EX-10..4






PACIFIC BIOMETRICS, INC.




SECURITIES PURCHASE AGREEMENT




January 31, 2005




1




TABLE OF CONTENTS




Page




1. Agreement to Sell and Purchase



2. Fees and Warrant



3. Closing, Delivery and Payment.




3.1 Closing


3.2 Delivery



4. Representations and Warranties of the Company



	 	 	 	 	 	 	 	 	 
	4.1	 	Organization, Good Standing and Qualification	 	 	 	 
	4.2	 	Subsidiaries	 	 	 	 
	4.3	 	Capitalization; Voting Rights	 	 	 	 
	4.4	 	Authorization; Binding Obligations	 	 	 	 
	4.5	 	Liabilities	 	 	 	 
	4.6	 	Agreements; Action	 	 	 	 
	4.7	 	Obligations to Related Parties	 	 	 	 
	4.8
	 	Changes	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.9
	 	Title to Properties and Assets; Liens, Etc.	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.10
	 	Intellectual Property	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.11
	 	Compliance with Other Instruments	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.12
	 	Litigation	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.13
	 	Tax Returns and Payments	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.14
	 	Employees	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.15
	 	Registration Rights and Voting Rights	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.16
	 	Compliance with Laws; Permits	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.17
	 	Environmental and Safety Laws	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.18
	 	Valid Offering	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.19
	 	Full Disclosure	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.20
	 	Insurance	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.21
	 	SEC Reports	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.22
	 	Listing	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.23
	 	No Integrated Offering	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.24
	 	Stop Transfer	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.25
	 	Dilution	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	4.26
	 	Patriot Act	 	 	12	 
	 
	 	 	 	 	 	 	 	 







5. Representations and Warranties of the Purchaser



	 	 	 
	5.1

	 	No Shorting
	
 
	 	 
	5.2

	 	Requisite Power and Authority
	
 
	 	 
	5.3

	 	Investment Representations
	
 
	 	 
	5.4

	 	Purchaser Bears Economic Risk
	
 
	 	 
	5.5

	 	Acquisition for Own Account
	
 
	 	 
	5.6

	 	Purchaser Can Protect Its Interest
	
 
	 	 
	5.7

	 	Accredited Investor
	
 
	 	 
	5.8

	 	Legends
	
 
	 	 







6. Covenants of the Company



	 	 	 
	6.1

	 	Stop-Orders
	
 
	 	 
	6.2

	 	Listing
	
 
	 	 
	6.3

	 	Market Regulations
	
 
	 	 
	6.4

	 	Reporting Requirements
	
 
	 	 
	6.5

	 	Use of Funds
	
 
	 	 
	6.6

	 	Access to Facilities
	
 
	 	 
	6.7

	 	Taxes
	
 
	 	 
	6.8

	 	Insurance
	
 
	 	 
	6.9

	 	Intellectual Property
	
 
	 	 
	6.10

	 	Properties
	
 
	 	 
	6.11

	 	Confidentiality
	
 
	 	 
	6.12

	 	Required Approvals
	
 
	 	 
	6.13

	 	Reissuance of Securities
	
 
	 	 
	6.14

	 	Opinion
	
 
	 	 








6.15 Margin Stock..............................................................................19



7. Covenants of the Purchaser




7.1 Confidentiality


7.2 Non-Public Information



8. Covenants of the Company and Purchaser Regarding Indemnification




8.1 Company Indemnification


8.2 Purchaser’s Indemnification



9. Conversion of Convertible Note




9.1 Mechanics of Conversion



10. Registration Rights.



	 	 	 	 	 	 	 
	10.1

	 	 	 	 	 	Registration Rights Granted
	
 
	 	 	 	 	 	 
	
 
	 	 	10.2	 	 	Offering Restrictions
	
 
	 	 	 	 	 	 







11. Miscellaneous



	 	 	 
	11.1

	 	Governing Law
	
 
	 	 
	11.2

	 	Survival
	
 
	 	 
	11.3

	 	Successors
	
 
	 	 
	11.4

	 	Entire Agreement
	
 
	 	 
	11.5

	 	Severability
	
 
	 	 
	11.6

	 	Amendment and Waiver
	
 
	 	 
	11.7

	 	Delays or Omissions
	
 
	 	 
	11.8

	 	Notices
	
 
	 	 
	11.9

	 	Attorneys’ Fees
	
 
	 	 
	11.10

	 	Titles and Subtitles
	
 
	 	 
	11.11

	 	Facsimile Signatures; Counterparts
	
 
	 	 
	11.12

	 	Broker’s Fees
	
 
	 	 
	11.13

	 	Construction
	
 
	 	 







	 	 	 
	LIST OF EXHIBITS
	Form of Convertible Term Note

	 	Exhibit A
	 
	 	 
	Form of Warrant.

	 	Exhibit B
	 
	 	 
	Form of Opinion.

	 	Exhibit C
	 
	 	 
	Form of Escrow Agreement.

	 	Exhibit D







2




SECURITIES PURCHASE AGREEMENT




THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of January
31, 2005, by and between PACIFIC BIOMETRICS, INC., a Delaware corporation (the “Company”), and
Laurus Master Fund, Ltd., a Cayman Islands company (the “Purchaser”).



RECITALS




WHEREAS, the Company has authorized the sale to the Purchaser of a Convertible Term Note in
the aggregate principal amount of One Million Five Hundred Thousand ($1,500,000.00) (the “Note”),
which Note is convertible into shares of the Company’s common stock, $0.01 par value per share (the
“Common Stock”) at an initial fixed conversion price of $1.17 per share of Common Stock (“Fixed
Conversion Price”);



WHEREAS, the Company wishes to issue a warrant to the Purchaser to purchase up to 326,087
shares of the Company’s Common Stock (subject to adjustment as set forth therein) in connection
with Purchaser’s purchase of the Note;



WHEREAS, Purchaser desires to purchase the Note and the Warrant (as defined in Section 2) on
the terms and conditions set forth herein; and



WHEREAS, the Company desires to issue and sell the Note and Warrant to Purchaser on the terms
and conditions set forth herein.



