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

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

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


                                   FORM 10-QSB



    [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934
           For the Quarterly Period Ended December 31, 2005


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


                         Commission File Number 0-21537



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



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



      220 WEST HARRISON STREET
      SEATTLE, WASHINGTON 98119                          (206) 298-0068
--------------------------------------------------------------------------------
(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 [_]

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

As of January 31, 2006, the issuer had outstanding 12,881,818 shares of common
stock

Transitional Small Business Disclosure Format:                   Yes [_]  No [X]

================================================================================
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                              INDEX TO FORM 10-QSB



                                                                            PAGE
                                                                            ----
PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

         Consolidated Balance Sheets as of December 31, 2005
         (unaudited) and June 30, 2005 (audited)............................   3

         Consolidated Statements of Operations for the three- and
         six-month periods ended December 31, 2005 and 2004 (unaudited).....   4

         Consolidated Statements of Cash Flows for the six-month
         periods ended December 31, 2005 and 2004 (unaudited)...............   5

         Condensed Notes to the Consolidated Financial Statements
         (unaudited)........................................................   6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS..........................................  13

ITEM 3 - CONTROLS AND PROCEDURES............................................  22


PART II - OTHER INFORMATION

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS........  22

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............  22

ITEM 5 - OTHER INFORMATION..................................................  23

ITEM 6 - EXHIBITS...........................................................  23

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



                                       -2-
<PAGE>

PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                                                                 DECEMBER 31,        JUNE 30,
                                                                                                 ------------------------------
                                       ASSETS                                                        2005              2005
                                                                                                 ------------      ------------
                                                                                                  (unaudited)       (audited)
                                                                                                 ------------------------------
<S>                                                                                              <C>               <C>
Current assets:
    Cash and cash equivalents                                                                    $    477,914      $  1,438,543
    Accounts receivable, net of allowance for doubtful accounts
                                                                                                    2,206,159           607,867
    Prepaid expenses and other assets                                                                 485,203           603,464
    Deferred financing cost on secured convertible note - current portion                             107,170           107,170
                                                                                                 ------------      ------------
          Total current assets                                                                      3,276,446         2,757,044

Property and equipment, net                                                                           667,588           437,436

Other assets:
    Deferred financing cost on secured convertible note - net of current portion                      179,202           232,787
                                                                                                 ------------      ------------
          Total assets
                                                                                                 $  4,123,236      $  3,427,267
                                                                                                 ============      ============

                       LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Accounts payable                                                                             $    959,946      $    438,342
    Accrued liabilities                                                                               720,385           846,267
    Advances from clients                                                                             491,757           697,561
    Capital lease obligation - current portion                                                         51,993            51,994
    Secured convertible note - current portion, net of unamortized fair value
        assigned to beneficial conversion feature and warrants of $0
        $0, respectively                                                                              769,733            83,333
    Other notes payable - current portion                                                              97,616           331,429
                                                                                                 ------------      ------------
          Total current liabilities                                                                 3,091,430         2,448,926


   Capital lease obligations - net of current portion                                                  82,982           108,493
   Secured convertible note - net of current portion, net of unamortized fair value
        assigned to beneficial conversion feature and warrants of $2,234,738
        $2,659,284, respectively                                                                      931,929         1,193,783
   Other notes payable - net of current portion                                                       196,901            38,148
                                                                                                 ------------      ------------
          Total long-term liabilities                                                               1,211,812         1,340,424
                                                                                                 ------------      ------------
          Total liabilities                                                                         4,303,242         3,789,350
                                                                                                 ------------      ------------

Stockholders' deficit:
    Preferred stock, $0.01 par value, 5,000,000 shares authorized
        Series A preferred stock, 1,550,000 shares designated, 1,550,000 shares issued and
        outstanding, liquidation preference of $2.00 per share, aggregating $3,100,000                 15,500            15,500
    Common stock, $0.01 par value, 30,000,000 shares authorized
        issued and outstanding 12,749,746 shares and 13,325,705, respectively                         305,059           304,985
    Additional paid-in capital                                                                     25,432,944        25,430,844
    Accumulated deficit                                                                           (25,932,086)      (26,111,988)
    Treasury stock                                                                                     (1,423)           (1,423)
                                                                                                 ------------      ------------
          Total stockholders' deficit                                                                (180,006)         (362,083)
                                                                                                 ------------      ------------

          Total liabilities and stockholders' deficit                                            $  4,123,236      $  3,427,267
                                                                                                 ============      ============

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

                                      -3-
<PAGE>

PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                            Three Months Ended               Six Months Ended
                                                               December 31,                    December 31,
                                                      ----------------------------    ----------------------------
                                                          2005            2004            2005            2004
                                                      ------------    ------------    ------------    ------------
<S>                                                   <C>             <C>             <C>             <C>
Revenue                                               $  3,113,248    $  1,008,755    $  4,947,690    $  1,443,496
                                                      ------------    ------------    ------------    ------------

 Laboratory expenses and cost of sales                   1,464,170         586,227       2,404,930         995,753
                                                      ------------    ------------    ------------    ------------
          Gross Profit                                   1,649,078         422,528       2,542,760         447,743

Operating expenses:
    Research and product development                        11,802          37,095          21,347          43,399
    Selling, general and administrative                    837,158         596,162       1,671,140       1,275,624
                                                      ------------    ------------    ------------    ------------

Operating income (loss)                                    800,118        (210,729)        850,273        (871,280)
                                                      ------------    ------------    ------------    ------------

Other income (expense):
  Interest expense                                        (101,497)        (75,062)       (196,457)       (138,147)
  Amortization of fair value assigned to beneficial
     conversion feature and warrants                      (212,273)        (66,682)       (424,546)       (139,007)
  Amortization of deferred finance costs                   (26,793)        (16,125)        (53,585)        (51,694)
  Interest income                                              455             449           1,947             540
  Other income                                               2,685           5,337           3,503           7,170
  Warrant financing cost                                    (1,232)                         (1,232)
                                                      ------------    ------------    ------------    ------------
                                                          (338,655)       (152,083)       (670,370)       (321,138)

Net income (loss) before tax expense                       461,463        (362,812)        179,903      (1,192,418)
                                                      ------------    ------------    ------------    ------------

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

Net income (loss)                                     $    461,463    $   (362,812)   $    179,903    $ (1,192,418)
                                                      ============    ============    ============    ============

Net income (loss) applicable to common stockholders   $    461,463    $   (362,812)   $    179,903    $ (1,192,418)
                                                      ============    ============    ============    ============

Net income (loss) per share:
  Basic earnings (loss) per share                     $       0.04    $      (0.03)   $       0.01    $      (0.10)
                                                      ============    ============    ============    ============
  Diluted earnings (loss) per share                   $       0.03    $      (0.03)   $       0.01    $      (0.10)
                                                      ============    ============    ============    ============

Weighted average common shares outstanding:
  Basic                                                 12,749,746      12,630,217      12,748,143      12,547,852
                                                      ============    ============    ============    ============
  Diluted                                               16,002,531      12,630,217      16,000,928      12,547,852
                                                      ============    ============    ============    ============


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

                                      -4-
<PAGE>

PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                                                               Six months ended
                                                                                                  December 31,
                                                                                         ------------------------------
                                                                                             2005              2004
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C>
Cash Flows From Operating Activities:
    Net income (loss)                                                                    $    179,903      $ (1,192,418)

