<PAGE>

                  U.S. Securities and Exchange Commission
                          Washington, D.C. 20549

                               FORM 10-QSB


[ X ]  QUARTERLY REPORT SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE  ACT OF 1934

For the quarterly period ended    SEPTEMBER 30, 1998

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
                              EXCHANGE ACT

                      Commission File Number 0-21537

                         PACIFIC BIOMETRICS, INC.
--------------------------------------------------------------------------------
         (Exact name of small business issuer specified in its charter)

         Delaware                                          93-1211114
--------------------------------------------------------------------------------
(State or other jurisdiction of                        (IRS Employer
incorporation or organization)                         Identification No.)


         25651 Atlantic Ocean Drive, Suite A-1, Lake Forest, CA 92630
--------------------------------------------------------------------------------
                   (Address of principal executive offices)

                                949-455-9724
--------------------------------------------------------------------------------
                        (Issuer's telephone number)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during  the past 12  months,  and (2) has been
subject to such filing requirements for the past 90 days. Yes ( X ) No ( )

As of November 12, 1998,  shares of common stock  outstanding of the issuer were
3,709,671.

Transitional Small Business Disclosure Format (check one) Yes (   )  No ( X )


                                       1
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                              INDEX TO FORM 10-QSB

PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
ITEM 1  - FINANCIAL STATEMENTS

Consolidated Balance Sheet.................................................. 3

Consolidated Statements of Operations....................................... 4

Condensed Consolidated Statements of Cash Flows............................. 5

Notes to Consolidated Financial Statements.................................. 6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
         OF FINANCIAL CONDITION AND RESULTS OF
         OPERATIONS.........................................................10

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS..................................................16

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS..........................16

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES....................................16

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
         SECURITY HOLDERS...................................................16

ITEM 5 - OTHER INFORMATION..................................................16

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...................................16

</TABLE>


                                       2
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)
                           CONSOLIDATED BALANCE SHEET
                               SEPTEMBER 30, 1998
                                   (UNAUDITED)

<TABLE>
<S>                                                                     <C>
                                        ASSETS
Current assets:
    Cash and cash equivalents                                           $    942,696
    Accounts receivable, net of allowance for doubtful
          accounts of $90,137                                                258,536
    Inventory                                                                171,315
    Prepaid expenses and other                                               170,990
                                                                        ------------
          Total current assets                                             1,543,537

Property and equipment, net                                                  655,008

Other assets:
    Technology license, net                                                2,426,191
    Prepaid financing costs                                                   53,906
    Restricted cash                                                          100,000
    Deposit and other                                                          2,750
                                                                        ------------
          Total assets                                                  $  4,781,392
                                                                        ============

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Notes payable to related parties                                    $    253,664
    Accounts payable                                                         202,735
    Accrued liabilities                                                      349,591
    Deferred compensation                                                     81,916
    Advances from customers                                                    3,376
    Technology licenses payable                                            2,221,369
    Capital lease obligations                                                262,396
                                                                        ------------
          Total current liabilities                                        3,375,047
                                                                        ------------
    Capital lease obligations - long term portion                            293,042
                                                                        ------------
          Total long term liabilities                                        293,042
                                                                        ------------
Stockholders' equity:
    Preferred stock, $0.01 par value, 5,000,000 shares
          authorized, 1,550,000 shares issued and outstanding                 15,500
    Common stock, $0.01 par value, 30,000,000 shares
          authorized, 3,709,671 shares issued and outstanding                 37,097
    Additional paid-in capital Common Stock                               13,700,868
    Additional paid-in capital Preferred Stock                             5,062,654
    Deficit accumulated during the development stage                     (17,702,816)
                                                                        ------------
          Total stockholders' equity                                       1,113,303
                                                                        ------------
          Total liabilities and stockholders' equity                    $  4,781,392
                                                                        ============
</TABLE>

