<PAGE>



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

                                  FORM 10-QSB


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

For the quarterly period ended      DECEMBER 31, 2001
                              -----------------------


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

                        Commission File Number 0-21537

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


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


              23120 Alicia Parkway #200, Mission Viejo, CA 92692
--------------------------------------------------------------------------------
                   (Address of principal executive offices)


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

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

As of January 31, 2002 there were outstanding 3,810,171 shares of common
stock.

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




<PAGE>



                           PACIFIC BIOMETRICS, INC.

                             INDEX TO FORM 10-QSB



PART I - FINANCIAL INFORMATION

                                                                            Page
                                                                            ----
ITEM 1  - FINANCIAL STATEMENTS

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

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

Condensed Consolidated Statements of Cash Flows.............................  6

Notes to Consolidated Financial Statements..................................  8

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
              OF FINANCIAL CONDITION AND RESULTS OF
              OPERATIONS.................................................... 11

PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS.................................................. 17

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.......................... 17

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.................................... 17

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
              SECURITY HOLDERS.............................................. 17

ITEM 5 - OTHER INFORMATION.................................................. 18

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...................................  18



                                      2
<PAGE>



                           PACIFIC BIOMETRICS, INC.
                     (A COMPANY IN THE DEVELOPMENT STAGE)
                          CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 2001


                                    ASSETS

<TABLE>
<S>                                                                                 <C>
Current assets:
 Cash and cash equivalents                                                           $     335,212
 Accounts receivable, net of allowance for doubtful accounts of $28,865                    344,138
 Prepaid expenses and other                                                                 27,810
                                                                                     -------------
    Total current assets                                                                   707,160

Property and equipment, net                                                                 99,778

Other assets:
 Restricted cash                                                                            69,814
                                                                                     -------------
    Total assets                                                                     $     876,752
                                                                                     =============


                     LIABILITIES AND STOCKHOLDERS' DEFICIT


Current liabilities:
 Notes payable to related parties                                                    $     529,525
 Notes payable other                                                                        20,267
 Accounts payable                                                                          517,620
 Accrued liabilities                                                                       844,659
 Dividends payable                                                                         785,828
 Deferred compensation                                                                     295,368
 Advances from customers                                                                   526,044
 Technology licenses payable                                                             2,244,040
 Capital lease obligations-current portion                                                 435,323
                                                                                     -------------
    Total current liabilities                                                            6,198,674

Capital lease obligations - long term portion                                               47,259
                                                                                     -------------
    Total liabilities                                                                    6,245,933
                                                                                     -------------

Stockholders' deficit:
 Preferred stock, $0.01 par value, 5,000,000 shares authorized, 1,550,000 shares
   issued and outstanding                                                                   15,500
 Common stock, $0.01 par value, 30,000,000 shares authorized, 3,810,171 shares
   issued and outstanding                                                                   38,102
 Additional paid-in capital Preferred Stock                                              5,000,966
 Additional paid-in capital Common Stock                                                13,060,624
 Deficit accumulated during the development stage                                      (23,484,373)
                                                                                     -------------
    Total stockholders' deficit                                                         (5,369,181)
                                                                                     -------------
    Total liabilities and stockholders' deficit                                      $     876,752
                                                                                     =============


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



                                       3
<PAGE>



                           PACIFIC BIOMETRICS, INC.
                     (A COMPANY IN THE DEVELOPMENT STAGE)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000
                                  (UNAUDITED)




<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                                                         December 31
                                                                 ----------------------------
                                                                     2001            2000
                                                                 ------------   -------------
<S>                                                              <C>            <C>
Revenues                                                         $   744,243     $  523,169
                                                                  ----------      ---------
Operating expenses:
 Laboratory expense and cost of goods sold                           364,755        229,907
 Research and product development                                      4,044         10,657
 Selling, general and administrative                                 305,180        237,010
                                                                  ----------      ---------

   Total operating expenses                                          673,979        477,574
                                                                  ----------      ---------

Operating income                                                      70,264         45,595
                                                                  ----------      ---------

Other income (expense):
 Interest expense                                                    (15,492)        (6,733)
 Interest income                                                         317            476
 Other income                                                         85,074         32,790
                                                                  ----------      ---------
                                                                      69,899         26,533
                                                                  ----------      ---------

Net income                                                       $   140,163     $   72,128
                                                                  ==========      =========
Preferred stock dividend accrued                                     (62,000)       (62,000)
                                                                  ----------      ---------
Net income applicable to common stockholders                     $    78,163     $   10,128
                                                                  ==========      =========
Basic and diluted income per share                               $      0.02     $     0.00
                                                                  ==========      =========
Number of shares used in per-share calculation                     3,810,171      3,810,171
                                                                  ==========      =========


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



                                       4
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                      (A COMPANY IN THE DEVELOPMENT STAGE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
     AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 2001




<TABLE>
<CAPTION>
                                                                                      For the Period
                                                   Six Months Ended December 31       from Inception
                                                   -----------------------------    (December 1992) to
                                                        2001            2000        December 31, 2001
                                                   -------------   -------------   -------------------
<S>                                                <C>             <C>             <C>
Revenues                                            $1,116,805      $  830,235        $  13,395,259
                                                    ----------      ----------        -------------
Operating expenses:
 Laboratory expense and cost of goods sold             624,103         461,406            9,444,181
 Research and product development                        8,253          23,131            5,728,161
 Selling, general and administrative                   579,449         494,515           11,449,844
 Purchased in-process research and development               0               0            6,373,884
 Amortization of intangible assets                           0               0            1,616,565
                                                    ----------      ----------        -------------