    Reconciliation of net loss to net cash provided by (used in) operating
    activities:
      Depreciation and amortization                                                           116,253            76,764
      Amortization of fair value assigned to beneficial conversion feature
      and warrants                                                                            424,546           139,007
      Amortization of deferred financing costs on secured convertible note                     53,585           (48,305)
      Common Stock and APIC addition from options exercised                                       548              --
      Warrants issued in conjunction with equipment financing                                   1,232              --
      Compensation expense from fair value adjustment to options                                  395               283
      Changes in assets and liabilities:
         Accounts receivable, net                                                          (1,598,292)         (455,229)
         Prepaid expenses and other assets                                                    118,260           (77,831)
         Advances from clients                                                               (205,804)          397,491
         Accounts payable                                                                     489,651          (164,087)
         Accrued liabilities                                                                 (125,882)          143,780
                                                                                         ------------      ------------
          Net cash used in operating activities                                              (545,605)       (1,180,545)
                                                                                         ------------      ------------
Cash Flows From Investing Activities:
    Purchases of capital equipment                                                           (314,452)         (104,950)
                                                                                         ------------      ------------
          Net cash used in investing activities                                              (314,452)         (104,950)
                                                                                         ------------      ------------
Cash Flows From Financing Activities:
    Payments on notes payable                                                                 (75,061)         (174,801)
    Payments on notes payable to related parties                                                 --             (22,183)
    Transfer to restricted cash                                                                  --                (197)
    Payments on capital lease obligations                                                     (25,512)          (23,677)
                                                                                         ------------      ------------
          Net cash used in financing activities                                              (100,574)         (220,858)
                                                                                         ------------      ------------

Net decrease in cash and cash equivalents                                                    (960,631)       (1,506,353)
Cash and cash equivalents, beginning of period                                              1,438,543         2,941,014
                                                                                         ------------      ------------

Cash and cash equivalents, end of period                                                 $    477,914      $  1,434,661
                                                                                         ============      ============

Cash paid during the period for interest                                                 $    190,735      $     73,007
                                                                                         ============      ============

Cash paid during the period for income taxes                                             $       --        $       --
                                                                                         ============      ============


Non-Cash Investing and Financing Activities:
      Proceeds from exercise of stock options and warrants                               $        474      $       --
      Shares released from escrow under restructure agreement with prior landlord        $    542,400      $       --
         Warrants issued in conjunction with equipment financing                         $      1,232
          Common stock issued upon conversion of principal on Laurus                     $       --        $     35,000

          Common stock issued as compensation of R&D costs related to Utek Agreement     $       --        $    120,000


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

                                      -5-
<PAGE>

                            PACIFIC BIOMETRICS, INC.

        CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.       ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc., a Delaware corporation ("PBI" or the "Company"),
provides specialty central laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business primarily through its wholly owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation ("PBI-WA"). The Company's two
other wholly owned subsidiaries are PBI Technology, Inc., a Washington
corporation ("PBI Tech"), and BioQuant, Inc., a Michigan corporation. All
material intercompany balances and transactions have been eliminated in the
accompanying consolidated financial statements.

Unaudited interim financial statements include all adjustments such as normal
recurring accruals that are, in the opinion of management, necessary for a fair
statement of results of interim periods. Operating results for the three- and
six-month periods ended December 31, 2005 are not necessarily indicative of the
results that may be expected for any future period. The accompanying unaudited
financial statements and related condensed notes should be read in conjunction
with the audited financial statements and notes thereto, for its fiscal year
ended June 30, 2005, as previously reported in the Company's annual report on
Form 10-KSB.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Accounting for Stock Based
Compensations" (SFAS 123R) This statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123(R). This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." The Company has adopted SFAS No. 123(R) and will recognize the
effect for employee stock compensation during fiscal year 2006 in accordance
with SFAS No. 123(R) beginning with the quarter ending March 31, 2006.

In May 2005, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards ("SFAS, No. 154"), "Accounting Changes and Error
Corrections," which replaces Accounting Principles Board Opinion No. 20,
"Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements -- An Amendment of APB Opinion No. 28". SFAS No. 154
provides guidance on accounting for and reporting changes in accounting
principle and error corrections. SFAS No. 154 requires that changes in
accounting principle be applied retrospectively to prior period financial
statements and is effective for fiscal years beginning after December 15, 2005.
The Company does not expect SFAS No. 154 to have a material impact on its
consolidated financial position, results of operations, or cash flows.

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion; however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This

                                      -6-
<PAGE>

statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Management believes the adoption of this statement will have no
impact on the financial statements of the Company.

In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. Management does not believe the adoption
of this statement will have any immediate material impact as the Company carries
no inventory.

In May 2003, the Financial Account Standards Board issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Accounting Standards no. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150").
SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those instruments were classified as
equity. The Company has determined that there was no impact from the adoption of
this statement.

STOCK-BASED COMPENSATION

The Company applies APB Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
and related interpretations in accounting for its stock-based employee
compensation plan. The Company has adopted the disclosure-only provisions of
SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." For the three- and
six-month periods ended December 31, 2005, the Company granted 0 and 285,000,
respectively, of incentive-based stock options under incentive compensation
plans. 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 loss and loss per share would have been changed to the
pro forma amounts below for the three- and six-month periods ended December 31:

<TABLE><CAPTION>
                                                              Three months                        Six months
                                                            ended December 31,                 ended December 31,
                                                          2005             2004              2005             2004
                                                      ------------     ------------      ------------     ------------
<S>                                                   <C>              <C>               <C>              <C>
     Net income (loss) as reported                    $    461,463     $   (362,812)     $    179,903     $ (1,192,418)
     Add: Total stock-based employee compensation
          awards, net of related tax benefit                  --            (84,596)           (9,900)         (86,647)
                                                      ------------     ------------      ------------     ------------
     Pro forma net income (loss)                      $    461,463     $   (447,408)     $    170,003     $ (1,279,065)
                                                      ============     ============      ============     ============
     Net loss per share:
          Basic - as reported                         $       0.04     $      (0.04)     $       0.01     $      (0.10)
                                                      ============     ============      ============     ============
          Diluted - as reported                       $       0.03     $      (0.04)     $       0.01     $      (0.10)
                                                      ============     ============      ============     ============
          Basic - pro forma                           $       0.04     $      (0.04)     $       0.01     $      (0.10)
                                                      ============     ============      ============     ============
          Diluted - pro forma                         $       0.03     $      (0.04)     $       0.01     $      (0.10)
                                                      ============     ============      ============     ============
</TABLE>

                                      -7-
<PAGE>

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

                                             2005                    2004
                                             ----                    ----
        Expected volatility                 87.86%                  141.05%
        Expected dividend yield              0.00%                   0.00%
        Risk-free interest rate              4.39%                   4.16%
        Expected life                      10 years                10 years

BENEFICIAL CONVERSION FEATURE

In accordance with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, using the relative
fair value method of Accounting Principles Board Opinion 14 ("APB 14"), the
Company recorded a beneficial conversion feature (BCF) related to the issuance
of convertible debt that has conversion features at fixed rates that were
in-the-money when issued and recorded the value allocated to warrants issued
with those instruments. The BCF for the convertible debt and for the value
allocated to warrants are measured and recognized by allocating a portion of the
proceeds to additional paid-in capital with an offset to the discount on the
convertible debt.

For convertible debt and related warrants, the recorded discount is amortized as
interest expense using the straight line interest method over the life of the
debt.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus the effect of
outstanding in-the-money stock options that have vested or will vest within 60
days of December 31, 2005 (or March 1, 2006) and in-the-money warrants using the
"treasury stock" method and the effect of preferred stock on an as-converted
basis. Diluted loss per share is computed on the basis of the weighted average
number of common shares outstanding and does not include the effect of dilution
from outstanding in-the-money stock options that have vested or will vest within
60 days of December 31, 2005 and in-the-money warrants using the "treasury
stock" method and the effect of preferred stock on an as-converted basis. All
per share calculations exclude treasury shares and shares held in trust as
security for a note payable.

