<PAGE>

                     U.S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                   FORM 10-QSB


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

For the quarterly period ended      SEPTEMBER 30, 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)


                                  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 October 31, 2001 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..............................  5

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

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
           OF FINANCIAL CONDITION AND RESULTS OF
           OPERATIONS........................................................  9

PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS................................................... 15

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 15

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..................................... 15

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
           SECURITY HOLDERS.................................................. 15

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

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





                                       2


<PAGE>

                            PACIFIC BIOMETRICS, INC.

                      (A COMPANY IN THE DEVELOPMENT STAGE)
                           CONSOLIDATED BALANCE SHEET

                               SEPTEMBER 30, 2001

                                   (UNAUDITED)



                                     ASSETS

Current assets:
    Cash and cash equivalents                                      $    45,082
    Accounts receivable, net of allowance for doubtful
          accounts of $28,890                                          204,656
    Prepaid expenses and other                                          20,839
                                                                   -----------
          Total current assets                                         270,577

Property and equipment, net                                            103,325

Other assets:
    Restricted cash                                                     69,607
                                                                   -----------
          Total assets                                             $   443,509
                                                                   ===========


                      LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
    Notes payable to bank                                          $    12,473
    Notes payable to related parties                                   522,230
    Notes payable other                                                 19,817
    Accounts payable                                                   485,243
    Accrued liabilities                                                856,976
    Dividends payable                                                  723,828
    Deferred compensation                                              295,368
    Advances from customers                                            239,573
    Technology licenses payable                                      2,244,040
    Capital lease obligations-current portion                          441,213
                                                                   -----------
          Total current liabilities                                  5,840,761

Capital lease obligations - long term portion                           50,092
                                                                   -----------
          Total liabilities                                          5,890,853
                                                                   -----------

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                         13,122,624
    Deficit accumulated during the development stage               (23,624,536)
                                                                   -----------
          Total stockholders' deficit                               (5,447,344)
                                                                   -----------
          Total liabilities and stockholders' deficit              $   443,509
                                                                   ===========

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



                                        3

<PAGE>

                            PACIFIC BIOMETRICS, INC.

                      (A COMPANY IN THE DEVELOPMENT STAGE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
     AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 2001
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                               For the Period
                                                        Three Months Ended September 30        from Inception
                                                      ------------------------------------   (December 1992) to
                                                           2001                  2000         September 30, 2001
                                                      --------------         -------------    ------------------
<S>                                                    <C>                   <C>                <C>
Revenues                                                $ 372,562             $ 307,066          $ 12,651,016
                                                        ---------             ---------          ------------

Operating expenses:
    Laboratory expense and cost of goods sold             259,348               231,499             9,079,426
    Research and product development                        4,209                12,474             5,724,117
    Selling, general and administrative                   274,269               257,505            11,144,664
    Purchased in-process research and development               0                     0             6,373,884
    Amortization of intangible assets                           0                     0             1,616,565
                                                        ---------             ---------          ------------

          Total operating expenses                        537,826               501,478            33,938,656
                                                        ---------             ---------          ------------

Operating loss                                           (165,264)             (194,412)          (21,287,640)
                                                        ---------             ---------          ------------

Other income (expense):
    Interest expense                                      (23,648)              (21,121)             (857,836)
    Interest income                                           473                   654               326,001
    Write-off of intangible assets                              0                     0            (2,078,100)
    Grant and other income                                 66,259                27,097               273,039
                                                        ---------             ---------          ------------

           Total other income                              43,084                 6,630            (2,336,896)
                                                        ---------             ---------          ------------

Net loss                                                $(122,180)            $(187,782)         $(23,624,536)
                                                        =========             =========          ============

Preferred stock dividend accrued                          (62,000)              (62,000)
                                                        ---------             ---------

Net loss applicable to common stockholders              $(184,180)            $(249,782)
                                                        =========             =========

Basic and diluted loss per share                          $ (0.05)              $ (0.07)
                                                        =========             =========

Number of shares used in per-share calculation          3,810,171             3,810,171
                                                        =========             =========
</TABLE>


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



                                        4
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                      (A COMPANY IN THE DEVELOPMENT STAGE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

        FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 AND
       FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO SEPTEMBER 30, 2001

                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                       Three Months Ended           For the Period
                                                          September 30              from Inception
                                                  ----------------------------    (December 1992) to
                                                     2001               2000       September 30, 2001
                                                     ----               ----       ------------------
<S>                                               <C>               <C>            <C>
Cash used by operating activities                 $ (7,004)         $ (28,870)       $ (9,441,602)

Cash used by investing activities                        -                  -            (246,585)

Cash (used) provided by financing activities       (48,461)            10,282           9,733,269
                                                  --------          ---------        ------------

Net Change in cash and cash equivalents            (55,465)           (18,588)             45,082

Cash and cash equivalents, beginning of period     100,547             93,932                   -
                                                  --------          ---------        ------------

Cash and cash equivalents, end of period          $ 45,082          $  75,344        $     45,082
                                                  ========          =========        ============
</TABLE>


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








                                       5

<PAGE>


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc. ("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. 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.