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


                                            3
<PAGE>

                                 PACIFIC BIOMETRICS, INC.
                          (A COMPANY IN THE DEVELOPMENT STAGE)
                         CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997,
         AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 1998
                                      (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Month Period          For the Period
                                                        Ended September 30,         from Inception
                                                   ----------------------------   (December 1992) to
                                                        1998           1997       September 30, 1998
                                                   -------------  -------------   ------------------
<S>                                                <C>            <C>             <C>
Revenues                                              $ 306,954      $ 638,347       $   7,841,197
                                                   -------------  -------------   ------------------
Operating expenses:
    Laboratory expense and cost of goods sold           316,948        394,680           5,990,308
    Research and product development                    509,841        462,234           5,148,506
    Selling, general and administrative                 579,389        439,785           6,721,939
    Purchased in-process research and development             0              0           6,373,884
    Amortization of intangible assets                   200,452         15,625           1,223,474
                                                   -------------  -------------   ------------------
          Total operating expenses                    1,606,630      1,312,324          25,458,111
                                                   -------------  -------------   ------------------
Operating loss                                       (1,299,676)      (673,977)        (17,616,914)
                                                   -------------  -------------   ------------------
Other income (expense):
    Interest expense                                    (69,859)       (13,474)           (463,640)
    Interest income                                      12,201         63,406             303,665
    Grant and other income                                  965            164              74,073
                                                   -------------  -------------   ------------------
                                                        (56,693)        50,096             (85,902)
                                                   -------------  -------------   ------------------
Net loss                                           $ (1,356,369)    $ (623,881)      $ (17,702,816)
                                                   =============  =============   ==================
Basic and diluted loss per share                   $      (0.38)      $  (0.17)           $ (11.25)
                                                   =============  =============   ==================
Number of shares used in per-share calculation        3,709,671      3,705,522           1,757,380
                                                   =============  =============   ==================
</TABLE>

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


                                                 4
<PAGE>

                                PACIFIC BIOMETRICS, INC.
                     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997,
         AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 1998
                                      (UNAUDITED)

<TABLE>
<CAPTION>
                                                          Three Month Period           For the Period
                                                          Ended September 30,          from Inception
                                                   ------------------------------    (December 1992) to
                                                        1998            1997         September 30, 1998
                                                   --------------   -------------    ------------------
<S>                                                <C>              <C>              <C>
Cash used by operations                            $  (1,117,976)   $    (404,099)   $    (8,634,864)

Cash used by investing activities                        (35,493)        (819,779)          (261,055)

Cash (used ) provided by financing activities           (147,891)         (79,035)         9,838,615
                                                   --------------   -------------    ----------------
(Decrease) Increase in cash and cash equivalents      (1,301,360)      (1,302,913)           942,696

Cash and cash equivalents:

Beginning of period                                    2,244,056        2,916,695                  0
                                                   --------------   -------------    ----------------
End of period                                      $     942,696    $   1,613,782    $       942,696
                                                   ==============   =============    ================
</TABLE>

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


                                                  5




<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND BASIS OF PRESENTATION

Pacific  Biometrics,  Inc. (the "Company" or "PBI") was incorporated in Delaware
in May 1996 in  connection  with the June 1996  acquisitions  of BioQuant,  Inc.
("BioQuant"), a Michigan corporation, and Pacific Biometrics, Inc. ("PBI-WA"), a
Washington  corporation,  whereby both became  wholly-owned  subsidiaries of the
Company in separate stock-for-stock exchange transactions.

The unaudited  financial  statements of the Company presented herein,  have been
prepared  pursuant to the rules of the  Securities  and Exchange  Commission for
quarterly  reports on Form 10-QSB and do not include all of the  information and
footnote disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the financial statements and notes
thereto for the year ended June 30, 1998 included in the Company's Annual Report
on Form 10-KSB.

In the opinion of management,  the financial  statements include all adjustments
(consisting  solely  of  normal,  recurring  adjustments)  necessary  for a fair
presentation of results for these interim periods.