AGREEMENT




NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises,
representations, warranties and covenants hereinafter set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:



1. Agreement to Sell and Purchase. Pursuant to the terms and conditions set forth in
this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the
Purchaser, and the Purchaser hereby agrees to purchase from the Company, a Note in the aggregate
principal amount of $1,500,000.00 convertible in accordance with the terms thereof into shares of
the Company’s Common Stock in accordance with the terms of the Note and this Agreement. The offer
and sale of the Note being purchased on the Closing Date shall be known as the “Offering.” A form
of the Note is annexed hereto as Exhibit A. The Note will mature on the Maturity Date (as defined
in the Note). Collectively, the Note and Warrant and Common Stock issuable in payment of the Note,
upon conversion of the Note and upon exercise of the Warrant are referred to as the “Securities.”




2. Fees and Warrant. On the Closing Date:




(a) The Company will issue and deliver to the Purchaser a Warrant to purchase up to
326,087 shares of Common Stock in connection with the Offering (the “Warrant”) pursuant to
Section 1 hereof. The Warrant must be delivered on the Closing Date. A form of Warrant is
annexed hereto as Exhibit B. All the representations, covenants, warranties, undertakings,
and indemnification, and other rights made or granted to or for the benefit of the Purchaser
by the Company are hereby also made and granted as of the date hereof in respect of the
Warrant and shares of the Company’s Common Stock issuable upon exercise of the Warrant (the
“Warrant Shares”).




(b) Subject to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
Management, LLC, the manager of the Purchaser, a closing payment in an amount equal to three
and one-half percent (3.50%) of the aggregate principal amount of the Note. The foregoing
fee is referred to herein as the “Closing Payment.”




(c) The Company shall reimburse the Purchaser for its reasonable expenses including
legal fees and expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Related Agreements (as hereinafter defined), and expenses incurred in
connection with the Purchaser’s due diligence review of the Company and its Subsidiaries (as
defined in Section 6.8) and all related matters. Amounts required to be paid under this
Section 2(c) will be paid on the Closing Date and shall be $10,000.00 for such expenses
referred to in this Section 2(c).




(d) The Closing Payment and the expenses referred to in the preceding clause (c) (net
of deposits previously paid by the Company) shall be paid at closing out of funds held
pursuant to a Funds Escrow Agreement of even date herewith among the Company, Purchaser, and
an Escrow Agent in the form attached hereto as Exhibit C (the “Funds Escrow Agreement”) and
a disbursement letter (the “Disbursement Letter”).




3. Closing, Delivery and Payment.



3.1 Closing. Subject to the terms and conditions herein, the closing of the
transactions contemplated hereby (the “Closing”), shall take place on the date hereof, at such time
or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as
the “Closing Date”).



3.2 Delivery. Pursuant to the Funds Escrow Agreement, at the Closing on the Closing
Date, the Company will deliver to the Purchaser, among other things, a Note in the form attached as
Exhibit A representing the aggregate principal amount of $1,500,000.00 and a Warrant in the form
attached as Exhibit B in the Purchaser’s name representing 326,087 Warrant Shares and the
Purchaser will deliver to the Company, among other things, the amounts set forth in the
Disbursement Letter by certified funds or wire transfer of immediately available funds as set
forth in the Disbursement Letter.



4. Representations and Warranties of the Company. The Company hereby represents and
warrants to the Purchaser as follows (which representations and warranties are qualified by the
information contained in the Company’s filings under either the Securities Exchange Act of 1934 or
the Securities Act of 1933, (each as amended) (collectively, the “Exchange Act Filings”), copies of
which have been made available to the Purchaser at www.sec.gov).



4.1 Organization, Good Standing and Qualification. Each of the Company and each of
its Subsidiaries is a corporation,, duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of the Company and each of its Subsidiaries has the
corporate power and authority (a) own and operate its properties and assets, (b) to execute and
deliver (to the extent it is a party thereto) (i) this Agreement, (ii) the Note and the Warrant to
be issued in connection with this Agreement, (iii) the Master Security Agreement dated as of the
date hereof between the Company, certain Subsidiaries of the Company and the Purchaser (as amended,
modified or supplemented from time to time, the “Master Security Agreement”), (iv) the Registration
Rights Agreement relating to the Securities dated as of the date hereof between the Company and the
Purchaser, (v) the Subsidiary Guaranty dated as of the date hereof made by certain Subsidiaries of
the Company (as amended, modified or supplemented from time to time, the “Subsidiary Guaranty”),
(vi) the Stock Pledge Agreement dated as of the date hereof among the Company, certain Subsidiaries
of the Company and the Purchaser (as amended, modified or supplemented from time to time, the
“Stock Pledge Agreement”), (vii) the Escrow Agreement dated as of the date hereof among the
Company, the Purchaser and the escrow agent referred to therein and (viii) all other agreements
related to this Agreement and the Note and referred to herein (the preceding clauses (ii) through
(viii), collectively, the “Related Agreements”) and (c) to carry out the provisions of this
Agreement and the Related Agreements and to carry on its respective business as presently
conducted. The Company has the corporate power and authority to issue and sell the Note and the
shares of Common Stock issuable upon conversion of the Note (the “Note Shares”), to issue and sell
the Warrant and the Warrant Shares. Each of the Company and each of its Subsidiaries is duly
qualified and is authorized to do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its properties (both owned and leased)
makes such qualification necessary, except for those jurisdictions in which failure to do so has
not, or could not reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of the Company and it Subsidiaries, taken individually and as a
whole (a “Material Adverse Effect”).