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 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.


                                       6
<PAGE>


The SalivaSac(Registration Mark) 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 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

The Company's common stock equivalents are anti-dilutive for the three months
ended September 30, 2001 and 2000, and therefore are not included in the fully
diluted loss per share calculation for that period.

Net loss applicable to common stockholders includes $62,000 in cumulative
dividends on the convertible preferred stock for each of the three month periods
ended September 30, 2001 and 2000.

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.


                                       7
<PAGE>

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. 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 continue to accrue at about $13,000 per month until the
space is 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").

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 October 20, 2001.

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.


                                       8
<PAGE>

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 $725,000; 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 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 September 30, 2001, the Company had an accumulated deficit since inception
of $23,624,536 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.


                                       9
<PAGE>

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 October 20, 2001.

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 $725,000; 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.


                                       10
<PAGE>


RESULTS OF OPERATIONS:

<TABLE>
<CAPTION>
Comparison of the three month periods ended September 30, 2001 and 2000:
------------------------------------------------------------------------------------------------------------
     Rounded to Nearest             Three              Comments on increase or decrease from
      Thousand Dollars              Months                          Prior period
------------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>
Revenues
------------------------------------------
Ended 9/30/2001                      $373    Laboratory revenues increased due to increases in the size
------------------------------------------   and number of clinical trials for which the laboratory
Ended 9/30/2000                      $307    performed testing and consulting work. As previously
------------------------------------------   disclosed, the Company has entered into an agreement to sell
$ variance                            $66    the laboratory. Accordingly, assuming that the laboratory is
------------------------------------------   sold in fiscal 2002, laboratory revenues will no longer
% variance                            21%    contribute to the revenues of the Company subsequent to such
------------------------------------------   sale.

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

Laboratory expenses and cost of sales:
------------------------------------------
Ended 9/30/2001                      $259
------------------------------------------   Laboratory expenses and cost of sales have primarily
Ended 9/30/2000                      $231    increased as a result of increased salaries & related
------------------------------------------   costs, offset by a decrease in lab equipment depreciation.
$ variance                            $28
------------------------------------------
% variance                            12%
------------------------------------------

Research and product development:
------------------------------------------
Ended 9/30/2001                        $4    Research and development operations have been curtailed due
------------------------------------------   to the Company's severe financial problems.
Ended 9/30/2000                       $12
------------------------------------------
$ variance                           ($8)
------------------------------------------
% variance                           -67%
------------------------------------------

Selling, general and administration expenses:
------------------------------------------
Ended 9/30/2001                      $274
------------------------------------------   Selling, general and administrative expenses have increased
Ended 9/30/2000                      $258    due to several factors, primarily including increased
------------------------------------------   training, salaries and travel.
$ variance                            $16
------------------------------------------
% variance                             6%
------------------------------------------

Total other income (expense):
------------------------------------------
Ended 9/30/2001                       $43
------------------------------------------   The increase in net other income is primarily due to fees
Ended 9/30/2000                        $7    paid by Saigene in consideration of extending the deadline
------------------------------------------   for purchase of the laboratory and sublet rental income
$ variance                            $36    from Saigene to the laboratory.
------------------------------------------
% variance                           514%
------------------------------------------

Net loss:
------------------------------------------
Ended 9/30/2001                    ($122)
------------------------------------------   The reduction in the net loss is primarily attributable
Ended 9/30/2000                    ($188)    to increased revenue and a stable level of expenditures.
------------------------------------------
$ variance                            $66
------------------------------------------
% variance                            35%
------------------------------------------
</TABLE>


                                       11

<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
September 30, 2001 approximately $700,000 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 Company issued 93,024 warrants to the Bank as part of
this agreement. The Company has been factoring the majority of the accounts
receivable from laboratory operations to provide the Company with working
capital to meet laboratory operations obligations and to maintain minimal
corporate operations. 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. Amounts outstanding as of
September 30, 2001 were $12,473.



                                       12

<PAGE>


OPERATIONS

As of September 30, 2001, the Company had cash and cash equivalents of $45,082.
In addition, the Company's current liabilities exceeded its current assets.
During the three months ended September 30, 2001, the Company's cash and cash
equivalents decreased by $55,465 primarily due to repayments of bank borrowings.

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 September 30, 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 October 20, 2001. 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
(see Note 5 - Pending Transactions). 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.



                                       13
<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 October 20, 2001.

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 $725,000; 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.


                                       14

<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.

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 continue to accrue at about $13,000 per month
until the space is 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.



                                       15

<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 September 30, 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: November 15, 2001

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




                                       16