Revenues are primarily from the  laboratory  business.  The Company's  potential
products are currently in research and development,  and no significant revenues
have been generated from these  potential  products to date.  Consequently,  the
Company is a development stage enterprise.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TECHNOLOGY

The  Company has an  exclusive  worldwide  license for the use of a  transdermal
sweat  collection  device  from  Sudormed,  Inc.  ("Sudormed")  for all  medical
diagnostic applications of such skin patch technology.  In addition, the license
allows  for  the  development  of  all  other  potential  applications  of  such
technology, except for those relating to alcohol and drugs of abuse. In exchange
for such license  rights,  the Company agreed to pay Sudormed  approximately  $3
million over a twenty-month  period,  of which  approximately  $900,000 has been
paid through  September 30, 1998.  Such payments  include a lump-sum  payment of
$1.6 million due on December 31, 1998.  During the quarter  ended  September 30,
1998 the Company  renegotiated the Sudormed License to defer $225,000 in monthly
payments until January 1, 1999.  These deferred  payments when combined with the
$1.6 million  obligation


                                       6
<PAGE>

and other scheduled  payments will total  approximately $1.9 million due related
to the maintenance of the license.

The Company also owns a fully paid license to the assay technology used with the
Osteopatch(TM) product. The SalivaSac-Registered Trademark- is a proprietary 
patented  product of the Company.

RISKS AND UNCERTAINTIES

The  Company's   products  require   approvals  from  the  U.S.  Food  and  Drug
Administration   (FDA)   and   international   regulatory   agencies   prior  to
commercialization.  There can be no assurance  that the Company's  products will
receive any of the required  approvals.  If the Company is denied such approvals
or if such approvals are delayed beyond current expectations, such actions would
have a material adverse effect on the Company.

The  Company's  financial  position  also  creates  risks and  uncertainties  as
discussed  below in Note 3 and puts the Company at risk of defaulting  under the
Sudormed license discussed above.

3.  GOING CONCERN

The Company has  experienced  recurring  losses  from  operations  and cash flow
shortages,  and has  deficiencies in working capital and  stockholders'  equity.
Also, the Company has significant  amounts of debt maturing on December 31, 1998
and on  January  1,  1999.  These  matters  raise  substantial  doubt  about the
Company's ability to continue as a going concern.  Management's  plans in regard
to these matters are described below. The consolidated  financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.

In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded  asset amounts shown in the  accompanying  balance
sheet is dependent  upon continued  operations of the Company,  which in turn is
dependent  upon the Company's  ability to meet its financing  requirements  on a
continuing basis.

Management  has taken the following  steps to revise its operating and financial
requirements,  which it believes  are  necessary to provide the Company with the
ability to continue in existence.  These steps include significant reductions in
expenses and staffing, delay of research and development projects, renegotiation
of certain contractual  commitments and engagement of an investment-banking firm
to raise capital.

The  Company  does not  anticipate  that  the  Company's  current  cash and cash
equivalents and short-term  investments,  together with projected  revenues from
operations  and  financing  arrangements  will  be  sufficient  to  satisfy  its
operating  expense  requirements  beyond  December 1998. The Company is actively
working to raise additional funds through equity,


                                       7
<PAGE>

debt  arrangements  and  product  licensing  agreements to  cover  current  year
liquidity requirements.  Failure to do so will have a material adverse effect on
the Company  and its ability  to continue to operate  as currently contemplated.

4.  EARNINGS PER SHARE

As the Company had a net loss from  continuing  operations  for the period ended
September 30, 1998,  and 1997 and for the period from inception to September 30,
1998, basic and diluted net loss per share are the same.

Net loss  applicable  to common  stockholders  includes  $62,000  in  cumulative
dividends on the convertible  preferred stock for the period ended September 30,
1998.  The  imputed  dividends  are a  non-cash,  one-time  charge  based on the
immediate conversion feature.