Due to the Company's net earnings for the three- and six-month periods ended
December 31, 2005, common stock equivalents related to the Company's: a)
in-the-money, vested options, b) in-the-money warrants, and c) convertible
preferred stock were used in the computation of diluted earnings per share. Due
to the Company's net loss per share for the three- and six-month periods ended
December 31, 2004, the Company's common stock equivalents were not used because
the effect would be anti-dilutive. As of December 31, 2005, the Company's common
stock equivalents included: a) in-the-money, vested options to purchase
1,145,391 shares of common stock; b) in-the-money warrants to purchase 1,590,727
shares of common stock; and c) 1,550,000 shares of Series A preferred stock
convertible into 516,667 shares of common stock. As of December 31, 2004, the
Company's common stock equivalents included: a) in-the-money, vested options to
purchase 727,454 shares of common stock; b) in-the-money warrants to purchase
590,727 shares of common stock; and c) 1,550,000 shares of Series A preferred
stock convertible into 516,667 shares of common stock.

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

                                      -8-
<PAGE>

<TABLE><CAPTION>
                                                        Three months ended                 Six months ended
                                                           December 31,                       December 31,
                                                  -----------------------------      -----------------------------
                                                      2005             2004              2005             2004
                                                  ------------     ------------      ------------     ------------
<S>                                               <C>              <C>               <C>              <C>
Net income (loss) (A)                             $    461,463     $   (362,812)     $    179,903     $ (1,192,418)

Net income (loss) applicable to common
         stockholders (B)                         $    461,463     $   (362,812)     $    179,903     $   (695,621)
                                                  ============     ============      ============     ============

Weighted average number of outstanding shares
         of common stock (C)                        12,749,746       12,630,217        12,748,143       12,547,852
                                                  ============     ============      ============     ============

Weighted average number of outstanding shares
         of common stock and common stock
         equivalents (D)                            16,002,531       12,630,217        16,000,928       12,547,852
                                                  ============     ============      ============     ============

Income (loss) per share:
         Basic (B/C)                              $       0.04     $      (0.03)     $       0.01     $      (0.10)
                                                  ============     ============      ============     ============
         Diluted (A/D)                            $       0.03     $      (0.03)     $       0.01     $      (0.10)
                                                  ============     ============      ============     ============
</TABLE>

DEFERRED FINANCE COSTS

In conjunction with the Company's $2.5 million and $1.5 million secured
convertible note financings that closed on May 28, 2004 and January 31, 2005,
respectively with Laurus Master Fund, Ltd., a New York City based investment
fund ("Laurus"), the Company paid various fees and expenses totaling $461,500,
which are being amortized to other expenses at the rate of $26,793 per quarter
over the 48-month life of the notes. As of December 31, 2005 and 2004, there
were unamortized balances of $286,372 and $236,431, respectively.

3.       GOING CONCERN AND MANAGEMENT'S PLANS

The Company had net income for the three- and six-month periods ended December
31, 2005 and net losses for the fiscal year ended June 30, 2005. The Company has
historically experienced recurring losses from operations and has had cash flow
shortages. While the Company currently has a positive working capital position
of $185,016 at December 31, 2005, it had significant amounts of debt, including
two secured convertible notes and other notes payable of $1,996,179 and other
liabilities of $2,307,063 and stockholders' deficit of $180,006. If the
beneficial conversion feature of the secured convertible note of $2,234,738 were
included, total liabilities at December 31, 2005 would equal $6,537,980 and
stockholders' deficit would be $180,006. Historically, the Company has had
deficiencies in working capital and stockholders' equity and has had significant
amounts of current and past due debt and payables. 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.

On a going forward basis, the Company's strategy is to meet the needs for
outsourcing by pharmaceutical, biotechnology, and diagnostic companies and other
central laboratories, and to assist in enhancing the drug and diagnostic
development processes by developing and delivering innovative services that
apply science and technology in the provision of high quality service within the
Company's areas of specialty.

The Company's primary business strategy is to continue its focus on providing
high quality specialty central laboratory services in its core areas, including
cardiovascular disease, metabolic diseases and bone and joint diseases. The
Company is pursuing other strategies identified below to further its business.
Because of the significant expense associated with some of these strategies, the
Company may not pursue some of these strategies unless its revenue increases
significantly or it is able to raise equity or debt financing to adequately fund
these strategies. There can be no assurance that the Company will pursue any or
all of the strategies below or, if pursued, that any of such strategies will be
successful.

LABORATORY AUTOMATION, INFORMATION TECHNOLOGY AND BACK-UP SYSTEMS

The Company is currently focusing a significant proportion of its capital
expenditures and investments in laboratory automation, information technology
systems and back-up systems. During the fourth quarter of fiscal 2005 and the
first half of fiscal 2006, the Company invested in its laboratory information
system, including the initial stages of the implementation of the ClinAxys II
Laboratory Information System. The installation of this new system should

                                      -9-
<PAGE>

streamline and improve the Company's project and data management capabilities.
Throughout fiscal 2006, the Company anticipates it will continue to invest in
the improvement of its information systems and the Company believes capital
improvements in these areas are important to meet the changing demands of drug
development by improving and facilitating its data reporting, testing capacity
and the overall service to and communications with its clients.

In fiscal 2006, to provide the Company's clients with the confidence that it can
minimize the impact of local power outages, it anticipates investing in
redundant or back-up systems. In fiscal 2005 the Company acquired and during the
first quarter of 2006 has begun the use of a back-up electrical generator. In
addition, the Company anticipates adding redundant or back-up CO2 systems for
its individual freezers to protect samples stored in those freezers.

DIVERSIFY CLIENT BASE

Another of the Company's goals is to continue to diversify its client base. In
fiscal 2005, the Company adopted a new corporate visual identity and is
integrating this with all of its marketing efforts and advertising. The Company
has also increased its visibility at industry trade shows and in industry
publications through print advertisements and publicity campaigns.

INCREASE SPECIALTY AREAS

In addition to its core specialties of cardiovascular disease and bone and joint
diseases, the Company's goal is to further expand its specialty laboratory
expertise within related areas where it believes it has a competitive advantage
of existing in-depth expertise. These areas include diabetes, obesity, metabolic
syndrome, rheumatoid and osteoarthritis, inflammatory diseases and certain
aspects of oncology.

CREATE GLOBAL CENTRAL LABORATORY

The Company believes that in the central laboratory services business it is
important to provide a broad geographic base as most clinical drug development
programs are global. Through partnering with a major central laboratory with a
large established client base and existing infrastructure for managing clinical
studies globally, the Company believes that it can compete with other central
laboratories that have offices, monitoring sites and laboratories in many
countries around the globe. This partnership will provide the unique advantage
of combining both scope and depth in quality specialty testing service. In
fiscal 2005, the Company entered into a joint marketing arrangement with
Quintiles Transnational and in fiscal 2006 the Company expects to build on this
relationship by expanding joint business development efforts and implementing
operational integration in certain areas that will lead to streamlined services.

ACQUISITIONS AND STRATEGIC RELATIONSHIPS

The Company's clients and its competitors have experienced significant
consolidation over the last several years and the Company expects that trend to
continue. The uncertainty caused by the consolidation trend may result in other
companies in the industry seeking to form strategic relationships or joint
ventures or to be acquired in order to stay competitive. This may make it
possible for the Company to make strategic acquisitions that are complementary
to its existing services and that expand its ability to serve its clients. The
Company is also exploring other strategic alternatives for its business and
operations, which may include joint ventures, co-marketing relationships, or
other strategic relationships especially with diagnostic companies with emerging
or proprietary technologies. Additionally, the Company will evaluate, as
appropriate, any potential business combinations involving the Company as a
whole, or involving a portion of its assets.

