, salary deferrals or
other cost cutting mechanisms, or raising additional capital by private
placements of equity or debt securities or through the establishment of other
funding facilities. None of these potential alternatives may be available to
us, or may only be available on unfavorable terms. If we are unable to obtain
sufficient cash to continue to fund operations, we may be forced to seek
protection from creditors under the bankruptcy laws and/or cease operations.
Any inability to obtain additional cash as needed could have a material adverse
effect on our financial position, results of operations and our ability to
continue in existence.

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As of September 30, 2003, we had negative working capital of approximately
$776,000, compared to negative working capital of approximately $685,000 at
June 30, 2003. The approximately $91,000 decrease in working capital is
attributable to several changes in the components of working capital. Changes
providing favorable impact include increases in: cash; accounts receivable;
and, prepaid expenses and other assets, and decreases in: advances from
customers; and except for additional borrowings of $150,000 under a new loan
and security agreement, decreases in our current notes payable and lease
obligations. Changes negatively impacting our working capital since June 30,
2003 include: receipt of payment (in the form of our common stock) on our
$200,000 note receivable from Saigene; use of our inventories during the
quarter; increases in accounts payable, accrued expenses and dividends payable;
and, the current portion of the new loan and security agreement, under which we
borrowed $150,000 during the quarter.

Net cash provided from operating activities was approximately $363,000 for the
quarter ended September 30, 2003, including the effect of approximately $16,000
in interest income on a note receivable from Saigene that was paid to us using
our common stock. Our investing activities used approximately $27,000 for the
quarter ended September 30, 2003 primarily for the purchase of capital
equipment. Cash flow provided by financing activities was approximately
$68,000 for the quarter ended September 30, 2003, consisting primarily of
approximately $150,000 in proceeds of additional borrowings, offset by
approximately $82,000 in payments on notes payable, notes payable to related
parties, and payments on capital lease obligations.

During the quarter ended September 30, 2003, we also received 72,072 shares of
our common stock as payment on a $200,000 note receivable and accrued interest
from Saigene, and accrued approximately $2,000 in dividends on our Series B
preferred stock. We also reversed approximately $1,000 previously recorded to
our common stock and prepaid financing expense accounts, reflecting the return
and cancellation of 83,333 shares of our common stock that had been held in
escrow under an agreement with our prior landlord. Under the terms of the
escrow agreement, 583,333 shares of our common stock remain in escrow.

During the quarter ended September 30, 2002, we also issued 183,917 stock
options and 117,624 warrants as consideration for cancellation of approximately
$933,000 in deferred compensation, issued 150,000 shares of common stock in
exchange for approximately $910,000 of accrued dividends on Series A Preferred
Stock, and issued 7,000,000 shares of common stock and provided other
consideration in exchange for technology, intellectual property and equipment
assets from Saigene. (See Saigene Investment Transaction and Note 14 to the
Notes to Consolidated Financial Statements in our Report on Form 10-KSB for
the year ended June 30, 2003.)

Saigene has informed us that in order to develop and commercialize the
technology that we acquired from Saigene in August 2002, we will likely require
in the near term a capital infusion in excess of $5 million. Moreover,
management believes that an additional $15 million over the next two years
would be required to achieve regulatory approval and commercialization of the
technologies acquired from Saigene in August 2002, as well as the
additional technologies that may be acquired under the option agreement with
Saigene. We intend to seek suitable financing to continue research and
development efforts, commence the regulatory approval process and
commercialization of the technologies, but there can be no assurance that we
will be able to obtain such financing, on favorable terms or at all.

Our auditors added an explanatory paragraph to their opinion on our fiscal 2003
financial statements stating that there was substantial doubt about our ability
to continue as a going concern. There can be no assurance that our efforts to
monitor expenses and generate revenue will be successful. We are currently
seeking to raise financing to fund operations. However, in the current market
condition, raising capital has been, and will continue to be difficult. We did
not raise sufficient financing from our Series B Preferred Stock private
placement. (See also Note 3 to the Notes to the Consolidated Financial
Statements in our Report on Form 10-KSB for the year ended
June 30, 2003.)
There can be no assurance that we will raise sufficient financing from any
equity or debt financing to help fund operations during the near term.
Accordingly, management will need to contemplate other alternatives to enable
us to fund continuing operations, including, but not limited to, exploring
strategic alternatives, which may include a merger, asset sale, joint venture
or another comparable transaction, loans from management or employees, salary
deferrals or other cost cutting mechanisms, or raising additional capital by
private placements of equity or debt securities or through the establishment of
other funding facilities. None of these potential alternatives may be
available to us, or may only be available on unfavorable terms. If we are
unable to obtain sufficient cash to continue to fund operations, we may be
forced to seek protection from creditors under the bankruptcy laws and/or cease
operations. Any inability to obtain additional cash as needed could have a
material adverse effect on our financial position, results of operations and
our ability to continue in

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existence. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

In November 2003, the Company initiated a best efforts private placement of
unregistered common stock.