   Total operating expenses                          1,211,805         979,052           34,612,635
                                                    ----------      ----------        -------------
Operating loss                                         (95,000)       (148,817)         (21,217,376)
                                                    ----------      ----------        -------------

Other income (expense):
 Interest expense                                      (39,140)        (27,854)            (873,328)
 Interest income                                           790           1,130              326,318
 Write-off of intangible assets                              0               0           (2,078,100)
 Other income                                          151,333          59,887              358,113
                                                    ----------      ----------        -------------
                                                       112,983          33,163           (2,266,997)
                                                    ----------      ----------        -------------

Net income (loss)                                   $   17,983      $ (115,654)       $ (23,484,373)
                                                    ==========      ==========        =============
Preferred stock dividend accrued                      (124,000)       (124,000)
                                                    ----------      ----------
Net loss applicable to common stockholders          $ (106,017)     $ (239,654)
                                                    ==========      ==========
Basic and diluted loss per share                    $    (0.03)     $    (0.06)
                                                    ==========      ==========
Number of shares used in per-share calculation       3,810,171       3,810,171
                                                    ==========      ==========


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



                                       5
<PAGE>

                           PACIFIC BIOMETRICS, INC.
                     (A COMPANY IN THE DEVELOPMENT STAGE)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE THREE MONTHS ENDED DECEMBER 31, 2001




<TABLE>
<CAPTION>
                                                       Three Months Ended
                                                          December 31
                                                   --------------------------
                                                       2001          2000
                                                   -----------   ------------
<S>                                                <C>           <C>
Cash provided (used) by operating activities        $ 332,190      $ (2,019)
Cash used by investing activities                     (14,054)           --
Cash (used) provided by financing activities          (28,006)       23,945
                                                    ---------      --------
Net Change in cash and cash equivalents               290,130        21,926
Cash and cash equivalents, beginning of period         45,082        75,344
                                                    ---------      --------
Cash and cash equivalents, end of period            $ 335,212      $ 97,270
                                                    =========      ========


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



                                      6
<PAGE>

                           PACIFIC BIOMETRICS, INC.
                     (A COMPANY IN THE DEVELOPMENT STAGE)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
    AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 2001




<TABLE>
<CAPTION>
                                                       Six Months Ended             For the Period
                                                          December 31               from Inception
                                                   ---------------------------    (December 1992) to
                                                       2001           2000        December 31, 2001
                                                   -----------   -------------   -------------------
<S>                                                <C>           <C>             <C>
Cash provided (used) by operating activities        $ 325,186      $ (30,889)       $ (9,139,720)
Cash used by investing activities                     (14,054)            --            (260,639)
Cash (used) provided by financing activities          (76,467)        34,227           9,735,571
                                                    ---------      ---------        ------------
Net Change in cash and cash equivalents               234,665          3,338             335,212
Cash and cash equivalents, beginning of period        100,547         93,932                  --
                                                    ---------      ---------        ------------
Cash and cash equivalents, end of period            $ 335,212      $  97,270        $    335,212
                                                    =========      =========        ============


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


                                      7


<PAGE>

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

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc. ("PBI" or the "Company") is a development stage
company that provides specialty reference laboratory services to the
pharmaceutical and diagnostics industries at its laboratory facility in
Seattle, Washington. The Company had previously been engaged in the
development and commercialization of non-invasive diagnostics to improve the
detection and management of chronic diseases. Due to a lack of significant
resources, the Company has suspended such activities for the foreseeable
future. The Company has developed two patented platform technologies that
permit the use of sweat and saliva as diagnostic fluids.

The Company was incorporated in Delaware in May 1996. The Company conducts its
business through its wholly owned subsidiaries, Pacific Biometrics, Inc., a
Washington corporation ("PBI-WA") and BioQuant, Inc., a Michigan corporation
("BioQuant"). On June 28, 1996, the Company completed the mergers (the
"Mergers") whereby BioQuant and PBI-WA became wholly owned subsidiaries of the
Company in separate stock-for-stock exchange transactions.

Except for the revenues from laboratory services, nominal revenues have been
generated from the Company's products. Consequently, the Company is a
development stage enterprise.

The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC") for interim financial reporting. These consolidated
financial statements are unaudited and, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments and accruals)
necessary for a fair presentation of the balance sheets, operating results, and
cash flows for the periods presented. Operating results for the three and six
months ended December 31, 2001 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2002. Certain financial
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been omitted in accordance with the rules and regulations of
the SEC. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements, and accompanying notes,
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June30, 2001.

All material intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Technology Licenses

The Company had an exclusive worldwide license for the use of a transdermal
perspiration collection device for all medical diagnostic applications of
Sudormed's skin patch technology, which is the basis for the Company's
OsteoPatch(TM) system. This license allowed for the development of all other
potential applications of such technology, except for those relating to
alcohol and drugs of abuse. Pursuant to the license agreement, the Company had
agreed to pay Sudormed approximately $3 million over a fifteen-month period
plus an ongoing royalty payment based on sales of products developed under
this license. Such payments included a lump-sum payment of $1.6 million due in
December 1998.

In May 2000, 3M notified the Company that, in its capacity as a secured party in
possession of the Sudormed assets, it demands payment in full of the $1.6
million plus accrued interest and fees due under the License Agreement between
the



                                      8
<PAGE>



Company and Sudormed. 3M is seeking to settle this claim or seek a judgment in a
court of law and has objected to the laboratory sale transaction that is
proceeding with Saigene. The Company disputes 3M's claim and intends to defend
itself in this matter. If 3M should be successful in blocking the proposed sale
of the laboratory, or commences a legal action against the Company, the Company
may have no alternative than to seek protection from creditors under the
bankruptcy laws (see Note 5 - Pending Transactions).