Basic and diluted net loss per common share for the period ended  September  30,
1998,  and 1997 and for the period from  inception  to  September  30, 1998 were
calculated as follows:

<TABLE>
<CAPTION>
                                          Three Month      Three Month    For the Period
                                         Period Ended     Period Ended    from Inception
                                            9/30/1998        9/30/1997      to 9/30/1998
                                       ---------------   --------------   ---------------
<S>                                    <C>               <C>              <C>
Net Loss                               $ (1,356,369)     $  (623,881)     $ (17,702,816)
Preferred Stock cumulative dividend      (   62,000)                0      (    132,093)
Imputed dividend on Preferred
   Stock issued                                    0                0       ( 1,937,500)
                                       --------------   --------------    ---------------
Net Loss available to Common
  stockholders                         $ (1,418,369)     $  (623,881)     $ (19,772,409)
                                       ==============   ==============    ===============

Basic and diluted net loss per share   $      (0.38)    $      (0.17)     $      (11.25)
                                       ==============   ==============    ===============

Weighted average shares
  outstanding                              3,709,671        3,705,522          1,757,380
                                       ==============   ==============    ===============
</TABLE>

5.  COMMITMENTS AND CONTINGENCIES

TECHNOLOGY AND MANUFACTURING AGREEMENTS

The Company has also entered into a supply agreement with Sudormed (Note 2) that
requires  certain minimum  purchases to retain the exclusive use of the licensed
technology. As of September 30, 1998, all minimum purchase requirements had been
met. The Company is obligated to purchase  400,000  additional units by June 30,
1999 and each year  thereafter.  Failure to make the necessary  purchases by the
Company could result in the technology license becoming non-exclusive.


                                       8
<PAGE>

EMPLOYMENT AND NONCOMPETITION AGREEMENTS

In October  1996,  the Company had entered into  employment  and  noncompetition
agreements with four executives.  These  agreements  specify that the executives
may not engage in any competitive  activity for periods ranging from 9 months to
2 years  following  termination.  Certain of the  agreements  also  provide  for
compensation  of nine months  salary and  benefits  in the event of  termination
under certain  circumstances.  As of September 30, 1998, the Company  recorded a
severance  liability of  approximately  $102,000 in connection with an executive
officer who resigned in July 1998.

LEGAL PROCEEDINGS

On September  24, 1997,  the Company  received from the former  manufacturer  of
SPINPRO-Registered Trademark-  a  demand  for  arbitration  in  connection  with
alleged  breaches  of  the  contract  relating  to  the  manufacture of  SPINPRO
-Registered  Trademark-.   The   former  manufacturer  is   seeking  damages  of
approximately $515,000.  The Company does  not believe that  the claims have any
merit and believes that the ultimate  outcome of this proceeding will not have a
material impact on the Company. The Company is vigorously contesting such claims
and has  filed counterclaims  against the former  manufacturer.  The Company has
also  filed  for  arbitration  against  a  former  vendor  relating  to  SPINPRO
-Registered Trademark-,  seeking  damages for alleged  breach  of  contract with
respect to the manufacture of molds for SPINPRO-Registered Trademark-parts.


                                       9
<PAGE>

                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following  discussion  and analysis  should be read in  conjunction
with the  preceding  consolidated  financial  statements  and notes in this Form
10-QSB and in  conjunction  with the financial  statements and notes thereto for
the year ended June 30, 1998  included in the  Company's  Annual  Report on Form
10-KSB.

OVERVIEW

PBI was  incorporated in Delaware in May 1996 in connection with the acquisition
of BioQuant and PBI-WA.  On June 28,  1996,  the Company  completed  the mergers
whereby  BioQuant and PBI-WA became wholly owned  subsidiaries of the Company in
separate stock-for-stock exchange transactions.

The mission of PBI is to develop and commercialize non-invasive technologies for
use in medical  diagnostics and laboratory services to improve the detection and
management of chronic diseases.  The Company has developed two patented platform
technologies that permit the use of sweat and saliva as diagnostic fluids.  Such
platform  technologies  are based on fifteen issued U.S. patents and two pending
U.S.  patents  with  respect  to  the  Company's  SweatPatch-TM-  and  SalivaSac
-Registered Trademark-.