Even after the aforementioned steps, the Company still has a significant amount
of debt that needs to be serviced, as well as fluctuating revenues. The Company
will continue to review its operating and financial requirements and attempt to
reduce and service outstanding debt with cash generated from its operations,
with stock, and/or from the sale or licensing of its technology assets.
Management believes that these funding and debt reduction efforts will succeed.
Nevertheless, the Company may not be successful in these efforts and may have to
seek protection from creditors under the bankruptcy laws.

                                      -10-
<PAGE>

These financial statements have been prepared on a going concern basis and no
potential adjustments have been recorded that may be required as a result of a
potential inability to continue as a going concern.

4.       CONCENTRATION OF CREDIT RISK

The largest client in the quarter ended December 31, 2005 individually accounted
for approximately 35% and 38% of the Company's total revenue in quarters ended
December 31, 2005 and 2004, respectively. The largest client for the six months
ended December 31, 2005 individually accounted for approximately 35% and 33% of
the Company's total revenue for the six months ended December 31, 2005 and 2004,
respectively. Revenue from the Company's five largest clients represented
approximately 82% and 79% of total revenue in the quarters ended December 31,
2005 and 2004, respectively. Revenue from the Company's five largest clients,
which are large, multi-national pharmaceutical firms and global central
laboratories, represented approximately 75% and 66% of total revenue for the six
months ended December 31, 2005 and 2004, respectively. As of December 31, 2005
and 2004, respectively, approximately 52% and 42% of the Company's accounts
receivable balance was from the two largest clients at that time. Management
believes that all of these accounts are collectable.

The Company maintains its cash in two commercial accounts at major financial
institutions. Although the financial institutions are considered creditworthy
and have not experienced any losses on their deposits, at December 31, 2005, the
Company's cash balance exceeded Federal Deposit Insurance Corporation (FDIC)
limits by $377,914

5.       RELATED PARTY TRANSACTIONS

There have been no related party transactions during the first or second
quarters of fiscal 2006. In fiscal 2005, during the six months ended December
31, 2004, the Company purchased certain computer equipment and other furniture
and equipment from Saigene Corporation, a related party. The property and
equipment was valued at $73,585 and the Company paid $15,000 in cash and
recorded an account payable to Saigene of $58,585. The Company also entered into
an office sharing agreement for Saigene to use some of the Company's office
space. For each month of that office-sharing agreement, the $58,585 payable to
Saigene was reduced at a (non-cash) rate of $1,540 per month. At June 30, 2005
the balance due to Saigene was $0.

6.       EQUIPMENT FINANCING

On November 3, 2005, the Company entered into a Loan and Security Agreement with
Franklin Funding, Inc., providing for a non-revolving line of credit of up to
$500,000 for equipment financing collateralized by the equipment. In connection
with the Loan and Security Agreement, the Company agreed to grant to Franklin
Funding stock purchase warrants to purchase up to 50,000 shares of the Company's
common stock, in increments of 5,000 shares, for each $50,000 borrowed, each
with an exercise price determined as of the respective date of borrowing and
expiration date of 10 years. Through December 31, 2005, the Company has borrowed
$250,000 under this equipment line of credit and issued to Franklin Funding
warrants to purchase 25,000 shares, at an exercise price of $1.17 per share. As
of December 31, 2005, the Company had not received $50,000 borrowed under this
equipment line of credit As of December 31, 2005, the Company recognized
expenses of $1,232 related to the grant of the warrants.

7.       SUBSEQUENT EVENTS

During January 2006, the Company borrowed an additional $100,000 from Franklin
Funding in January 2006 and issued an additional 10,000 warrants to Franklin
Funding per the terms of the loan and security agreement.

                                      -11-
<PAGE>

During January 2006 Laurus converted an additional $53,000 of the principal
amount due on the 2004 Note into 50,000 shares and through February 10, 2006,
Laurus converted an additional $63,600 of the principal amount due on the 2004
Note into 60,000 shares of the Company's common stock, leaving a remaining
principal balance on the 2004 Note of $2,319,800. No amounts of the 2005 Note
have been converted, and through February 10, 2006, the remaining principal
balance on the 2005 Note is $1,500,000.

































                                      -12-
<PAGE>

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

INVESTORS SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED CONDENSED NOTES IN THIS FORM
10-QSB, OUR FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 2005 AND OUR AUDITED
FINANCIAL STATEMENTS AND RELATED NOTES FOR THE FISCAL YEAR ENDED JUNE 30, 2005,
INCLUDED IN OUR ANNUAL REPORT ON FORM 10-KSB.

THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS A NUMBER OF FORWARD-LOOKING
STATEMENTS THAT REFLECT MANAGEMENT'S CURRENT VIEWS AND EXPECTATIONS WITH RESPECT
TO OUR BUSINESS, STRATEGIES, PRODUCTS, FUTURE RESULTS AND EVENTS AND FINANCIAL
PERFORMANCE. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT, INCLUDING
FUTURE RESULTS OF OPERATIONS OR FINANCIAL POSITION, MADE IN THIS QUARTERLY
REPORT ON FORM 10-QSB ARE FORWARD LOOKING. IN PARTICULAR, THE WORDS "EXPECT,"
"ANTICIPATE," "ESTIMATE", "DESIRE", "GOAL", " BELIEVE", "MAY", "WILL", "SHOULD",
"INTEND", "OBJECTIVE", "SEEK", "PLAN", "STRIVE", VARIATIONS OF SUCH WORDS, OR
SIMILAR EXPRESSIONS, OR THE NEGATIVES OF THESE WORDS, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING SUCH
STATEMENTS AND THEIR ABSENCE DOES NOT MEAN THAT THE STATEMENT IS NOT
FORWARD-LOOKING. EXAMPLES OF FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS AS TO
OUR ESTIMATES FOR FUTURE REVENUES AND COST OF REVENUES, OUR EXPECTATIONS
REGARDING FUTURE EXPENSES, INCLUDING RESEARCH AND DEVELOPMENT AND SALES AND
MARKETING EXPENSES, OUR ESTIMATES REGARDING THE ADEQUACY OF OUR CAPITAL
RESOURCES, OUR CAPITAL REQUIREMENTS AND OUR NEEDS FOR ADDITIONAL FINANCING,
PLANNED CAPITAL EXPENDITURES, USE OF OUR WORKING CAPITAL, SOURCES OF REVENUE AND
ANTICIPATED REVENUE, INCLUDING LICENSES OF INTELLECTUAL PROPERTY, TECHNOLOGY
DEVELOPMENT AND SERVICE CONTRACTS, OUR BUSINESS DEVELOPMENT EFFORTS, FUTURE
ACQUISITIONS OR INVESTMENTS, THE IMPACT OF ECONOMIC AND INDUSTRY CONDITIONS ON
US AND OUR CLIENTS, THE ANTICIPATED GROWTH OF OUR BUSINESS, OUR ABILITY TO
ATTRACT CLIENTS, EXPECTATIONS REGARDING COMPETITION AND THE IMPACT OF RECENT
ACCOUNTING PRONOUNCEMENTS.

THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT ARE SUBJECT TO RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED BELOW AND IN THE SECTION CAPTIONED
"FACTORS THAT MAY AFFECT OPERATING RESULTS," AND AS DISCUSSED IN OUR ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 2005, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE CONCENTRATION OF BUSINESS
WITH LARGE CLIENTS, THE ABILITY TO DEVELOP NEW TECHNOLOGY AND INTRODUCE NEW
PRODUCTS, COMPETITION, FLUCTUATIONS IN GENERAL ECONOMIC CONDITIONS, THE RISK OF
BANKRUPTCY, AND CHANGES IN POLICIES BY REGULATORY AGENCIES. FOR ADDITIONAL
FACTORS THAT CAN AFFECT THESE FORWARD-LOOKING STATEMENTS, SEE THE "RISK FACTORS"
SECTION WITHIN OUR ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDING JUNE
30, 2005, AND IN OUR REGISTRATION STATEMENTS ON FORM SB-2. THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS REPORT SPEAK ONLY AS OF THE DATE HEREOF. WE CAUTION
READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS. WE
EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES
OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT TO
REFLECT ANY CHANGE IN MANAGEMENT'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.