The Company has licensed exclusive rights, related to bone resorption in human
perspiration, to use patented pyridinium crosslinks antibody technology (this
is an exclusive worldwide license excluding Japan). The Company owns a fully
paid license to the assay technology used with the OsteoPatch(TM) product.
Licensing fees to this antibody technology have been fully amortized.

The SalivaSac(R) is a proprietary patented product of the Company that
collects and processes saliva for medical diagnostic purposes.

Risks And Uncertainties

Any product that the Company develops will likely require approvals from the
Food and Drug Administration (FDA) and international regulatory agencies prior
to commercialized sales. With respect to the Company's OsteoPatch(TM) product,
the Company failed to receive FDA approval and, as a result, has ceased
product development and has defaulted on the Sudormed license agreement.

In April 2000, the Company entered into an agreement to sell the laboratory
business, the only current source of revenue for the Company (see Note 5 -
Pending Transactions). Additionally, the Company's securities have been
delisted from the Nasdaq Stock Market.

The Company's financial position also creates risks and uncertainties as
discussed below in Note 3.

3.  GOING CONCERN

The Company has experienced recurring losses from operations and cash flow
shortages, and has reported deficiencies in working capital and stockholders'
equity. Also the Company has significant amounts of debt past due. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term. These steps include significant
reductions in expenses and staffing, suspension of research and development
projects, attempts to license or sell SalivaSac(R) technology, renegotiations
of contractual commitments, and a proposed sale of the Company's laboratory
(see Note 5-Pending Transactions).

Even if the Company is able to sell the laboratory operations, the Company
will still have significant debts and claims that need to be settled. The
Company will attempt to settle these debts with cash, stock, and technology
assets. There can be no assurance that the Company will be successful in these
negotiations and therefore may have to seek protection from creditors under
the bankruptcy laws (see Note 5 - Pending Transactions).

4.  EARNINGS PER SHARE

Net loss applicable to common stockholders includes $124,000 in cumulative
dividends on the convertible preferred stock for each of the six month periods
ended December 31, 2001 and 2000.

For the three months ended December 31, 2001 and 2000, the weighted average
number of shares used to compute basic earnings per share was 3,810,171.
Options to purchase 955,047 shares of common stock and warrants to purchase
455,055 shares of common stock were outstanding at December 31,



                                      9
<PAGE>



2001, and were not included in the computation of diluted net income per share
because the exercise price of the options and warrants was greater than the
average market price of the common shares and, therefore, the effect would be
anti-dilutive.

5.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On May 10, 2001 a Final Judgment of Permanent Injunction was issued by the
United States District Court for the District of Columbia ordering the Company
to (a) file with the SEC, on or before June 29, 2001: (1) the Company's Annual
Report on Form 10-KSB for its fiscal year ended June 30, 2000; (2) the
Company's Quarterly Reports on Form 10-QSB for its quarters ended March 31,
September 30, and December 31, 2000; and (3) such other periodic reports which
may become due prior to the entry of the Final Judgment, and (b) file timely
and in proper form with the SEC accurate and complete information and reports
of the Company as are required to be filed under the securities laws. The
Company filed all such reports on June 29, 2001, and since that date has filed
all such subsequent reports by the required due dates. Accordingly, the
Company believes it is currently in compliance with the Final Judgment and it
intends to remain so in the future, failing which the Company might be subject
to sanctions from the SEC.

On September 24, 1997 the Company received from the former manufacturer of
SPINPRO(R) a demand for arbitration in connection with alleged breaches of the
contract relating to the manufacture of SPINPRO(R). The former manufacturer is
seeking damages of approximately $515,000. The Company does not believe that
the claims have any merit and believes that the ultimate outcome of this
proceeding will not have a material impact on the Company. The Company has
contested such claims and has filed counterclaims against the former
manufacturer. The Company has also filed for arbitration against a former
vendor relating to SPINPRO(R), seeking damages for alleged breach of contract
with respect to the manufacture of molds for SPINPRO(R) parts. The arbitration
with this former vendor was settled on December 3, 2001 and the Company
received $20,000 in payment. No amounts have been accrued for this potential
liability in the accompanying financial statements.

The landlord of the Company's previous office and laboratory space in Lake
Forest, California was proceeding against the Company to cancel the lease. The
landlord has obtained a judgment against the Company from Orange County
Superior Court for approximately $150,000 related to the default on the lease.
In addition, liabilities continued to accrue at about $13,000 per month until
the space was leased. The total liability to the Company is estimated to be
approximately $350,000, which has been accrued in the accompanying financial
statements. The Company has been advised by Saigene Corporation ("Saigene"),
the proposed purchaser of the Company's laboratory, that Saigene has purchased
from the landlord of the Lake Forest property, for the sum of $350,000, the
rights to all claims and judgments rendered against the Company related to its
default on the Lake Forest lease, subject to the sale of the Company's
laboratory assets to Saigene. However, it is unclear whether or not Saigene
may re-assign such rights to the landlord if the sale of the laboratory assets
to Saigene is not completed. In any event, Saigene, under the terms of the
Purchase Agreement (see Pending Transactions below), has agreed that Saigene
will be responsible for satisfaction of such judgment and, therefore, the
Company believes it would be entitled to seek recovery from Saigene for any
costs or liabilities as a result of Saigene's failure to satisfy such claim.