Expenses  consist,  and are  expected  to  continue  to  consist,  primarily  of
operating  expenses  necessary to continue the commercial  laboratory  operation
(the  Company's  only  significant  current  source of  revenue),  research  and
development costs for products under  development,  administration  expenses and
payment of license  and  royalty  fees to maintain  the  Company's  intellectual
property rights.

As of September 30, 1998, the Company had an accumulated deficit since inception
of $17,702,816  which included a one-time  charge of $6,373,884 for the value of
purchased  research and development  expenses  relating to the Company's  merger
with  BioQuant  and a one-time  charge of $428,368  relating  to a prior  merger
involving PBI-WA in 1995.


                                      10
<PAGE>

RESULTS OF OPERATIONS:

Comparison of the three month periods ending September 30, 1998 and 1997:

<TABLE>
<CAPTION>
------------------------------------------
     Rounded to Nearest         Three
      Thousand Dollars          Months
------------------------------------------
<S>                             <C>            <C>
 Revenues:
------------------------------------------
Ending 9/30/98                     $  307      Revenues  for both  quarters  are almost  entirely  comprised of
------------------------------------------     laboratory  service  revenue.   Revenues  were  higher  for  the
Ending 9/30/97                     $  638      quarter ended 9/30/97 due to work  performed on a large contract
------------------------------------------     that was not replaced.
Dollar variance                    $(331)
------------------------------------------
Percent variance                    (52)%
------------------------------------------

 Laboratory expenses and cost
 of goods sold:
------------------------------------------
Ending 9/30/98                      $ 317      The  decrease  is  related  directly  to  the  lower  level  of
------------------------------------------     laboratory service revenues.
Ending 9/30/97                      $ 395
------------------------------------------
Dollar variance                     $(78)
------------------------------------------
Percent variance                    (20)%
------------------------------------------

 Research and product 
 development:
------------------------------------------
Ending 9/30/98                      $ 510      The increase is related to the  Company's  funding of continuing
------------------------------------------     research   related  to   development   of   technology   license
Ending 9/30/97                      $ 462      opportunities and support of product introduction in Europe.
------------------------------------------
Dollar variance                      $ 48
------------------------------------------
Percent variance                      10%
------------------------------------------

 Selling, general and 
 administration expenses:
------------------------------------------
Ending 9/30/98                      $ 579      The increase is primarily due to increased  legal and  accounting
------------------------------------------     fees  and  increased severance  costs as a result  of  reductions
Ending 9/30/97                      $ 440      in staff during this period.
------------------------------------------
Dollar variance                    $  139
------------------------------------------
Percent variance                      32%
------------------------------------------

 Amortization of intangible
 assets:
------------------------------------------
Ending 9/30/98                      $ 200      The increase is due to the inclusion of non-cash  amortization of
------------------------------------------     the Sudormed license.
Ending 9/30/97                       $ 16
------------------------------------------
Dollar variance                    $  184
------------------------------------------
Percent variance                    1150%
------------------------------------------

 Total other income (expense):
------------------------------------------
Ending 9/30/98                     $ (57)      The  additional  net  expense  is due to both  the  inclusion  of
------------------------------------------     imputed  interest on the  Sudormed  license  obligation  and on a
Ending 9/30/97                      $  50      decline in interest income.
------------------------------------------
Dollar variance                    $(107)
------------------------------------------
Percent variance                   (214)%
------------------------------------------

 Net income (loss):
------------------------------------------
Ending 9/30/98                  $ (1,356)      The  increased  net  loss is due to  lower  sales,  inclusion  of
------------------------------------------     imputed  interest,  lower interest  income,  higher  research and
Ending 9/30/97                     $(624)      development  and  selling,   general  and  administrative  costs,
------------------------------------------     partially offset by reductions in staff.
Dollar variance                    $(732)
------------------------------------------
Percent variance                   (117)%
------------------------------------------
</TABLE>


                                      11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES:

FINANCING ACTIVITIES

The Registration  Statement pertaining to the initial public offering ("IPO") of
the Company's  securities was declared  effective by the Securities and Exchange
Commission on October 29, 1996.  Gross  proceeds  from the public  offering were
approximately  $8.1  million.  The  Company has used the net  proceeds  from the
offering   (approximately  $6.3  million)  for  product  development  activities
relating to the Osteopatch-TM-,  for funding the growth of its central reference
laboratory operations, for research on SalivaSac-Registered Trademark- potential
products, working capital, and approximately $1.2 million to repay debt.