4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the direct
owner of such Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2. For
the purpose of this Agreement, a “Subsidiary” of any person or entity means (i) a
corporation or other entity whose shares of stock or other ownership interests having ordinary
voting power (other than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such corporation, or other
persons or entities performing similar functions for such person or entity, are owned, directly or
indirectly, by such person or entity or (ii) a corporation or other entity in which such person or
entity owns, directly or indirectly, more than 50% of the equity interests at such time.




4.3 Capitalization; Voting Rights.




(a) The authorized capital stock of the Company, as of the date hereof consists of
35,000,000 shares, of which 30,000,000 are shares of Common Stock, par value $0.01 per
share, 13,310,622 shares of which were issued and outstanding on January 25, 2005, and
5,000,000 are shares of preferred stock, par value $0.01 per share of which 1,550,000 shares
are designated as Series A convertible preferred stock all of which are issued and
outstanding) and 1,666,667 shares are designated Series B convertible preferred stock (no
 shares of which are issued and outstanding). The authorized capital stock of each
Subsidiary of the Company is set forth on Schedule 4.3.




(b) Except as disclosed on Schedule 4.3 or in the Exchange Act Filings, other than:
(i) the shares reserved for issuance under the Company’s stock incentive plans; and (ii)
 shares which may be granted pursuant to this Agreement and the Related Agreements, there are
no outstanding options, warrants, rights (including conversion or preemptive rights and
rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of
any kind for the purchase or acquisition from the Company of any of its securities. Except
as disclosed on Schedule 4.3, neither the offer, issuance or sale of any of the Note or the
Warrant, or the issuance of any of the Note Shares or Warrant Shares, nor the consummation
of any transaction contemplated hereby will result in a change in the price or number of any
securities of the Company outstanding, under anti-dilution or other similar provisions
contained in or affecting any such securities.




(c) All issued and outstanding shares of the Company’s Common Stock: (i) have been
duly authorized and validly issued and are fully paid and nonassessable; and (ii) were
issued in compliance with all applicable state and federal laws concerning the issuance of
securities.




(d) The rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Company’s Certificate of Incorporation, as amended through the
date hereof (the “Charter”). The Note Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this Agreement and
the Company’s Charter, the Securities will be validly issued, fully paid and nonassessable,
and will be free of any liens or encumbrances; provided, however, that the Securities may be
subject to restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.



4.4 Authorization; Binding Obligations. All corporate action on the part of the
Company and each of its Subsidiaries (including the respective officers and directors) necessary
for the authorization of this Agreement and the Related Agreements, the performance of all
obligations of the Company and its Subsidiaries hereunder and under the other Related Agreements at
the Closing and, the authorization, sale, issuance and delivery of the Note and Warrant has been
taken or will be taken prior to the Closing. This Agreement and the Related Agreements, when
executed and delivered and to the extent it is a party thereto, will be valid and binding
obligations of each of the Company and each of its Subsidiaries, enforceable against each such
person in accordance with their terms, except:




(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights; and




(b) general principles of equity that restrict the availability of equitable or legal
remedies.



The sale of the Note and the subsequent conversion of the Note into Note Shares are not and will
not be subject to any preemptive rights or rights of first refusal that have not been properly
waived or complied with. The issuance of the Warrant and the subsequent exercise of the Warrant for
Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal
that have not been properly waived or complied with.



4.5 Liabilities. Neither the Company nor any of its Subsidiaries has any known
contingent liabilities, except current liabilities incurred in the ordinary course of business and
liabilities disclosed in any Exchange Act Filings, and except as would not have a Material Adverse
Effect.



4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as disclosed in any
Exchange Act Filings:




(a) there are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company or any of its
Subsidiaries is a party or by which it is bound which may involve: (i) obligations
(contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than
obligations of, or payments to, the Company arising from purchase or sale agreements entered
into in the ordinary course of business); or (ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to or from the Company (other than
licenses arising from the purchase of “off the shelf” or other standard products); or (iii)
provisions restricting the development, manufacture or distribution of the Company’s
products or services; or (iv) indemnification by the Company with respect to infringements
of proprietary rights.




(b) Since March 31, 2004, neither the Company nor any of its Subsidiaries has: (i)
declared or paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock; (ii) incurred any indebtedness for money
borrowed or any other liabilities (other than ordinary course obligations and expenses
incurred in connection with the transactions contemplated by this Agreement) individually in
excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than
$50,000, in excess of $100,000 in the aggregate; (iii) made any loans or advances to any
person not in excess, individually or in the aggregate, of $100,000, other than ordinary
course advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of
its assets or rights, other than the sale of its inventory in the ordinary course of
business (other than inter-company transfers set forth on Schedule 4.6(b)(iv) hereto).




(c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed transactions involving the
same person or entity (including persons or entities the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.



4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7, there are no
obligations of the Company or any of its Subsidiaries to officers, directors, stockholders or
employees of the Company or any of its Subsidiaries other than:




(a) for payment of salary for services rendered and for bonus payments;




(b) reimbursement for reasonable expenses incurred on behalf of the Company and its
Subsidiaries;




(c) for other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan approved by the
Board of Directors of the Company); and




(d) obligations listed in the Company’s financial statements or disclosed in any of its
Exchange Act Filings.