OVERVIEW

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

                                      -13-
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and
estimates since the end of our 2005 fiscal year. For detailed information on our
critical accounting policies and estimates, see our financial statements and
notes thereto included in this Report and our Annual Report on Form 10-KSB for
the year ended June 30, 2005.

The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis we evaluate our estimates including, among
others, those affecting revenues, the allowance for doubtful accounts, and the
useful lives of tangible and intangible assets. The discussion below is intended
to be a brief discussion of some of the judgments and uncertainties that can
impact the application of these policies and the specific dollar amounts
reported on our financial statements. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form our basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, or if management made
different judgments or utilized different estimates. Many of our estimates or
judgments are based on anticipated future events or performance, and as such are
forward-looking in nature, and are subject to many risks and uncertainties,
including those discussed below and elsewhere in this Report. We do not
undertake any obligation to update or revise this discussion to reflect any
future events or circumstances.

We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is neither a complete list of all of our accounting policies,
nor does it include all the details surrounding the accounting policies we have
identified. There are other accounting policies that are significant to our
company. For a more detailed discussion on the application of these and our
other accounting policies, see "Note 2 to the Consolidated Financial Statements"
included in this Report and "Note 2 to Consolidated Financial Statements"
included in our Annual Report on Form 10-KSB for the year ended June 30, 2005.

         REVENUE RECOGNITION

We recognize revenue in the period that the related services are performed.
Historically, a majority of our net revenue has been earned under contracts
which range in duration from six months to eighteen months, but can extend in
duration up to two years or longer. Service contracts generally take the form of
fixed-price arrangements. Under fixed-price contracts, revenue is recognized as
services are performed, with performance generally assessed using output
measures, such as units-of-work performed to date as compared to the total
units-of-work contracted. Changes in the scope of work generally result in a
renegotiation of contract pricing terms. Renegotiated amounts are not included
in net revenue until earned and realization is assured. We also receive advances
from certain clients related to the services to be performed for them. These
advances are deferred and recognized as revenue in the period the related
services are performed. Estimates of costs to complete are made, as appropriate,
to provide for losses expected on contracts. Costs are not deferred in
anticipation of contracts being awarded, but instead are expensed as incurred.
All out-of-pocket costs are included in total revenue and expenses.

         BENEFICIAL CONVERSION FEATURE

In accordance with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, using the relative
fair value method of Accounting Principles Board Opinion 14 ("APB 14"), we
recorded a beneficial conversion feature (BCF) related to: a) the issuance of
convertible debt that had conversion features at fixed rates that were
in-the-money when issued, and b) the estimated value of warrants issued along
with the convertible debt. The BCF for the convertible debt and for the value
allocated to warrants are measured and recognized by allocating a portion of the
proceeds to additional paid-in capital with an offset to a discount on the
convertible debt.

                                      -14-
<PAGE>

         OPERATING EXPENSES

Historically, we have segregated our recurring operating expenses among three
categories: laboratory and cost of goods sold; selling, general and
administrative expenses; and research and development. Laboratory expenses and
cost of goods sold consist of amounts necessary to complete the revenue and
earnings process, and includes direct labor and related benefits, other direct
costs, and an allocation of facility charges and information technology costs,
and depreciation and amortization. Also, laboratory expenses and cost of goods
sold include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenue,
tends, and is expected, to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving studies
conducted during any period of time.

Selling, general and administrative expenses include business development
activities, sales and marketing expenses and related commissions, and laboratory
administration expenses. Selling, general and administrative expenses consist
primarily of administrative payroll and related benefit charges, legal and
accounting fees, advertising and promotional expenses, administrative travel and
an allocation of facility charges, information technology costs, and
depreciation and amortization.

Research and development expenses consist of direct labor and related benefits,
supplies, legal fees for patent applications, travel expenses, and depreciation
and amortization.

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

RESULTS OF OPERATIONS FOR THREE-MONTH AND SIX-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004

REVENUE:

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
REVENUE                  $  3,113   $  1,009   $  2,104        309%   $  4,948   $  1,443   $  3,505        343%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
</TABLE>

Our revenue is generated from clinical trials and diagnostic testing services.
Our revenue increased to $3,113,000 from $1,009,000 or approximately 309%
between the comparable quarters ended December 31, 2005 and 2004, respectively.
This was the result of an increase in the size and number of clinical trials
testing services we performed. This increase reflects the continuing significant
increases in revenue and open work orders we have been experiencing over four of
the past five quarters. For the comparable six months ended December 31, 2005
and 2004, our revenue increased to $4,948,000 from $1,443,000 or approximately
343%. This also was the result of an increase in the size and number of clinical
trials testing services we performed.

Our quarterly fluctuations in total revenue are often explained by changes in
the testing and open work orders from our historically largest clients. This is
the result of prior work orders having been completed, clinical studies having
ended or clinical studies having been terminated early. In particular, our
recent fluctuations in revenue can be partially explained by the testing
requirements and open work orders of our top five clients. For the three- and
six-month periods ended December 31, 2005, our current largest client accounted
for 35% and 35% of our total revenue, compared to approximately 38% and 33%,
respectively, for the three- and six-month periods ended December 31, 2004. We
have been making efforts to diversify our client base, however, we expect to
remain substantially dependent on our top five clients for a significant portion
of our revenue, and as such, a decline or increase in the

                                      -15-
<PAGE>

volume of services performed for any one or more of these clients will continue
to have a significant impact on our revenue. The concentration of credit risk is
described above in Note 4 to our unaudited consolidated financial statements.

During the three- and six-months ended December 31, 2005, revenue generated from
clinical trials testing services accounted for approximately 78% and 70%,
respectively of our total revenue as compared to 60% and 51%, respectively,
during the quarter and six months ended December 31, 2004. During the three- and
six-month periods ended December 31, 2005, revenue generated from diagnostic
services and trial services accounted for approximately 3% and 7%, respectively
of our total revenue as compared to 14% and 20%, respectively, during the
quarter and six months ended December 31, 2004. During the three- and six-month
periods ended December 31, 2005, revenue generated from referral sources
accounted for approximately 19% and 23%, respectively of our total revenues as
compared to 24% and 22%, respectively, during the quarter and six months ended
December 31, 2004.

LABORATORY EXPENSE AND COST OF GOODS SOLD:

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
LABORATORY EXPENSES AND
COST OF GOODS SOLD       $  1,464   $    586   $    878       250%    $  2,405   $    996   $  1,409       242%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------

PERCENTAGE OF REVENUE         47%        58%                               49%        69%
-----------------------  --------   --------                          --------   --------
</TABLE>

Laboratory expense and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical trial
samples, 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. For the comparable quarters ended December 31, 2005 and
2004, laboratory expenses and cost of goods sold increased approximately 250% to
$1,464,000 from $586,000, respectively, and as a percentage of revenue,
decreased to approximately 47% from approximately 58%. The relative decrease in
laboratory expense and cost of goods sold as a percentage of revenue was
primarily the result of the significant increase in revenue over the comparable
period and the fixed components of laboratory expense and cost of goods sold.

For the comparable six-month periods ended December 31, 2005 and 2004,
laboratory expenses and cost of goods sold increased approximately 242% to
$2,405,000 from $996,000, respectively, and as a percentage of revenue,
decreased to approximately 49% from approximately 69%. The relative decrease in
laboratory expense and cost of goods sold as a percentage of revenue was
primarily the result of the significant increase in revenue over the comparable
period and the fixed components of laboratory expense and cost of goods sold.