On February  20, 1998,  the Company  consummated  the sale of 925,000  shares of
Series  A  Convertible   Preferred  Stock  (the   "Preferred   Stock")  with  an
institutional  investor  for an  aggregate  purchase  price  of  $1,850,000.  In
addition,  the  Company  granted  such  institutional  investor  an option  (the
"Option") to purchase up to 625,000 shares of Preferred Stock until May 20, 1998
for an exercise price of $1,250,000. The Option was exercised in full during May
1998.

OPERATIONS

As of September 30, 1998 the Company had cash and cash  equivalents of $942,696.
In addition,  the Company's  current  liabilities  exceeded its current  assets.
During the  quarter  ended  September  30,  1998,  the  Company's  cash and cash
equivalents declined by approximately $1.3 million from the prior quarter.

The Company has  implemented  cost reduction  programs that will permit existing
cash reserves to meet operating expense  requirements through December 31, 1998.
These programs  include:  reducing  staffing from 50 employees in May 1998 to 27
employees as of October 1998, deferral of approximately $82,000 in compensation,
and suspension of current research and development activities.  In addition, the
Company has renegotiated the Sudormed license agreement to defer certain monthly
payments of  approximately  $225,000 until January 1, 1999.  However,  under the
license agreement,  the Company is required to pay approximately $1.6 million on
December 31, 1998.  Based on existing  resources,  the Company will be unable to
make such payments (see "Future Operations" below).

On July 22, 1998 the Company  announced that Russ Warnick,  the Company's  Chief
Scientific  Officer,  had  resigned  from the  Company to pursue  other  outside
interests.  Mr.  Warnick's areas of  responsibility  have been reassigned to Dr.
Elizabeth  Leary,  Vice President of Laboratory  Services,  Dr. Michael  Murphy,
Laboratory  Director,  and Dr. Allan  Pronovost,  Vice President of Research and
Development.  Dr.  Pronovost,  who joined the Company  last  January,  has had a
distinguished   career  in   medical  diagnostic  product   development,  having
directed   the   development   of  over  35   products   through   FDA  approval


                                      12
<PAGE>

and market introduction. As a result of the depth of experience and expertise of
the  Company's  technical  staff, the  Company  does  not  expect  Mr. Warnick's
departure to have a material adverse impact on the Company.

PRODUCTS AND SERVICES

On September 8, 1998 the Company  announced it is seeking  development  partners
for new applications and marketing  partners for existing  products and products
under   development   utilizing   its   proprietary    non-invasive   collection
technologies, the  SweatPatch-TM- and the SalivaSac-Registered Trademark-.  Such
technologies  involve the collection  and analysis of various  analytes in sweat
and  saliva, respectively,  for screening,  diagnosis and monitoring of diseases
and medical  conditions.  Many of the  analytes measured in  urine and serum can
also be found in sweat and saliva. The Company has made significant  progress in
the development of  these  platform technologies  and the Company  believes that
both of these technologies can be used to develop accurate,  affordable and easy
to use non-invasive tests in a variety of markets.  In  particular, the  Company
is focused on developing  partnering  agreements  related to using the SalivaSac
-Registered  Trademark-   technology  for  drugs  of  abuse  detection  and  for
non-invasive saliva glucose screening.