Except as described above or set forth on Schedule 4.7, none of the officers, directors or, to the
best of the Company’s knowledge, key employees or stockholders of the Company or any members of
their immediate families, are indebted to the Company, individually or in the aggregate, in excess
of $50,000 or have any direct or indirect ownership interest in any firm or corporation with which
the Company is affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, other than passive investments in publicly traded
companies (representing less than one percent (1%) of such company) which may compete with the
Company. Except as described above, no officer, director or to the best of the Company’s knowledge
any stockholder, or any member of their immediate families, is, directly or indirectly, interested
in any material contract with the Company and no agreements, understandings or proposed
transactions are contemplated between the Company and any such person. Except as set forth on
Schedule 4.7 or disclosed in its Exchange Act Filings, the Company is not a guarantor or indemnitor
of any indebtedness of any other person, firm or corporation.



4.8 Changes. Since March 31, 2004, except as disclosed in any Exchange Act Filing or
in any Schedule to this Agreement or to any of the Related Agreements, there has not been:




(a) any change in the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company or any of its Subsidiaries,
which individually or in the aggregate has had, or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;




(b) any resignation or termination of any officer, key employee or group of employees
of the Company or any of its Subsidiaries;




(c) any material change, except in the ordinary course of business, in the contingent
obligations of the Company or any of its Subsidiaries by way of guaranty, endorsement,
indemnity, warranty or otherwise;




(d) any damage, destruction or loss, whether or not covered by insurance, has had, or
could reasonably be expected to have, individually or in the aggregate, a Material Adverse
Effect;




(e) any waiver by the Company or any of its Subsidiaries of a valuable right or of a
material debt owed to it;




(f) any direct or indirect loans made by the Company or any of its Subsidiaries to any
stockholder, employee, officer or director of the Company or any of its Subsidiaries, other
than advances made in the ordinary course of business;




(g) any material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder of the Company or any of its Subsidiaries;




(h) any declaration or payment of any dividend or other distribution of the assets of
the Company or any of its Subsidiaries;




(i) any labor organization activity related to the Company or any of its Subsidiaries;




(j) any debt, obligation or liability incurred, assumed or guaranteed by the Company or
any of its Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;




(k) any sale, assignment or transfer of any patents, trademarks, copyrights, trade
secrets or other intangible assets owned by the Company or any of its Subsidiaries (other
than inter-company transfers set forth on Schedule 4.6(b)(iv) hereof);




(l) any change in any material agreement to which the Company or any of its
Subsidiaries is a party or by which either the Company or any of its Subsidiaries is bound
which either individually or in the aggregate has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;




(m) any other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect; or




(n) any arrangement or commitment by the Company or any of its Subsidiaries to do any
of the acts described in subsection (a) through (m) above.



4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule 4.9,
each of the Company and each of its Subsidiaries has good and marketable title to its owned
properties and assets, and valid and enforceable title to its leasehold interests in its leased
property, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other
than:




(a) Statutory landlord liens and liens those resulting from taxes which have not yet
become delinquent;




(b) minor liens and encumbrances which do not materially detract from the value of the
property subject thereto or materially impair the operations of the Company or any of its
Subsidiaries;




(c) those that have otherwise arisen in the ordinary course of business; and




(d) liens in favor of the Purchaser.



All facilities, machinery, equipment, fixtures, vehicles and other personal properties owned,
leased or used by the Company and its Subsidiaries are in good operating condition and repair
(ordinary wear and tear excepted) and are reasonably fit and usable for the purposes for which they
are being used. Except as set forth on Schedule 4.9, the Company and its Subsidiaries are in
compliance with all material terms of each lease to which it is a party or is otherwise bound.




4.10 Intellectual Property.




(a) Each of the Company and each of its Subsidiaries owns or possesses sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes necessary for its business
as now conducted and to the Company’s knowledge, as presently proposed to be conducted (the
“Intellectual Property”), without any known infringement of the rights of others. There are
no outstanding options, licenses or agreements of any kind relating to the foregoing
proprietary rights, nor is the Company or any of its Subsidiaries bound by or a party to any
options, licenses or agreements of any kind with respect to the patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and other proprietary
rights and processes of any other person or entity other than such licenses or agreements
arising from the purchase of “off the shelf” or standard products.




(b) Neither the Company nor any of its Subsidiaries has received any communications
alleging that the Company or any of its Subsidiaries has violated any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other proprietary
rights of any other person or entity, nor is the Company or any of its Subsidiaries aware of
any basis therefor.




(c) The Company does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to their
employment by the Company or any of its Subsidiaries, except for inventions, trade secrets
or proprietary information that have been rightfully assigned to the Company or any of its
Subsidiaries.



4.11 Compliance with Other Instruments. Neither the Company nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or Bylaws, or (y) of any
provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which it
is party or by which it is bound or of any judgment, decree, order or writ, which violation or
default, in the case of this clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution, delivery and
performance of and compliance with this Agreement and the Related Agreements to which it is a
party, and the issuance and sale of the Note by the Company and the other Securities by the Company
each pursuant hereto and thereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or constitute a default under
any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or
charge upon any of the properties or assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization
or approval applicable to the Company, its business or operations or any of its assets or
properties.



4.12 Litigation. There is no action, suit, proceeding or investigation pending or, to
the Company’s knowledge, currently threatened against the Company or any of its Subsidiaries that
prevents the Company or any of its Subsidiaries from entering into this Agreement or the other
Related Agreements, or from consummating the transactions contemplated hereby or thereby, or which
has had, or could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect or any change in the current equity ownership of the Company or any of its
Subsidiaries, nor is the Company aware that there is any basis to assert any of the foregoing.
Except as set forth in the Exchange Act filings, neither the Company nor any of its Subsidiaries is
a party or subject to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company or any of its Subsidiaries currently pending or which the Company or
any of its Subsidiaries intends to initiate.