Pending Transactions

As previously reported, the Company executed an Agreement of Purchase and Sale
of Assets dated April 18, 2000 and a First Amendment to Agreement of Purchase
and Sale of Assets dated June 22, 2000 (together, the "Purchase Agreement")
with Saigene. The Purchase Agreement, which is subject to stockholder
approval, will transfer the business and all assets of the Company's Seattle
laboratory operation to Saigene for a total consideration of $4,000,000.
Saigene failed to satisfy certain conditions relating to payments as required
and defaulted on the Purchase Agreement. Saigene requested a further extension
to January 20, 2001 to complete the Purchase Agreement and the Company and
Saigene signed a Second Amendment to Agreement of Purchase and Sale of Assets,
dated August 4, 2000 (the "Second Amendment").



                                      10
<PAGE>



In exchange for this extension, Saigene agreed to the following additional
terms. Saigene paid the Company $50,000 on May 22, 2000 and $75,000 on July
19, 2000 as part of the purchase price. Saigene paid $20,000 on each of August
28th, September 20th, October 20th, November 20th and December 20, 2000. One
half of each $20,000 payment will be credited toward the purchase price and
one-half of each payment will be consideration paid for the additional time
extension. Payments toward the purchase price will be credited against the
escrow payment required at the time of closing. All payments made according to
the Second Amendment will be forfeited by Saigene if they fail to make any of
the required payments, including the closing payments. Saigene and the Company
have further agreed that Saigene may extend the January 20, 2001 Closing Date
on a month-by-month basis by increasing the monthly payments to $30,000
beginning January 20, 2001. One-half of each such payment would be credited to
the purchase price and one-half would be consideration for the additional time
extension. The Company has the right to terminate the Purchase Agreement at
the end of any extension period by giving 20 days prior written notice.

Saigene failed to complete the Purchase Agreement on January 20, 2001 but has
elected to extend the Closing Date on a month-by-month basis having made all
required payments due through December 20, 2000 and all payments due from
January 20, 2001 through January 20, 2002.

There can be no assurance that Saigene will be able to complete the Purchase
Agreement as amended or consummate the transactions contemplated therein.
Failure to complete this transaction would likely return operational control
of the laboratory to the Company. While the laboratory would have less debt as
a result of the Second Amendment, the Company will not be financially capable
of maintaining the laboratory operation and there can be no assurance that
another buyer could be found in a timely manner. This could force the Company
to seek protection from creditors under the bankruptcy laws.

Even upon completion of the transaction with Saigene, the Company will still
have significant debts and claims that need to be settled. These include
amounts owed to various consultants, vendors and suppliers of the Company not
related to the Seattle laboratory operation of approximately $600,000;
deferred compensation to current and former employees of approximately
$800,000 (included in accrued liabilities and deferred compensation); accrued
dividends to preferred stockholders of approximately $785,000; and a potential
liability, disputed by the Company, of approximately $2.2 million related to
the OsteoPatch(TM) technology. The Company will attempt to settle these debts
with cash, stock, and technology assets. There can be no assurance that the
Company will be successful in these negotiations and may have to seek
protection from creditors under the bankruptcy laws. If the Company is
successful in settling the remaining debts, then the Company plans to pursue a
merger with another company as a means of providing some value to common
stockholders. There can be no assurance that the Company will be successful in
finding and negotiating a successful merger or that any such merger would
create value for the stockholders.

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

The following discussion and analysis should be read in conjunction with the
preceding consolidated financial statements and notes in this Form 10-QSB and
in conjunction with the financial statements and notes thereto for the year
ended June 30, 2001 included in the Company's Annual Report on Form 10-KSB.

OVERVIEW

Pacific Biometrics, Inc. ("PBI" or the "Company") was incorporated in Delaware
in May 1996 in connection with the acquisition of BioQuant, Inc. ("BioQuant"),
a Michigan corporation, and Pacific Biometrics, Inc. ("PBI-WA"), a Washington
corporation. On June 28, 1996, the Company completed the mergers whereby
BioQuant and PBI-WA became wholly owned subsidiaries of the Company in
separate stock-for-stock exchange transactions.

PBI is a development stage company that provides specialty reference
laboratory services to the pharmaceutical and diagnostics industries. The
Company's specialty reference laboratory is under contract to be sold to
Saigene Corporation ("Saigene") for a total consideration of $4,000,000. PBI
and Saigene have also entered into a Management Agreement in which Saigene
provides day-to-day management of the laboratory. The Company had previously
been engaged in the development and commercialization of non-invasive
diagnostics to improve the detection and management of chronic diseases, which
commercialization efforts have been terminated due to the Company's inability
to obtain FDA approval for its OsteoPatch(TM) product and lack of necessary
funding. The Company has developed two



                                      11
<PAGE>



patented technologies that permit the use of sweat and saliva as diagnostic
fluids.

Expenses consist, and are expected to continue to consist, primarily of
operating expenses necessary for the laboratory operations. In addition, the
Company maintains a small corporate office in Mission Viejo, California.

As of December 31, 2001, the Company had an accumulated deficit since
inception of $23,484,373 which included a one-time charge of $6,373,884 for
the value of purchased research and development expenses relating to the
Company's merger with BioQuant and a one-time charge of $428,368 relating to a
prior merger involving PBI-WA in 1995.

As previously reported, the Company executed an Agreement of Purchase and Sale
of Assets dated April 18, 2000 and a First Amendment to Agreement of Purchase
and Sale of Assets dated June 22, 2000 (together, the "Purchase Agreement")
with Saigene. The Purchase Agreement, which is subject to stockholder
approval, will transfer the business and all assets of the Company's Seattle
laboratory operation to Saigene for a total consideration of $4,000,000.
Saigene failed to satisfy certain conditions relating to payments as required
and defaulted on the Purchase Agreement. Saigene requested a further extension
to January 20, 2001 to complete the Purchase Agreement and the Company and
Saigene signed a Second Amendment to Agreement of Purchase and Sale of Assets,
dated August 4, 2000 (the "Second Amendment").