The largest component increase in laboratory expense and costs of goods sold was
the 363% increase in lab supplies to approximately $663,000 from $195,000 for
the quarters ended December 31, 2005 and 2004, respectively. Lab supplies
represented approximately 45% and 33% of laboratory expense and cost of goods
sold for the quarters ended December 31, 2005 and 2004, respectively. The
increase in lab supplies between the comparable quarters is the result of the
increase in clinical and diagnostic testing services we provided to our clients.
Lab supplies expense increased 363% to approximately $957,000 from $264,000 for
the six-month period ended December 31, 2005 and 2004, respectively. Lab
supplies represented approximately 40% and 26% of laboratory expense and cost of
goods sold for the six-month period ended December 31, 2005 and 2004,
respectively. The increase in lab supplies between the comparable six-month
periods is the result of the increase in clinical and diagnostic testing
services we provided to our clients.

Salaries and related benefits for our employees performing analysis of clinical
trials and diagnostic samples rose 207% to approximately $460,000 from $222,000
for the quarters ended December 31, 2005 and 2004, respectively. Salaries and
related benefits accounted for approximately 31% and 38% of total laboratory
expense and cost of goods sold for the quarters ended December 31, 2005 and
2004, respectively. Salaries and related benefits rose

                                      -16-
<PAGE>

193% to approximately $809,000 from $420,000 for the six-month period ended
December 31, 2005 and 2004, respectively. Salaries and related benefits
accounted for approximately 34% and 42% of total laboratory expense and cost of
goods sold for the six-month periods ended December 31, 2005 and 2004,
respectively. The significant increase in salaries and benefits is due to
increased hiring of laboratory personnel related to the increase in our business
activity. On December 31, 2005 we had 32 FTE in our laboratory services. This
compares to 20 FTE on December 31, 2004.

For the quarter and six months ended December 31, 2005, we incurred computer
consulting expenses of approximately $76,000 and $121,000, respectively, in
connection with initial stages of implementation of our new ClinAxys II
Laboratory Information System, and recruiting expenses of approximately $0 and
$23,000, respectively. We had no comparable expenses during the quarter and six
months ended December 31, 2004. We anticipate that we will incur additional
computer consulting expense during the remainder of fiscal 2006 as we complete
the implementation of our new laboratory information system.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE   $    837   $    596   $    241       140%    $  1,671   $  1,276   $    395       131%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------

PERCENTAGE OF REVENUE         27%        59%                               34%        88%
-----------------------  --------   --------                          --------   --------
</TABLE>

Our selling, general and administrative expense consists primarily of
compensation for our executive officers, board members and other selling,
general and administrative personnel, legal and accounting fees, and payments
under consulting arrangements. Selling, general and administrative expense
increased 140% to approximately $837,000 from $596,000 for the quarters ended
December 31, 2005 and 2004, respectively. As a percentage of revenue, selling,
general and administrative expense was 27% and 59%, respectively, for the
quarters ended December 31, 2005 and 2004.

The 140% increase in selling, general and administrative expense was primarily
the result of a 137% increase to approximately $488,000 from $356,000 in overall
salaries, commissions, consulting fees, board fees and related benefits for the
quarters ended December 31, 2005 and 2004, respectively. This increase was
greatest for laboratory administration (increased from $139,000 to $233,000 for
the three months ended December 31, 2004 and 2005, respectively) and laboratory
sales (increased from $92,000 to $155,000 for the three months ended December
31, 2004 and 2005, respectively). This increase in expense was primarily due to
added staff.

Selling, general and administrative expense increased 131% to approximately
$1,671,000 from $1,276,000 for the six-month periods ended December 31, 2005 and
2004, respectively. As a percentage of revenue, selling, general and
administrative expense was 34% and 88%, respectively, for the six-month periods
ended December 31, 2005 and 2004.

The 131% increase in selling, general and administrative expense was primarily
the result of a 139% increase to approximately $979,000 from $705,000 in overall
salaries, commissions, consulting fees, board fees and related benefits for the
six-month periods ended December 31, 2005 and 2004, respectively. This increase
was greatest for laboratory administration (increased from $258,000 to $446,000
for the six months ended December 31, 2004 and 2005, respectively) and
laboratory sales (increased from $191,000 to $242,000 for the six months ended
December 31, 2004 and 2005, respectively). This increase in expense was
primarily due to added staff.

Offsetting this increase was an 18% reduction to approximately $304,000 from
$372,000 in legal, accounting, printing and general public company costs for the
six months ended December 31, 2005 and 2004, respectively. During the six months
ended December 31, 2004 as compared to the six months ended December 31, 2005 we

                                      -17-
<PAGE>

incurred higher legal fees and accounting expenses that were primarily the
result of work on our two resale registration statements during the six months
ended December 31, 2004. Those two registration statements were declared
effective on September 28, 2004. We had no significant registration expense for
the six months ended December 31, 2005.

Selling, general and administrative expenses also include compensation expense
or income resulting from the May 2002 repricing of all then-outstanding stock
options to the then-current market price of $0.06. To adjust these options to
fair market value, we recognized income (expense) of approximately $283 and
$(2,259) for the six months ended December 31, 2005 and 2004, respectively. As
of December 31, 2005 and 2004, respectively, 0 and 7,902 repriced options
remained outstanding. (See "Note 12 to Notes to Consolidated Financial
Statements" in our Report on Form 10-KSB for the year ended June 30, 2005). The
Company will no longer recognize compensation expense or income in the future on
the repriced stock options since all outstanding repriced stock options have
been exercised or have expired.

RESEARCH AND PRODUCT DEVELOPMENT:

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
RESEARCH AND PRODUCT
DEVELOPMENT              $     12   $     37   $    (25)     (68)%    $     21   $     43   $    (22)     (51)%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------

PERCENTAGE OF REVENUE          0%         4%                                0%         3%
-----------------------  --------   --------                          --------   --------
</TABLE>

Research and product development expenses consist mainly of our expenditures
incurred in connection with development of our OsteoPatch, SalivaSac, LIDA and
cell viability technology held in our subsidiary PBI Technology. For the
comparable quarters ended December 31, 2005 and 2004, research and product
development expenses decreased 68% to approximately $12,000 from $37,000. For
the comparable six-month periods ended December 31, 2005 and 2004, research and
product development expenses decreased 51% to approximately $21,000 from
$43,000. The decrease in research and development expenses for the comparable
periods of fiscal 2006 over fiscal 2005 is due to the termination of our
agreement with Utek, which was terminated as of June 23, 2005. For both the
quarter and six months ended December 31, 2004, we incurred $30,000 in non-cash
compensation costs associated with our agreement with Utek.

We anticipate that we will continue to incur relatively small research and
development expenses. However, if we are unable to increase revenues or raise
additional funding to continue to fund our existing research and development
efforts, we might seek to further reduce our research and development efforts
and expenses.

OTHER EXPENSE:

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
OTHER EXPENSE            $    339   $    152   $    187       223%    $    670   $    321   $    349       209%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------

PERCENTAGE OF REVENUE         11%        15%                               14%        22%
-----------------------  --------   --------                          --------   --------
</TABLE>

Total other expense increased 223% or approximately $187,000 to $339,000 from
$152,000 during the quarters ended December 31, 2005 and 2004, respectively.
Total other expense increased 209% or approximately $349,000 to $670,000 from
$321,000 during the six months ended December 31, 2005 and 2004, respectively.