4.13 Tax Returns and Payments. Except as set forth on Schedule 4.13 hereto, each of
the Company and each of its Subsidiaries has timely filed all tax returns (federal, state and
local) required to be filed by it. All taxes shown to be due and payable on such returns, any
assessments imposed, and all other taxes due and payable by the Company or any of its Subsidiaries
on or before the Closing, have been paid or will be paid prior to the time they become delinquent.
Except as set forth on Schedule 4.13, neither the Company nor any of its Subsidiaries has been
advised:




(a) that any of its returns, federal, state or other, have been or are being audited as
of the date hereof; or




(b) of any deficiency in assessment or proposed judgment to its federal, state or other
taxes.



The Company has no knowledge of any liability of any tax to be imposed upon its properties or
assets as of the date of this Agreement that is not adequately provided for.



4.14 Employees. Neither the Company nor any of its Subsidiaries has any collective
bargaining agreements with any of its employees. There is no labor union organizing activity
pending or, to the Company’s knowledge, threatened with respect to the Company or any of its
Subsidiaries. Except as disclosed in the Exchange Act Filings, neither the Company nor any of its
Subsidiaries is a party to or bound by any currently effective employment contract, deferred
compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or
other employee compensation plan or agreement. To the Company’s knowledge, no employee of the
Company or any of its Subsidiaries, nor any consultant with whom the Company or any of its
Subsidiaries has contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such individual to be
employed by, or to contract with, the Company or any of its Subsidiaries because of the nature of
the business to be conducted by the Company or any of its Subsidiaries; and to the Company’s
knowledge the continued employment by the Company or any of its Subsidiaries of its present
employees, and the performance of the Company’s and its Subsidiaries’ contracts with its
independent contractors, will not result in any such violation. Neither the Company nor any of its
Subsidiaries is aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with their duties to
the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has
received any notice alleging that any such violation has occurred. Except for employees who have a
current effective employment agreement with the Company or any of its Subsidiaries, no employee of
the Company or any of its Subsidiaries has been granted the right to continued employment by the
Company or any of its Subsidiaries or to any material compensation following termination of
employment with the Company or any of its Subsidiaries. The Company is not aware that any officer,
key employee or group of employees intends to terminate his, her or their employment with the
Company or any of its Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of employees.



4.15 Registration Rights and Voting Rights. Except as set forth on Schedule 4.15 or
except as disclosed in Exchange Act Filings, neither the Company nor any of its Subsidiaries is
presently under any obligation, and neither the Company nor any of its Subsidiaries has granted any
rights, to register any of the Company’s or its Subsidiaries’ presently outstanding securities or
any of its securities that may hereafter be issued. Except as set forth on Schedule 4.15 or except
as disclosed in Exchange Act Filings, to the Company’s knowledge, no stockholder of the Company or
any of its Subsidiaries has entered into any agreement with respect to the voting of equity
securities of the Company or any of its Subsidiaries.



4.16 Compliance with Laws; Permits. Neither the Company nor any of its Subsidiaries
is in violation of any applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of the conduct of its
business or the ownership of its properties which has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained and no registrations
or declarations are required to be filed in connection with the execution and delivery of this
Agreement or any other Related Agreement and the issuance of any of the Securities, except such as
has been duly and validly obtained or filed, or with respect to any filings that must be made after
the Closing, as will be filed in a timely manner. Each of the Company and its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.



4.17 Environmental and Safety Laws. Neither the Company nor any of its Subsidiaries
has received notice of any violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material expenditures are
or will be required in order to comply with any such existing statute, law or regulation. Except as
set forth on Schedule 4.17, no Hazardous Materials (as defined below) are used or have been used,
stored, or disposed of by the Company or any of its Subsidiaries (except as would not have a
Material Adverse Effect) or, to the Company’s knowledge, by any other person or entity on any
property owned, leased or used by the Company or any of its Subsidiaries. For the purposes of the
preceding sentence, “Hazardous Materials” shall mean:




(a) materials which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that govern the
existence and/or remedy of contamination on property, the protection of the environment from
contamination, the control of hazardous wastes, or other activities involving hazardous
substances, including building materials; or




(b) any petroleum products or nuclear materials.



4.18 Valid Offering. Assuming the accuracy of the representations and warranties of
the Purchaser contained in this Agreement, the offer, sale and issuance of the Securities will be
exempt from the registration requirements of the Securities Act of 1933, as amended (the
“Securities Act”), and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of all applicable state
securities laws.



4.19 Full Disclosure. Each of the Company and each of its Subsidiaries has provided
the Purchaser with all information requested by the Purchaser in connection with its decision to
purchase the Note and Warrant. Neither this Agreement, the Related Agreements, the exhibits and
schedules hereto and thereto nor any other document delivered by the Company or any of its
Subsidiaries to Purchaser or its attorneys or agents in connection herewith or therewith or with
the transactions contemplated hereby or thereby, contain any untrue statement of a material fact
nor omit to state a material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to the Purchaser by the Company or any of its Subsidiaries
were based on the Company’s and its Subsidiaries’ experience in the industry and on assumptions of
fact and opinion as to future events which the Company or any of its Subsidiaries, at the date of
the issuance of such projections or estimates, believed to be reasonable.



4.20 Insurance. Each of the Company and each of its Subsidiaries has general
commercial, fire and casualty insurance policies with coverages which the Company believes are
adequate.



4.21 SEC Reports. Except as set forth on Schedule 4.21 or as disclosed in its
Exchange Act Filings, the Company has filed all proxy statements, reports and other documents
required to be filed by it under the Securities Exchange Act 1934, as amended (the “Exchange Act”).
The Company has made available to the Purchaser at www.sec.gov copies of: (i) its Annual Report
on Form 10-KSB for its fiscal years ended June 30, 2004; and (ii) its Quarterly Report on Form
10-QSB for its fiscal quarter ended September 30, 2004, and (iii) the Form 8-K filings which it has
made during the fiscal year 2005 to date (collectively, the “SEC Reports”). Except as set forth on
Schedule 4.21, each SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any
untrue statement of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the circumstances under which they
were made, not misleading.