On  September  8, 1998 the Company  also  announced  that Segix  Italia S. p. A.
("Segix")  exercised  its option to enter into an  exclusive  ten year  license,
supply and  distribution  agreement with the Company for the distribution of the
Osteopatch-TM-   system  in  Italy.  This  agreement  was  finalized  after  the
successful market and technical evaluation of the Osteopatch-TM- system in Italy
during  the  past  year.   This  agreement  will  permit  Segix  to  launch  the
Osteopatch-TM- system in Italy. If the Company were to lose its rights under the
Sudormed license agreement (see "Future Operations" below),  Sudormed would have
the option, if Segix's agrees,  to continue to license Segix directly.  However,
Segix (or Sudormed as licensor) in order to use the  Osteopatch-TM-  would still
require the Company's  Pyridinoline  Assay Kit, which is covered by a fully paid
exclusive  license with Metra Biosystems,  Inc.  Development of a separate assay
would take considerable time and expense.

On September 14, 1998 the Company  announced  that BSI, Inc., the North American
Division of BSI, the world's leading  registrar of quality  management  systems,
awarded the Osteopatch-TM- an Annex 5 CE marking  certificate under the European
Medical Device Directive.  The CE marking of the  Osteopatch-TM-  product allows
the Company to commercially  distribute the Osteopatch-TM- system throughout the
European common market.

In February  1998 the Company  completed  the  initial  clinical  trials for the
Osteopatch-TM-, for the collection and analysis of bone resorption, an indicator
of fracture risk and filed a 510(k)  premarket  notification  with the U.S. Food
and  Drug  Administration  (FDA).  While  the  Company  was  encouraged  by  the
results  of  the  clinical  trials, the  FDA will require additional information
before  this   product  can   be  approved  as  a   collection  and   analytical


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<PAGE>

device for bone resorption markers. The Company has been and expects to continue
to work with the FDA to determine which additional  studies and information will
be required to support the  approval  process.  Given the  novelty of sweat as a
diagnostic  fluid  today,  the  Company  believes  this  product  application is
establishing  a   precedent  for  future   applications  of  the  SweatPatch-TM-
technology and therefore will  require  a more  detailed  review  on the part of
the FDA than originally anticipated.

The additional studies required for resubmission to the FDA will not begin until
after appropriate  funding has been raised by the Company and the clinical trial
design has been reviewed with the FDA. The Company  estimates that completion of
such  studies and  resubmission  will cost  approximately  $2 million.  Once the
Company commences these trials, it is expected it will take at least six to nine
months  before the Company can resubmit  its  application  to the FDA.  Based on
current  capital  requirements,  without an immediate  infusion of capital,  the
Company will not be able to commence  such trials.  Further,  even if commenced,
there can be no  assurance  that the Company will have  sufficient  resources to
complete such trials or that the FDA will not require  further  studies so as to
delay the Company's  application,  or that the FDA will  ultimately  approve the
Company's product.

FUTURE OPERATIONS

If the Company is unable to renegotiate the scheduled  December 31, 1998 payment
of  $1.6  million  or  raise  equity  funding  adequate  to pay or  finance  the
obligation,  it is at risk of losing the  Sudormed  license  rights to the patch
technology   (SweatPatch-TM-).   Loss  of  such  license  would  result  in  the
abandonment  of the  Osteopatch-TM-  product and all  research  and  development
efforts relating to the SweatPatch-TM- technology.

The Company is working to raise approximately $5 million in debt or equity. This
would permit the Company to maintain the Sudormed  license and continue with the
Company's  plans to  develop  non-invasive  diagnostic  products  using both the
SweatPatch-TM-  and  SalivaSac-Registered Trademark-  technologies and build the
laboratory  service business.  If the Company is  unsuccessful in these efforts,
the Company will likely  lose the  SweatPatch-TM-  license  and will  focus  its
efforts  on the laboratory service business and  SalivaSac-Registered Trademark-
licensing opportunities to create future value.

If the Company loses the Sudormed license and is absolved of its related payment
obligations,   current  assets  would  exceed  current   liabilities.   However,
laboratory  service  revenues would have to be increased  and/or  expenses would
have to be  reduced  in order to  achieve  self-sufficiency  without  additional
funding.  Therefore,  without  additional outside funding the Company may not be
able to meet its operating expense requirements beyond December 1998.