In exchange for this extension, Saigene agreed to the following additional
terms. Saigene paid the Company $50,000 on May 22, 2000 and $75,000 on July
19, 2000 as part of the purchase price. Saigene paid $20,000 on each of August
28th, September 20th, October 20th, November 20th and December 20, 2000. One
half of each $20,000 payment will be credited toward the purchase price and
one-half of each payment will be consideration paid for the additional time
extension. Payments toward the purchase price will be credited against the
escrow payment required at the time of closing. All payments made according to
the Second Amendment will be forfeited by Saigene if they fail to make any of
the required payments, including the closing payments. Saigene and the Company
have further agreed that Saigene may extend the January 20, 2001 Closing Date
on a month-by-month basis by increasing the monthly payments to $30,000
beginning January 20, 2001. One-half of each such payment would be credited to
the purchase price and one-half would be consideration for the additional time
extension. The Company has the right to terminate the Purchase Agreement at
the end of any extension period by giving 20 days prior written notice.

Saigene failed to complete the Purchase Agreement on January 20, 2001 but has
elected to extend the Closing Date on a month-by-month basis having made all
required payments due through December 20, 2000 and all payments due from
January 20, 2001 through January 20, 2002.

There can be no assurance that Saigene will be able to complete the Purchase
Agreement as amended or consummate the transactions contemplated therein.
Failure to complete this transaction would likely return operational control
of the laboratory to the Company. While the laboratory would have less debt as
a result of the Second Amendment, the Company will not be financially capable
of maintaining the laboratory operation and there can be no assurance that
another buyer could be found in a timely manner. This could force the Company
to seek protection from creditors under the bankruptcy laws.

Even upon completion of the transaction with Saigene, the Company will still
have significant debts and claims that need to be settled. These include
amounts owed to various consultants, vendors and suppliers of the Company not
related to the Seattle laboratory operation of approximately $600,000;
deferred compensation to current and former employees of approximately
$800,000 (included in accrued liabilities and deferred compensation); accrued
dividends to preferred stockholders of approximately $785,000; and a potential
liability, disputed by the Company, of approximately $2.2 million related to
the OsteoPatch(TM) technology. The Company will attempt to settle these debts
with cash, stock, and technology assets. There can be no assurance that the
Company will be successful in these negotiations and may have to seek
protection from creditors under the bankruptcy laws. If the Company is
successful in settling the remaining debts, then the Company plans to pursue a
merger with another company as a means of providing some value to common
stockholders. There can be no assurance that the Company will be successful in
finding and negotiating a successful merger or that any such merger would
create value for the stockholders.



                                      12
<PAGE>



RESULTS OF OPERATIONS:

Comparison of the three and six month periods ended December 31, 2001 and
2000:
<TABLE>
<CAPTION>
<S>                             <C>             <C>      <C>
------------------------------------------------------------------------------------------------------------------------
     Rounded to Nearest            Three       Six                   Comments on increase or decrease from
      Thousand Dollars             Months     Months                            Prior period
------------------------------------------------------------------------------------------------------------------------

Revenues:
------------------------------------------------------
Ended 12/31/2001                     $744      $1,117   Laboratory  revenues increased due to increases in the size and
------------------------------------------------------  number of clinical  trials for which the  laboratory  performed
Ended 12/31/2000                     $523        $830   testing and  consulting  work.  As  previously  disclosed,  the
------------------------------------------------------  Company has entered into an  agreement to sell the  laboratory.
$ variance                           $221        $287   Accordingly,  assuming  that the  laboratory  is sold in fiscal
------------------------------------------------------  2002,  laboratory  revenues  would no longer  contribute to the
% variance                            42%         35%   revenues of the Company subsequent to such sale.
------------------------------------------------------

Laboratory expenses and cost of sales:
------------------------------------------------------
Ended 12/31/2001                     $365        $624   Laboratory expenses,  including salaries,  supplies and outside
------------------------------------------------------  services  have  increased  as  a  result  of  the  increase  in
Ended 12/31/2000                     $230        $461   laboratory testing and consulting activity.
------------------------------------------------------
$ variance                           $135        $163
------------------------------------------------------
% variance                            59%         35%
------------------------------------------------------

Research and product development:
------------------------------------------------------
Ended 12/31/2001                       $4          $8   Research and product  development  expenses have decreased as a
------------------------------------------------------  result of research and development  operations  being curtailed
Ended 12/31/2000                      $11         $23   due to the Company's severe financial problems.
------------------------------------------------------
$ variance                           ($7)       ($15)
------------------------------------------------------
% variance                           -64%        -65%
------------------------------------------------------
Selling, general and administration expenses:
------------------------------------------------------
Ended 12/31/2001                     $305        $579   Selling,  general and  administrative  expenses have  increased
------------------------------------------------------  due to several factors,  primarily including increased salaries
Ended 12/31/2000                     $237        $495   and outside  services  relating to the increased level of sales
------------------------------------------------------  activity, offset by lower depreciation expense.
$ variance                            $68         $84
------------------------------------------------------
% variance                            29%         17%
------------------------------------------------------

Total other income (expense):
------------------------------------------------------
Ended 12/31/2001                      $70        $113   The increase in net other income  (expense) is primarily  due to
------------------------------------------------------  fees paid by Saigene in  consideration of extending the deadline
Ended 12/31/2000                      $27         $33   for purchase of the  laboratory  and sublet  rental  income from
------------------------------------------------------  Saigene to the laboratory.
$ variance                            $43         $80
------------------------------------------------------
% variance                           159%        242%
------------------------------------------------------