                                      -18-
<PAGE>

A major component of other expense in the quarter and six months ended December
31, 2005 was approximately $84,000 and $191,000, respectively of cash interest
expense on notes payable and lease obligations. We also incurred approximately
$212,000 and $425,000, respectively of non-cash interest expense that
represented the amortization of the intrinsic value of the beneficial conversion
features of the two secured convertible notes and fair market value allocated to
2,207,905 warrants related to our two secured convertible notes with Laurus in
May 2004 and January 2005 (respectively, the "2004 Note" and "2005 Note"). As of
December 31, 2005 $2,235,000 remained unamortized and will be amortized, using
the straight-line interest method, over the remaining lives of the 2004 and 2005
Notes, or upon their earlier conversion. (See "Note 9 to Notes to Consolidated
Financial Statements" in our Report on Form 10-KSB for the year ended June 30,
2005). In comparison, major components of other expense in the quarter and six
months ended December 31, 2004 was approximately $18,000 and $73,000,
respectively of cash interest expense on notes payable and lease obligations,
and approximately $67,000 and $139,000, respectively of non-cash interest
expense that represented the amortization of the intrinsic value of the
beneficial conversion features of the 2004 Note and fair market value allocated
to 681,818 warrants related to our 2004 Note. (See "Note 9 to Notes to
Consolidated Financial Statements" in our Report on Form 10-KSB for the year
ended June 30, 2005).

For the quarter and six months ended December 31, 2005, we also incurred
approximately $27,000 and $54,000, respectively in expense related to the
amortization of our deferred finance cost associated with both the 2004 Note and
the 2005 Note, whereas for the quarter and six months ended December 31, 2004,
we incurred approximately $16,000 and $53,000, respectively in such amortization
expense of our deferred finance cost associated with the only the 2004 Note.

NET INCOME (LOSS):

<TABLE><CAPTION>
-----------------------  --------------------------------------------------------------------------------------
                          THREE MONTHS ENDED                            SIX MONTHS ENDED
DOLLARS IN THOUSANDS,        DECEMBER 31,          $         %            DECEMBER 31,          $         %
ROUNDED TO NEAREST       --------   --------   --------   --------    --------   --------   --------   --------
THOUSAND                   2005       2004      Change     Change       2005       2004      Change     Change
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
NET INCOME (LOSS)        $    461   $   (363)  $    824       227%    $    180   $ (1,192)  $  1,372       115%
-----------------------  --------   --------   --------   --------    --------   --------   --------   --------

PERCENTAGE OF REVENUE         15%      (36)%                                4%      (83)%
-----------------------  --------   --------                          --------   --------
</TABLE>

We had net income of approximately $461,000 for the quarter ended December 31,
2005 compared to a net loss of approximately $363,000 for the quarter ended
December 31, 2004. This difference between the net income and net loss for the
quarters was primarily attributable to our significantly increased revenue and
percentage of gross profits in the comparable quarters. The increase in gross
margin was offset partially by the increase in selling, general and
administrative expenses and the increase in other expense discussed above.

We had net income of approximately $180,000 for the six-month period ended
December 31, 2005 compared to a net loss of approximately $1,192,000 for the
six-month period ended December 31, 2004. This difference between the net income
and net loss was primarily attributable to our significantly increased revenue
and percentage of gross profit in the comparable six-month periods and the
increased interest expense related to the 2004 Note with Laurus. These
additional expenses were only partially offset by decreases in research and
product development expenses discussed above.

We realized operating income of approximately $800,000 and $850,000,
respectively for the quarter and six months ended December 31, 2005, as compared
to operating losses of approximately $211,000 and $871,000 for the three- and
six-month periods ended December 31, 2004.

Excluding the effects of the following non-cash items: 1) the amortization of
the fair market value of the beneficial conversion feature and warrants of
approximately $212,000 and $425,000, respectively; 2) the amortization of
deferred finance costs on the 2004 Note and 2005 Note of approximately $27,000
and $54,000, respectively; and 3) depreciation and amortization of approximately
$64,000 and $116,000, respectively, we realized earnings of approximately
$766,000 and $775,000, respectively for the quarter and six months ended
December 31, 2005.

                                      -19-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES:

We had net operating income for the six-month period ended December 31, 2005 and
a net loss for the fiscal year ended June 30, 2005. Revenue for the six-month
period ended December 31, 2005 was significantly higher than revenue in the
comparable prior fiscal periods. Revenue for our fiscal year ended June 30, 2005
was significantly lower than revenue in the comparable prior fiscal year
periods, although we saw improvements in revenue during the second and third
quarters of the 2005 fiscal year that has continued during the first and second
quarters of the 2006 fiscal year. Should revenue continue to increase, we will
possibly avoid our previous experience of significant losses and adverse effects
on our cash and working capital positions. Our operations historically have been
funded through revenue generated from operations and from the sale and issuance
of our common stock, preferred stock and debt.

At December 31, 2005, our cash and cash equivalents were approximately $478,000,
compared to approximately $1,439,000 at June 30, 2005. In addition, at December
31, 2005, we had working capital of approximately $185,000, compared to working
capital of approximately $308,000 at June 30, 2005. The decreases in cash, cash
equivalents and working capital are attributable to several changes in the
balance sheet components. Changes providing favorable impact include an increase
in accounts receivable and decreases in accrued liabilities, advances from
customers, and other notes payable - current portion. The decrease in our
working capital, cash and equivalents is primarily attributable to our build up
in accounts receivable, net of a relatively smaller increase in accounts
payable. To a lesser degree the net decrease in our working capital, cash and
cash equivalents is the result of 1) certain payments made on our notes payable
2) decrease in accrued liabilities, 3) decrease in advance payments from
customers, and 4) payments we made for capital expenditures.

At December 31, 2005, we had approximately $2,206,000 in accounts receivable,
compared to approximately $608,000 as of June 30, 2005, reflecting the timing of
revenues billed and collected. We generally have a high collectibility rate on
our accounts receivable, and our allowance for doubtful accounts is only $32,100
which we believe is reasonable based on our past experience. Our accounts
receivable generally reflect our billings, and may include one or several
individually large client receivables from time to time. We had one clinical
service client that represented 29% or approximately $632,000 of our accounts
receivable balance as of December 31, 2005. Additionally, given the significant
increase in our revenue for the six-month period ended December 31, 2005 as
compared to the six-month period ended December 31, 2004, accounts receivable
decreased as a percentage of revenue as of December 31, 2005, to approximately
71% as compared to 81% as of December 31, 2004.

Total liabilities recorded on our balance sheet as of December 31, 2005 were
approximately $4,303,000 compared to approximately $3,789,000 as of June 30,
2005. The increase in liabilities was the result of an increase in accounts
payable, an increase in the booked values of our 2004 and 2005 Notes as the
beneficial discount is amortized, and an increase in other notes payable,
offsetting our payments against accounts payable and certain notes payable. A
significant component of our liabilities are represented by the 2004 and 2005
Notes with Laurus (See "BUSINESS -- Laurus Debt Investment" in our Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2005), and, to a lesser
degree, our new borrowings in fiscal 2006 under our $500,000 credit facility
with Franklin Funding. As required by U.S. generally accepted accounting
principles, the liability we recorded for the 2004 and 2005 Notes reflected an
aggregate discount from the face value of the note by approximately $2,235,000,
related to the valuation of the beneficial conversion feature and the warrants.
During the six-month period ended December 31, 2005, Laurus converted $63,600 of
the principal amount due and as of December 31, 2005 the remaining aggregate
principal balance on the 2004 and 2005 Notes was $3,819,800. Accordingly, if the
discount to face value is disregarded, our total liabilities as of December 31,
2005 and June 30, 2005, respectively, would be approximately $6,538,000 and
$6,449,000. Payments on the 2004 Laurus Note of $85,000 per month are scheduled
to begin in June 2006. These payments will reduce the outstanding principal of
the 2004 Note by $83,333 per month. Payments on the 2005 Laurus Note of $51,000
per month are scheduled to begin in August 2006. These payments will reduce the
outstanding principal of the 2005 Note by $50,000 per month. Because a portion
of the 2004 Note has been converted into the Company's common stock, as of
December 31, 2005, the amount due for June 2006 is $19,733.