4.22 Trading. The Company’s Common Stock is traded on the NASD Over-the-Counter
Market (“OTC BB”) and satisfies all requirements for the continuation of such trading . The
Company has not received any notice that its Common Stock will not be eligible to trade on the
OTC:BB or that its Common Stock does not meet all requirements for the continuation of such
trading.



4.23 No Integrated Offering. Neither the Company, nor any of its Subsidiaries or
affiliates, nor any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security under circumstances
that would cause the offering of the Securities pursuant to this Agreement or any of the Related
Agreements to be integrated with prior offerings by the Company for purposes of the Securities Act
which would prevent the Company from selling the Securities pursuant to Rule 506 under the
Securities Act, nor will the Company or any of its affiliates or Subsidiaries take any action or
steps that would cause the offering of the Securities to be integrated with other offerings.



4.24 Stop Transfer. The Securities are restricted securities as of the date of this
Agreement. Neither the Company nor any of its Subsidiaries will issue any stop transfer order or
other order impeding the sale and delivery of any of the Securities at such time as the Securities
are registered for public sale or an exemption from registration is available, except as required
by state and federal securities laws or pursuant to the Registration Rights Agreement.



4.25 Dilution. The Company specifically acknowledges that its obligation to issue the
shares of Common Stock upon conversion of the Note and exercise of the Warrant is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.



4.26 Patriot Act. The Company certifies that, to the best of Company’s knowledge,
neither the Company nor any of its Subsidiaries has been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order 13224. The Company hereby
acknowledges that the Purchaser seeks to comply with all applicable laws concerning money
laundering and related activities. In furtherance of those efforts, the Company hereby represents,
warrants and agrees that: (i) none of the cash or property that the Company or any of its
Subsidiaries will pay or will contribute to the Purchaser has been or shall be derived from, or
related to, any activity that is deemed criminal under United States law; and (ii) no contribution
or payment by the Company or any of its Subsidiaries to the Purchaser, to the extent that they are
within the Company’s and/or its Subsidiaries’ control shall cause the Purchaser to be in violation
of the United States Bank Secrecy Act, the United States International Money Laundering Control Act
of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001. The Company shall promptly notify the Purchaser if any of these representations ceases
to be true and accurate regarding the Company or any of its Subsidiaries. The Company agrees to
provide the Purchaser any additional information regarding the Company or any of its Subsidiaries
that the Purchaser deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Company understands and agrees that if at
any time it is discovered that any of the foregoing representations are incorrect, or if otherwise
required by applicable law or regulation related to money laundering similar activities, the
Purchaser may undertake appropriate actions to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of the Purchaser’s investment in the
Company. The Company further understands that the Purchaser may, pursuant to a court order,
release confidential information about the Company and its Subsidiaries and, if applicable, any
underlying beneficial owners, to proper authorities if the Purchaser, in its sole discretion,
determines that it is required under relevant rules and regulations under the laws set forth in
subsection (ii) above provided that the Purchaser shall first provide the Company with notice of
such court order and an opportunity to seek a protective order.



5. Representations and Warranties of the Purchaser. The Purchaser hereby represents
and warrants to the Company as follows (such representations and warranties do not lessen or
obviate the representations and warranties of the Company set forth in this Agreement):



5.1 No Shorting. The Purchaser or any of its affiliates and investment partners has
not, will not and will not cause any person or entity, directly or indirectly, to engage in “short
sales” of the Company’s Common Stock as long as the Note shall be outstanding.



5.2 Requisite Power and Authority. The Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this Agreement and the
Related Agreements and to carry out their provisions. All corporate action on Purchaser’s part
required for the lawful execution and delivery of this Agreement and the Related Agreements have
been or will be effectively taken prior to the Closing. Upon their execution and delivery, this
Agreement and the Related Agreements will be valid and binding obligations of Purchaser,
enforceable in accordance with their terms, except:




(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights; and




(b) as limited by general principles of equity that restrict the availability of
equitable and legal remedies.



5.3 Investment Representations. Purchaser understands that the Securities are being
offered and sold pursuant to an exemption from registration contained in the Securities Act based
in part upon Purchaser’s representations contained in the Agreement, including, without limitation,
that the Purchaser is an “accredited investor” within the meaning of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”). The Purchaser confirms that it has
received or has had full access to all the information it considers necessary or appropriate to
make an informed investment decision with respect to the Note and the Warrant to be purchased by it
under this Agreement and the Note Shares and the Warrant Shares acquired by it upon the conversion
of or payment on the Note and the exercise of the Warrant, respectively. The Purchaser further
confirms that it has had an opportunity to ask questions and receive answers from the Company
regarding the Company’s and its Subsidiaries’ business, management and financial affairs and the
terms and conditions of the Offering, the Note, the Warrant and the Securities and to obtain
additional information (to the extent the Company possessed such information or could acquire it
without unreasonable effort or expense) necessary to verify any information furnished to the
Purchaser or to which the Purchaser had access.



5.4 Purchaser Bears Economic Risk. The Purchaser has substantial experience in
evaluating and investing in private placement transactions of securities in companies similar to
the Company so that it is capable of evaluating the merits and risks of its investment in the
Company and has the capacity to protect its own interests. The Purchaser must bear the economic
risk of this investment until the Securities are sold pursuant to: (i) an effective registration
statement under the Securities Act; or (ii) an exemption from registration is available with
respect to such sale.



5.5 Acquisition for Own Account. The Purchaser is acquiring the Note and Warrant and
the Note Shares and the Warrant Shares for the Purchaser’s own account for investment only, and not
as a nominee or agent and not with a view towards or for resale in connection with their
distribution.