Net income (loss):
------------------------------------------------------
Ended 12/31/2001                     $140         $18   The  reduction  in the net  loss and  resulting  net  income  is
------------------------------------------------------  primarily   attributable  to  increased  revenue  from  clinical
Ended 12/31/2000                      $72      ($116)   trials and an increase in other income.
------------------------------------------------------
$ variance                            $68        $134
------------------------------------------------------
% variance                            94%        116%
------------------------------------------------------
</TABLE>


                                      13
<PAGE>





LIQUIDITY AND CAPITAL RESOURCES:

FINANCING ACTIVITIES
--------------------

The registration statement pertaining to the initial public offering ("IPO")
of the Company was declared effective by the Securities and Exchange
Commission on October 29, 1996. Gross proceeds from the public offering were
$8,075,000. The Company has used the net proceeds from the offering
(approximately $6.3 million) for product development activities relating to
the OsteoPatch(TM), for funding the growth of its central reference laboratory
operations, working capital, and approximately $1.2 million to repay debt.

On February 20, 1998, the Company consummated the sale of 925,000 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") with an
institutional investor for an aggregate purchase price of $1,850,000. In
addition, the Company granted such institutional investor an option (the
"Option") to purchase an additional 625,000 shares of Preferred Stock until
May 20, 1998 for an exercise price of $1,250,000. The Option was exercised in
full during May 1998. The Preferred Stock is convertible into shares of the
Company's Common Stock at the option of the holder at any time on a
one-for-one basis, subject to adjustment for stock splits, dividends and
similar events. The Preferred Stock provides for a cumulative cash dividend
payable quarterly in arrears at an annual rate of 8%. The Company has the
right to force conversion of the Preferred Stock in the event the price per
share of the Common Stock is $8.00 or more for twenty consecutive trading
days. The Company has agreed to use commercially reasonable efforts to effect
the registration of the Common Stock into which the Preferred Stock is
convertible. To date, no such efforts have been undertaken. The Company is not
current on dividend payments and as of December 31, 2001 approximately
$785,000 in dividends have been accrued.

In April 1997, the Company entered into a capital equipment leasing facility
with Transamerica Business Credit Corporation to provide credit for equipment
purchases up to $1,500,000. The Company issued 51,429 warrants to Transamerica
as part of this agreement. The Company received gross proceeds of $376,808
under the agreement during fiscal 1997 and received gross proceeds of $329,154
during fiscal 1998. The Company is required to raise additional capital in
order to draw additional funding from this arrangement.

The Company has continued to negotiate Forbearance Agreements with
Transamerica Business Credit related to payments due on capital leases. In
exchange for the first Forbearance Agreement the 51,429 warrants were repriced
to $0.50 per share in March 1999. No discount was recorded for the value of
the warrants because the amount was not material.

In exchange for the most recent Forbearance Agreement, dated August 1999, the
Company had repriced warrants previously issued to Transamerica from $.50 per
share to $.09 per share, granted Transamerica additional warrants and granted
Transamerica a priority lien position on assets of the Company. This
Forbearance Agreement expired on September 30, 1999 and was extended again
through December 31, 1999 in exchange for 150,508 additional warrants with an
exercise price of $.09 per share. All warrants issued to Transamerica were
again repriced on February 12, 2000 to $.06 per share. Although the
Forbearance Agreement has expired, Transamerica has not taken action to
collect the debt, which approximates $450,000. Most of this debt will be
assumed by Saigene upon sale of the laboratory. The expense associated with
the warrant re-pricing was not material. The Company recorded a discount of
approximately $38,000 in connection with issuance of the 150,508 warrants as
of December 1999.

In April of 1999 the Company and its subsidiaries entered into a Accounts
Receivable Factoring Agreement (the "Factoring Agreement") with Silicon Valley
Bank (the "Bank"). The purpose of the borrowings, when necessary, are to
provide the Company with working capital to meet laboratory operations
obligations and to maintain minimal corporate operations. The Company issued
93,024 warrants to the Bank as part of this agreement. Under the terms of this
agreement, the Bank will advance 80% of accepted receivables and charge the
Company an administrative fee of .75% and an annualized rate of 21% on
outstanding balances. There were no amounts outstanding as of December 31,
2001.





                                      14



<PAGE>


OPERATIONS
----------

As of December 31, 2001, the Company had cash and cash equivalents of
$335,212. In addition, the Company's current liabilities exceeded its current
assets. During the three months ended December 31, 2001, the Company's cash
and cash equivalents increased by $290,130 primarily due to an increase in
advances from customers on new clinical trial contracts.

PRODUCTS AND SERVICES
---------------------

In May 1998, the Company received a letter from the FDA in response to its
510(k) application for the OsteoPatch(TM) device notifying the Company that
the agency did not find the device to be substantially equivalent to the
predicate device, a urine test marketed by Metra Biosystems. Despite numerous
discussions and a meeting with the FDA in July 1998, the Company was unable to
reverse the agency's decision or negotiate requirements for additional data
that were within the Company's financial ability to perform. Due to lack of
funds, the Company ceased development activities on the OsteoPatch(TM) device
in August 1998.

In December 1998, the Company failed to make a payment of $1.6 million to
Sudormed Inc. ("Sudormed"), the licensor of the patch technology relating to
the SweatPatch(TM) and OsteoPatch(TM), resulting in a default under both the
License Agreement and the Supply Agreement with Sudormed. Sudormed terminated
the License Agreement in May 1999 for failure to make required payments. The
License Agreement permits the Company to retain full license rights as long as
the Company has inventory of patches. As of December 31, 2001 the Company had
approximately 80,000 patches in inventory, which are no longer saleable due to
expirations, but are useable for research purposes only. All investments in
SweatPatch(TM) technology, including the OsteoPatch(TM) and inventory, were
expensed in March 1999.