The  Company  is  actively  working  to raise  the  funds  mentioned  above  and
additional  funds to cover  longer term  requirements  for product  research and
development and laboratory


                                      14
<PAGE>

operations.  The  Company  has  also  reduced  its  net cash  used in  operating
activities,  which has averaged over $1 million  per quarter for the past twelve
months,  in  order to  conserve  existing  cash resources.  In  August 1998, the
Company  announced that it had retained  R&R Capital Group to  assist in raising
capital. However there can be no assurance that such external sources of funding
will be available or be  available on terms  acceptable to the Company, in which
event,  the  Company  will  be  required  to delay,  scale back or eliminate its
research and development programs,  including but not limited to the development
of the  Osteopatch-TM-  and other products  involving the SweatPatch-TM- and the
SalivaSac-Registered Trademark-  technologies.  Alternatively,  the  Company may
obtain funds through entering  into  arrangements  with  collaborative  partners
or  others  that  may  require the Company  to  relinquish rights,  which may be
substantial,  to  certain  of  its  technologies or potential  products that the
Company  would  not  otherwise  relinquish.  Outside funding, if available, will
probably involve  substantial  dilution to existing  stockholders or  changes in
stockholder rights in order to raise the necessary additional funds.

The Company has advised Nasdaq that for the period ended September 30, 1998, the
Company has fallen below the  $2,000,000  in net tangible  assets  (total assets
minus total liabilities and goodwill) maintenance criteria for continued listing
of the Company's  securities  on the Nasdaq  SmallCap  Market.  The Company also
received  notice from Nasdaq that it is not in compliance with the $1.00 minimum
bid requirement  with respect to its common stock.  The Company is reviewing its
current  efforts to obtain  additional  equity  investments  with Nasdaq and has
requested  a delay in any  delisting  proceedings  awaiting  the  outcome of the
Company's current efforts.

In the event of Nasdaq  SmallCap  Market  delisting  the  Company's  securities,
trading,  if any, in the Company's  securities may then continue to be conducted
on the OTC  Electronic  Bulletin  Board  or in the  non-Nasdaq  over-the-counter
market. As a result,  an investor may find it more difficult to purchase,  sell,
or to  obtain  accurate  quotations  as to the  market  value  of the  Company's
securities and it could become more difficult for the Company to raise capital.


                                      15
<PAGE>

PART II  - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The  Company  is not a party to any  material  legal  proceedings.  However,  on
September  24,  1997 the  Company  received  from  the  former  manufacturer  of
SPINPRO-Registered Trademark-  a  demand  for  arbitration  in  connection  with
alleged  breaches of  the  contract  relating  to  the  manufacture  of  SPINPRO
-Registered  Trademark-.    The  former  manufacturer  is  seeking   damages  of
approximately $515,000.  The Company does not  believe that the  claims have any
merit and believes that the ultimate  outcome of this proceeding will not have a
material  impact  on  the  Company.  The  Company  is vigorously contesting such
claims and has filed counterclaims against the former manufacturer.  The Company
has also  filed for  arbitration  against a  former  vendor relating to  SPINPRO
-Registered Trademark-,  seeking  damages  for  alleged  breach of contract with
respect to the manufacture of molds for SPINPRO-Registered Trademark- parts.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable.

ITEM 5 - OTHER INFORMATION - Not Applicable.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

    (a)       Exhibits:

    (10.30)   License, Supply and Distribution Agreement, dated July 17, 1998 by
              and between Segix Italia S.p.A. and the Company.

    (27.1)    Financial Data Schedule.

    (b)       The  following  current  reports  on Form 8-K were  filed  during 
                  the quarter ended September 30, 1998:

    (i)       July 29, 1998 with respect to the engagement of Grant Thornton LLP
              s the Company's independent auditors.


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<PAGE>

SIGNATURES

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

DATED:    November 19, 1998


 \s\ Paul G. Kanan                            President and Chief Executive
-----------------------------                 Officer
Paul G. Kanan


 \s\ Peter B. Ludlum                          Vice President and Chief Financial
----------------------------                  Officer (Principal Financial and 
Peter B. Ludlum                               Accounting Officer)


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