5.6 Purchaser Can Protect Its Interest. The Purchaser represents that by reason of
its, or of its management’s, business and financial experience, the Purchaser has the capacity to
evaluate the merits and risks of its investment in the Note, the Warrant and the Securities and to
protect its own interests in connection with the transactions contemplated in this Agreement and
the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in
connection with the transactions contemplated in the Agreement or the Related Agreements.



5.7 Accredited Investor. Purchaser represents that it is an accredited investor
within the meaning of Regulation D under the Securities Act. Purchaser’s principal place of
business is in the State of New York.




5.8 Legends.




(a) The Note shall bear substantially the following legend:



“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PACIFIC BIOMETRICS, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED.”




(b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as
hereinafter defined), shall bear a legend which shall be in substantially the following form
until such shares are covered by an effective registration statement filed with the SEC:



“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PACIFIC BIOMETRICS, INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.”




(c) The Warrant shall bear substantially the following legend:



“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER
SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PACIFIC BIOMETRICS, INC. THAT SUCH REGISTRATION
IS NOT REQUIRED.”



5.9 Patriot Act. Purchaser certifies that, to the best of
Purchaser’s ’s knowledge, the Purchaser has not been designated, and is not
owned or controlled, by a “suspected terrorist” as defined in Executive
Order 13224. The Purchaser hereby acknowledges that the Purchaser and the
Company seek to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, the Purchaser
hereby represents, warrants and agrees that: (i) none of the cash or
property that the Purchaser will pay or will contribute to the Company has
been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no contribution or payment by the
Purchaser to the Company to the extent that they are within the Purchaser’s
control shall cause the Purchaser or the Company to be in violation of the
United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Purchaser
shall promptly notify the Company if any of these representations ceases to
be true and accurate. The Purchaser agrees to provide the Company any
additional information regarding the Purchaser that the Company deems
necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Purchaser
understands and agrees that if at any time it is discovered that any of the
foregoing representations are incorrect, or if otherwise required by
applicable law or regulation related to money laundering similar activities,
the Company may undertake appropriate actions to ensure compliance with
applicable law or regulation, including but not limited to segregation
and/or redemption of the Purchaser’s investment in the Company. The
Purchaser further understands that the Purchaser may, pursuant to a court
order, release confidential information about the Purchaser and, if
applicable, any underlying beneficial owners, to proper authorities if the
Company , in its sole discretion, determines that it is required under
relevant rules and regulations under the laws set forth in subsection (ii)
above provided that the Company shall first provide the Purchaser with
notice of such court order and an opportunity to seek a protective order.



6. Covenants of the Company. The Company covenants and agrees with the Purchaser as
follows:



6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it receives
notice of issuance by the Securities and Exchange Commission (the “SEC”), any state securities
commission or any other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Company, or of the suspension of the qualification
of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of
any proceeding for any such purpose.



6.2 Trading . The Company shall maintain the trading of its Common Stock issuable
upon conversion of the Note and upon the exercise of the Warrant on the OTC:BB (the “Principal
Market”) upon which shares of Common Stock are traded . The Company will maintain the trading of
its Common Stock on the Principal Market, and will comply in all material respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of the National
Association of Securities Dealers (“NASD”) and such exchanges, as applicable.



6.3 Market Regulations. The Company shall notify the SEC, NASD and applicable state
authorities, in accordance with their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid issuance of the
Securities to the Purchaser and promptly provide copies thereof to the Purchaser.



6.4 Reporting Requirements. The Company will timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from terminating its status as an
issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the
rules or regulations thereunder would permit such termination.



6.5 Use of Funds. The Company agrees that it will use the proceeds of the sale of the
Note and the Warrant for general working capital purposes only.



6.6 Access to Facilities. Each of the Company and each of its Subsidiaries will permit
any representatives designated by the Purchaser (or any successor of the Purchaser), upon
reasonable notice and during normal business hours, at such person’s expense and accompanied by a
representative of the Company, to:




(a) visit and inspect any of the properties of the Company or any of its Subsidiaries;




(b) examine the corporate and financial records of the Company or any of its
Subsidiaries (unless such examination is not permitted by federal, state or local law or by
contract) and make copies thereof or extracts therefrom; and




(c) discuss the affairs, finances and accounts of the Company or any of its
Subsidiaries with the directors, officers and independent accountants of the Company or any
of its Subsidiaries.



Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries will provide any
material, non-public information to the Purchaser unless the Purchaser signs a confidentiality
agreement and otherwise complies with Regulation FD, under the federal securities laws.



6.7 Taxes. Each of the Company and each of its Subsidiaries will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon the income, profits, property or business of the
Company and its Subsidiaries; provided, however, that any such tax, assessment, charge or levy need
not be paid if the validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company and/or such Subsidiary shall have set aside on its books adequate
reserves with respect thereto, and provided, further, that the Company and its Subsidiaries will
pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings
to foreclose any lien which may have attached as security therefor.