Net cash used in operating activities was approximately $546,000 for the
six-month period ended December 31, 2005, primarily to fund changes in our
working capital. For the six-month period ended December 31, 2005, net cash used
in operations included the effect of approximately $116,000 in depreciation and
amortization,

                                      -20-
<PAGE>

approximately $478,000 of amortization related to the 2004 and 2005 Notes. Our
investing activities used approximately $314,000 for the six-month period ended
December 31, 2005 primarily for the purchase of capital equipment. Cash flows
used in financing activities included approximately $101,000 in payments on
notes payable, notes payable to related parties, and payments on capital lease
obligations. We have no off-balance sheet financing arrangements.

As described above, we experienced a significant increase in revenues for the
three- and six-month periods ended December 31, 2005 and we incurred significant
improvement in net income. In prior periods, except for the proceeds from our
2004 and 2005 Notes with Laurus and new equipment line of credit with Franklin
Funding, we realized a degradation of our cash and working capital position from
operations. While we experienced significantly improved revenues in the first
six months of fiscal 2006, the rapid improvement created a negative impact on
our cash and working capital positions that may continue until the growth rate
slows. In an effort to become more competitive and to increase our revenue, we
are currently actively increasing our business development activities, and
planning to make additional investments in our technology infrastructure,
operations and other areas of our business. These efforts will use significant
amounts of time, effort and funding.

Our efforts to control expense, generate revenue and raise sufficient capital
may not be successful. With the prior cash infusions from the Laurus debt
investment in May 2004 and January 2005 (See "BUSINESS -- Laurus Debt
Investment" in our Annual Report on Form 10-KSB for the year ended June 30,
2005) and our private placement in March 2004, the six-month principal payment
deferral on the 2004 Note and the twelve-month extensions of our 2004 and 2005
Notes (See "BUSINESS -- Laurus Debt Investment" in our Annual Report on Form
10-KSB for the fiscal year ended June 30, 2005) we expect that our current cash,
current assets and any cash flows from operations will be sufficient to fund
operations through the fourth quarter of fiscal 2006. However, any decreases in
revenue would adversely affect our financial condition, and with this
uncertainty and our current capital investment requirements we will likely seek
additional capital during fiscal 2006 or 2007. We may not be able to raise
sufficient financing, whether debt or equity. We have as of December 31, 2005
$250,000 available to us under our Franklin Funding equipment line of credit,
however, we do not have any other credit facility in place. In addition, based
on the terms of the Laurus debt financings, raising additional capital may be
difficult or highly dilutive to existing stockholders.

Management continues to contemplate alternatives to enable us to fund continuing
operations, including loans from management or employees, salary deferrals and
reductions and other cost cutting mechanisms, and raising additional capital by
private placements of equity or debt securities or through the establishment of
other funding facilities. In addition, we are exploring strategic alternatives,
which may include a merger, asset sale, joint venture or another comparable
transaction. None of these potential alternatives may be available to us, or may
only be available on unfavorable terms. If we are unable to obtain sufficient
cash to continue to fund operations or if we are unable to locate a strategic
partner, we may be forced to seek protection from creditors under the bankruptcy
laws or cease operations. Any inability to obtain additional cash as needed
could have a material adverse effect on our financial position, results of
operations and our ability to continue in existence. Our auditors added an
explanatory paragraph to their opinion on our fiscal 2005 financial statements
stating that there was substantial doubt about our ability to continue as a
going concern.

FACTORS THAT MAY AFFECT OPERATING RESULTS

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

     o    Our business development and marketing efforts and our ability to
          enter into and build relationships with new clients, and obtain
          additional projects from existing clients;
     o    The timing and number of clinical trials by clients, the number of
          samples submitted to us for testing, and the amount of revenues
          generated from these tests;
     o    Our ability to participate in and win bids from RFPs (requests for
          proposals) for clinical tests;
     o    Our ability to motivate and retain our existing employees;

                                      -21-
<PAGE>

     o    Our ability to manage our cash flow, including by managing or reducing
          our expenses
     o    Our ability to collect outstanding accounts receivable;
     o    Our ability to raise money from debt or equity financing to help fund
          cash flows;
     o    Capital expenditure requirements, including for research and
          development efforts, upgrading or replacing laboratory equipment and
          making investments in information technology; and
     o    Plans to pursue alternative business strategies, which may include
          entering into a joint venture, asset sale or merger.

Many of the above factors are outside of our control, and all of the above
factors are difficult for us to forecast. These factors can materially adversely
affect our business and operating results for one quarter or a series of
quarters.

ITEM 3.       CONTROLS AND PROCEDURES

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

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

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

PART II - OTHER INFORMATION

ITEM 2        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On November 3, 2005, we entered into a Loan and Security Agreement with Franklin
Funding, Inc., providing us a non-revolving line of credit of up to $500,000 for
equipment financing. In connection with the Loan and Security Agreement, we
agreed to grant to Franklin Funding stock purchase warrants to purchase up to
50,000 shares of our common stock, in increments of 5,000 shares, for each
$50,000 borrowed, each with an exercise price determined as of the respective
date of borrowing. As of December 31, 2005, we have issued to Franklin Funding
warrants to purchase 25,000 shares, at an exercise price of $1.17 per share. The
warrants were issued in reliance on the statutory exemption from registration
provided by Section 4(2) of the Securities Act.

ITEM 4        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our 2005 annual meeting of stockholders held on December 1, 2005, the four
director-nominees were duly elected on the following vote, each for a one-year
term:

                                      -22-
<PAGE>

                                      Affirmative Votes         Votes Withheld
                                      -----------------         --------------

       Ronald R. Helm                     9,023,586                  2,580
       Terry M. Giles                     9,019,086                  7,080
       Paul G. Kanan                      9,019,963                  6,203
       Richard W. Palfreyman              9,023,968                  2,198

At our 2005 annual meeting of stockholders held on December 1, 2005, the 2005
Stock Incentive Plan was approved on the following vote:

         For               Against            Abstain          Not Voted
         5,912,750         45,166             19,193           3,049,057

ITEM 5        OTHER INFORMATION

At the meeting of the Company's Board of Directors on February 7, 2006, the
Board authorized the Company to offer to the holders of the outstanding
1,550,000 shares of Series A preferred stock the opportunity to exchange their
shares of Series A preferred stock for Company common stock.

The exchange rate for the Series A preferred stock will be based on the higher
of (i) $1.17 per share, (ii) the highest ten trading day average during the
first 30 days after the quarterly results for the second quarter of fiscal 2006
are released (provided that at least 12,000 shares must have traded during the
day in order for any day to qualify in the average), or (iii) the price of a
common share offered by the Company in any private offering initiated during the
third quarter of fiscal 2006.

The number of shares of common stock issuable on exchange will equal the total
cash consideration originally paid by the Series A preferred holders (aggregate
amount of $3,100,000) divided by the exchange rate. Accordingly, if all of the
1,550,000 shares of Series A preferred stock were exchanged into common stock at
the lowest rate of $1.17 per share, the total number of shares of common stock
issuable to the Series A stockholders would be 2,649,573.

ITEM 6        EXHIBITS

          31.1      Certification of Ronald R. Helm, Chief Executive Officer

          31.2      Certification of Michael L. Hartzmark, Interim Chief
                    Financial Officer

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

          32.2      Certification of Michael L. Hartzmark, Interim 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.

                                   SIGNATURES

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

         Dated:  February 13, 2006

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



                                       /s/ Michael L. Hartzmark
                                       -----------------------------------------
                                       Michael L. Hartzmark
                                       Interim Chief Financial Officer
                                       (principal financial and accounting
                                       officer)

                                      -23-