Director Compensation

In November 2003, the Compensation Committee of our Board of Directors
recommended and our Board of Directors ratified a compensation program for
outside Directors (the Director Compensation Program) covering the period
from August 2002 to September 30, 2003. Pursuant to the Director Compensation
Program, each of our outside directors will receive an annual retainer of
$18,000, with an additional retainer of $10,000 for the Chair of each of our
audit and compensation committees. In addition, our outside Directors are
reimbursed their expenses associated with attending Board meetings, and receive
a fee for participation in meetings as follows, with a reduced fee provided for
committee meetings that occur concurrent with a Board meeting:

Separate MeetingConcurrentIn-Person
    
    Telephonic
    
    MeetingBoard
    
    $
    1,000
    
    
    $
    500
    
    
    
    n/aAudit Committee
    
    
    750
    
    
    
    750
    
    
    $
    500Compensation Committee
    
    
    750
    
    
    
    750
    
    
    $
    500


Our outside Directors also each receive option grants of 6,000 shares upon
their initial election to the Board, and a quarterly option grant of 1,000
shares. In accordance with the Director Compensation Program, we recorded Board
fees of $73,500 in the quarter ended September 30, 2003 which, when combined
with the estimated accrual for such expenses of $50,000 recorded as of June 30,
2003, total $123,500 for the period from August 2002 to September 2003. Board
members may elect to receive payment of their fees in cash, stock of the
Company, stock options, or by promissory note. As of September 30, 2003, we
had made payments of $35,000 against the $123,500 owed to our outside
Directors.

The Board of Directors has not yet approved a compensation program covering the
period subsequent to September 30, 2003.

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ITEM 3. CONTROLS AND PROCEDURES

The Companys management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of the end of the period covered by this quarterly report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this quarterly report,
the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been
made known to them in a timely fashion.

There were no changes in internal controls over financial reporting that
occurred during the period covered by this report that have materially
affected, or are likely to materially affect, the Companys internal control
over financial reporting.




PART II  OTHER INFORMATION




ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

Under the terms of an August 5, 2003, Loan and Security Agreement the Company
issued to Franklin Funding, Inc., warrants to purchase an aggregate of 15,000
shares of common stock, with 5,000 shares priced at $1.10 per share, 5,000 at
$0.95 per share, and 5,000 at $1.00 per share.

Under the terms of February 3, 2003 Placement Agent Agreement, the Company
issued to Joseph Carl Securities, Inc., warrants to purchase an aggregate of
3,366 shares of common stock at $3.00 per share.




ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On September 25, 2003, the holder of a majority of the voting rights
represented by the Companys outstanding common stock executed a written
consent to approve the following matters:



| |  |  | an increase in the size of our Board of Directors from five to six
directors,
| | - |  | -----------------------------------------------------------------------------



| |  |  | the election of the following six directors to serve on our
Board  Ronald R. Helm, Michael L. Hartzmark, Terry M. Giles, Paul G.
Kanan, Richard W. Palfreyman and Timothy A. Wudi; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an amendment to our 1996 Stock Incentive Plan to increase the
number of shares of common stock authorized for issuance under the
plan to 1,800,000 shares.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

The actions were approved by the holder of voting rights representing 6,315,014
shares of our total issued and outstanding common stock, representing
approximately 69% of the 9,063,053 votes entitled to be cast with regard to the
actions.

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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K



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

31.1
    
    Certification of Ronald R. Helm, Chief Executive
Officer31.2
    
    Certification of Michael P. Carrosino, Chief
Financial Officer32.1
    
    Certification of Ronald R. Helm, Chief Executive
Officer of Pacific Biometrics, Inc., pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of Michael P. Carrosino, Chief
Financial Officer of Pacific Biometrics, Inc., pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.




| | (b) |  | No current reports on Form 8-K were filed during the quarter
ended September 30, 2003.
| | --- |  | --------------------------------------------------------------------------------------




SIGNATURES

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

Dated: November 14, 2003/s/ Ronald R. HelmRonald R. HelmChief Executive Officer(principal executive officer)/s/ Michael P. CarrosinoMichael P. CarrosinoChief Financial Officer(principal financial officer)


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