In May 2000, the Company executed the Purchase Agreement with Saigene, a
privately held company located in Redmond, Washington. The Purchase Agreement,
which is subject to stockholder approval, will transfer the business and
assets of the Company's Seattle laboratory operation to Saigene for a total
consideration of $4,000,000, including cash, cash advances, notes to Preferred
Stockholders, and assumption of debt. In August 2000, the Company announced a
further extension to the closing date from August 15, 2000 to January 20,
2001. The closing date has been further extended on a month-by-month basis by
Saigene through January 20, 2002. Saigene is able to extend the closing date
by making monthly payments of $30,000, in which half of such payments may be
credited to the purchase price upon consummation of the sale transaction. The
Company can terminate the Purchase Agreement at the end of any extension
period by providing 20 days written notice.

The SalivaSac(R), developed by the Company, collects a non-invasive saliva
sample that the Company had hoped would be able to replace blood and urine
testing in various applications. The Company had been awarded two SBIR Phase I
grants to research this technology for non-invasive glucose monitoring. As a
result of this research the Company had used its SalivaSac(R) technology to
research the development of a screening product to detect diabetes in the
general population and a monitoring product to produce detailed quantitative
measurements of glucose levels to enable diabetics to monitor glucose levels
throughout the day. While previous attempts by others to correlate saliva
glucose with blood glucose have been unsuccessful, the Company has had
encouraging preliminary results using the SalivaSac(R) device, as it appears
to exclude substances that interfere with accurate glucose measurements.
However, almost all development of the SalivaSac(R) has been suspended as of
December, 1998 due to a lack of funding and without additional funding the
Company will not be able to successfully develop the SalivaSac(R) for such
use. On August 15, 2000 the Company was issued United States Patent No.
6,102,872 for Glucose Detector and Method as a result of the SalivaSac(R)
research conducted earlier. In September, 1999 the Company received a SBIR
Phase I grant to research the use of the SalivaSac(R) technology for the
collection and measurement of homocysteine, a newly discovered marker with
potential application for use as a risk factor in heart disease. The Company
was not able to make any useful discoveries with this Phase I grant and has no
plans to file for a Phase II grant for the homocysteine application.

FUTURE OPERATING RESULTS
------------------------

As previously reported, the Company executed a Purchase Agreement with
Saigene. The Purchase Agreement, which is subject to stockholder approval,
will transfer the business and all assets of the Company's Seattle laboratory
operation to Saigene for a total consideration of $4,000,000. Saigene failed
to satisfy certain conditions relating to payments as required and defaulted
on the Purchase Agreement. Saigene requested a further extension to January
20, 2001 to



                                      15
<PAGE>



complete the Purchase Agreement.

In exchange for this extension, Saigene agreed to the following additional
terms. Saigene paid the Company $50,000 on May 22, 2000 and $75,000 on July
19, 2000 as part of the purchase price. Saigene paid $20,000 on each of August
28th, September 20th, October 20th, November 20th and December 20, 2000. One
half of each $20,000 payment will be credited toward the purchase price and
one-half of each payment will be consideration paid for the additional time
extension. Payments toward the purchase price will be credited against the
escrow payment required at the time of closing. All payments made according to
the Second Amendment will be forfeited by Saigene if they fail to make any of
the required payments, including the closing payments. Saigene and the Company
have further agreed that Saigene may extend the January 20, 2001 Closing Date
on a month-by-month basis by increasing the monthly payments to $30,000
beginning January 20, 2001. One-half of each such payment would be credited to
the purchase price and one-half would be consideration for the additional time
extension. The Company has the right to terminate the Purchase Agreement at
the end of any extension period by giving 20 days prior written notice.

Saigene failed to complete the Purchase Agreement on January 20, 2001 but has
elected to extend the Closing Date on a month-by-month basis having made all
required payments due through December 20, 2000 and all payments due from
January 20, 2001 through January 20, 2002.

There can be no assurance that Saigene will be able to complete the Purchase
Agreement as amended or consummate the transactions contemplated therein.
Failure to complete this transaction would likely return operational control
of the laboratory to the Company. While the laboratory would have less debt as
a result of the Second Amendment, the Company will not be financially capable
of maintaining the laboratory operation and there can be no assurance that
another buyer could be found in a timely manner. This could force the Company
to seek protection from creditors under the bankruptcy laws.

Even upon completion of the transaction with Saigene, the Company will still
have significant debts and claims that need to be settled. These include
amounts owed to various consultants, vendors and suppliers of the Company not
related to the Seattle laboratory operation of approximately $600,000;
deferred compensation to current and former employees of approximately
$800,000 (included in accrued liabilities and deferred compensation); accrued
dividends to preferred stockholders of approximately $785,000; and a potential
liability, disputed by the Company, of approximately $2.2 million related to
the OsteoPatch(TM) technology. The Company will attempt to settle these debts
with cash, stock, and technology assets. There can be no assurance that the
Company will be successful in these negotiations and may have to seek
protection from creditors under the bankruptcy laws. If the Company is
successful in settling the remaining debts, then the Company plans to pursue a
merger with another company as a means of providing some value to common
stockholders. There can be no assurance that the Company will be successful in
finding and negotiating a successful merger or that any such merger would
create value for the stockholders.

The landlord of the Company's previous office and laboratory space in Lake
Forest, California cancelled the lease. The landlord also obtained a judgment
against the Company from Orange County Superior Court for approximately
$150,000 related to the default on the lease. In addition, liabilities
continued to accrue at about $13,000 per month until the space was leased. The
total liability to the Company is estimated to be approximately $350,000. The
Company has been advised by Saigene that Saigene has purchased from the
landlord of the Lake Forest property, for the sum of $350,000, the rights to
all claims and judgments rendered against the Company related to its default
on the Lake Forest lease, subject to the sale of the Company's laboratory
assets to Saigene. However, it is unclear whether or not Saigene may re-assign
such rights to the landlord if the sale of the laboratory assets to Saigene is
not completed. In any event, Saigene, under the terms of the First Amendment,
has agreed that Saigene will be responsible for satisfaction of such judgment
and, therefore, the Company believes it would be entitled to seek recovery
from Saigene for any costs or liabilities as a result of Saigene's failure to
satisfy such claim. While the laboratory would have less debt as a result of
the Purchase Agreement, the Company will not be financially capable of
maintaining the laboratory operations and there can be no assurance that
another buyer could be found in a timely manner. This could force the Company
to seek protection from creditors under the bankruptcy laws.



                                      16
<PAGE>


The Minnesota Mining and Manufacturing Company (3M), as a party in possession
of secured property, has not informed the Company of its plans for the
Sudormed assets. This includes the SkinPatch(TM) technology rights, which are
part of the Company's OsteoPatch(TM) product. The Company had sought to
reestablish certain rights to this technology in order to create additional
value for the Company's other intellectual property related to the
OsteoPatch(TM). Without an agreement with 3M, the Company's OsteoPatch(TM)
assets may not have any value. The Company expensed all of these assets in
March 1999. In May 2000, 3M notified the Company that, in its capacity as a
secured party in possession of the Sudormed assets, it demands payment in full
of the $1.6 million plus accrued interest and fees due under the License
Agreement between the Company and Sudormed. The Company and 3M are seeking to
settle this claim. 3M has objected to the laboratory sale transaction that is
proceeding with Saigene. Although the Company disputes 3M's claim, 3M may seek
to enforce its rights through legal process. The Company is not certain of the
impact of 3M's demand on the proposed transaction with Saigene or what legal
rights may be asserted by 3M to protect its claim. If 3M should be successful
in blocking the proposed sale of the laboratory, or commences a legal action
against the Company, the Company may have no alternative than to seek
protection from creditors under the bankruptcy laws.

PART II  - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On May 10, 2001 a Final Judgment of Permanent Injunction was issued by the
United States District Court for the District of Columbia ordering the Company
to (a) file with the SEC, on or before June 29, 2001: (1) the Company's Annual
Report on Form 10-KSB for its fiscal year ended June 30, 2000; (2) the
Company's Quarterly Reports on Form 10-QSB for its quarters ended March 31,
September 30, and December 31, 2000; and (3) such other periodic reports which
may become due prior to the entry of the Final Judgment, and (b) file timely
and in proper form with the SEC accurate and complete information and reports
of the Company as are required to be filed under the securities laws. The
Company filed all such reports on June 29, 2001, and since that date has filed
all such subsequent reports by the required due dates. Accordingly, the
Company believes it is currently in compliance with the Final Judgment and it
intends to remain so in the future, failing which the Company might be subject
to sanctions from the SEC.

On September 24, 1997 the Company received from the former manufacturer of
SPINPRO(R) a demand for arbitration in connection with alleged breaches of the
contract relating to the manufacture of SPINPRO(R). The former manufacturer is
seeking damages of approximately $515,000. The Company does not believe that
the claims have any merit and believes that the ultimate outcome of this
proceeding will not have a material impact on the Company. The Company is
vigorously contesting such claims and has filed counterclaims against the
former manufacturer. The Company has also filed for arbitration against a
former vendor relating to SPINPRO(R), seeking damages for alleged breach of
contract with respect to the manufacture of molds for SPINPRO(R) parts. The
arbitration with this former vendor was settled on December 3, 2001 and the
Company received $20,000 in payment.

As previously reported, the landlord of the Company's office and laboratory
space in Lake Forest, California was proceeding against the Company to cancel
the lease. The landlord has obtained a judgment against the Company from
Orange County Superior Court for approximately $150,000 related to the default
on the lease. In addition, liabilities continued to accrue at about $13,000
per month until the space was leased. The total liability to the Company is
estimated to be approximately $350,000. The Company has been advised by
Saigene that Saigene has purchased from the landlord of the Lake Forest
property, for the sum of $350,000, the rights to all claims and judgments
rendered against the Company related to its default on the Lake Forest lease,
subject to the sale of the Company's laboratory assets to Saigene. However, it
is unclear whether or not Saigene may re-assign such rights to the landlord if
the sale of the laboratory assets to Saigene is not completed. In any event,
Saigene, under the terms of the Purchase Agreement, has agreed that Saigene
will be responsible for satisfaction of such judgment and, therefore, the
Company would be entitled to seek recovery from Saigene for any costs or
liabilities as a result of Saigene's failure to satisfy such claim.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS - Not Applicable

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable.

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



                                      17
<PAGE>



ITEM 5 - OTHER INFORMATION - Not Applicable.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

    (a)  Exhibits:

         None.

    (b) The following current reports on Form 8-K were filed during and
subsequent to the quarter ended December 31, 2001:

         None.

SIGNATURES

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

DATED:    February 15, 2002

\s\ Paul G. Kanan                            President, Chief Executive
-----------------------------------          Officer, Acting Principal Financial
Paul G. Kanan                                and Accounting Officer