6.8 Insurance. Each of the Company and its Subsidiaries will keep its assets which
are of an insurable character insured by financially sound and reputable insurers against loss or
damage by fire, explosion and other risks customarily insured against by companies in similar
business similarly situated as the Company and its Subsidiaries in such amounts as the Company
shall reasonably determine appropriate; and the Company and its Subsidiaries will maintain, with
financially sound and reputable insurers, insurance against other hazards and risks and liability
to persons and property to the extent and in the manner which the Company reasonably believes is
customary for companies in similar business similarly situated as the Company and its Subsidiaries
and to the extent available on commercially reasonable terms. The Company, and each of its
Subsidiaries will jointly and severally bear the full risk of loss from any loss of any nature
whatsoever with respect to the assets pledged to the Purchaser as security for its obligations
hereunder and under the Related Agreements. At the Company’s and each of its Subsidiaries’ joint
and several cost and expense in amounts and with carriers reasonably acceptable to Purchaser, the
Company and each of its Subsidiaries shall (i) keep all its insurable properties and properties in
which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the Company’s or the respective
Subsidiary’s including business interruption insurance; (ii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered by others; (iii)
maintain all such worker’s compensation or similar insurance as may be required under the laws of
any state or jurisdiction in which the Company or the respective Subsidiary is engaged in business;
and (v) furnish Purchaser with (x) copies of all policies and evidence of the maintenance of such
policies at least thirty (30) days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming Purchaser as “co-insured” or “additional
insured” and appropriate loss payable endorsements in form and substance satisfactory to Purchaser,
naming Purchaser as loss payee, and (z) evidence that as to Purchaser the insurance coverage shall
not be impaired or invalidated by any act or neglect of the Company or any Subsidiary and the
insurer will provide Purchaser with at least thirty (30) days notice prior to cancellation. The
Company and each Subsidiary shall instruct the insurance carriers that in the event of any loss
thereunder, the carriers shall make payment for such loss to the Company and/or the Subsidiary and
Purchaser jointly. In the event that as of the date of receipt of each loss recovery upon any such
insurance, the Purchaser has not declared an event of default with respect to this Agreement or any
of the Related Agreements, then the Company and/or such Subsidiary shall be permitted to direct the
application of such loss recovery proceeds toward investment in property, plant and equipment that
would comprise “Collateral” secured by Purchaser’s security interest pursuant to its security
agreement, with any surplus funds to be applied toward payment of the obligations of the Company to
Purchaser. In the event that Purchaser has properly declared an event of default with respect to
this Agreement or any of the Related Agreements, then all loss recoveries received by Purchaser
upon any such insurance thereafter may be applied to the obligations of the Company hereunder and
under the Related Agreements, in such order as the Purchaser may determine. Any surplus (following
satisfaction of all Company obligations to Purchaser) shall be paid by Purchaser to the Company or
applied as may be otherwise required by law. Any deficiency thereon shall be paid by the Company
or the Subsidiary, as applicable, to Purchaser, on demand.



6.9 Intellectual Property. Each of the Company and each of its Subsidiaries shall
maintain in full force and effect its existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary
to the conduct of its business.



6.10 Properties. Each of the Company and each of its Subsidiaries will keep its
properties in good repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements, additions and
improvements thereto; and each of the Company and each of its Subsidiaries will at all times comply
with each provision of all leases to which it is a party or under which it occupies property if the
breach of such provision could, either individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.



6.11 Confidentiality. The Company agrees that it will not disclose, and will not
include in any public announcement, the name of the Purchaser, unless expressly agreed to by the
Purchaser or unless and until such disclosure (i) is required by law or applicable regulation, and
then only to the extent of such requirement or (ii) the Purchaser has previously agreed to the
language of the proposed disclosure. Purchaser acknowledges that promptly following Closing, the
Company will file with the SEC a Form 8-K Current Report with respect to this Agreement, the
Related Agreements and the transactions contemplated hereunder and thereunder, and the Purchaser
shall cooperate with the Company in connection with such required disclosure. Notwithstanding the
foregoing, the Company may disclose Purchaser’s identity and the terms of this Agreement to its
current and prospective debt and equity financing sources.



6.12 Required Approvals. For so long as twenty-five percent (25%) of the principal
amount of the Note is outstanding, the Company, without the prior written consent of the Purchaser
(which consent shall not be unreasonably withheld), shall not, and shall not permit any of its
Subsidiaries to:




(a) directly or indirectly declare or pay any dividends, other than dividends paid to
the Company or any of its wholly-owned Subsidiaries;




(b) liquidate, dissolve or effect a material reorganization (it being understood that
in no event shall the Company dissolve, liquidate or merge with any other person or entity
(unless the Company is the surviving entity);




(c) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company’s or any of its Subsidiaries right to perform the
provisions of this Agreement, any Related Agreement or any of the agreements contemplated
hereby or thereby;




(d) materially alter or change the scope of the business of the Company and its
Subsidiaries taken as a whole;




(e) (i) create, incur, assume or suffer to exist any indebtedness (exclusive of trade
debt and debt incurred to finance the purchase of equipment (not in excess of ten ( percent
(10%) per annum of the fair market value of the Company’s assets) whether secured or
unsecured other than (x) the Company’s indebtedness to Laurus, or other indebtedness issued
by the Company on a pari passu basis with Laurus as contemplated in that certain letter
agreement dated as of May 28, 2004 between the Company and the Purchaser (y) indebtedness
set forth on Schedule 6.12(e) attached hereto and made a part hereof and any
refinancings or replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, and (z) any debt incurred in connection with the
purchase of assets in the ordinary course of business, or any refinancings or replacements
thereof on terms no less favorable to the Purchaser than the indebtedness being refinanced
or replaced; (ii) cancel any debt owing to it in excess of $50,000 in the aggregate during
any 12 month period; (iii) assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person, except the
endorsement of negotiable instruments by the Company for deposit or collection or similar
transactions in the ordinary course of business or guarantees of indebtedness otherwise
permitted to be outstanding pursuant to this clause (e); and




(f) create or acquire any Subsidiary after the date hereof unless (i) such Subsidiary
is a wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes party to the
Master Security Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty (either by
executing a counterpart thereof or an assumption or joinder agreement in respect thereof)
and, to the extent required by the Purchaser, satisfies each condition of this Agreement and
the Related Agreements as if such Subsidiary were a Subsidiary on the Closing Date.



6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.8 above at such time as:




(a) the holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or




(b) upon resale subject to an effective registration statement after such Securities
are registered under the Securities Act.



The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule
144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the
Company and its counsel receive reasonably requested representations from the selling Purchaser and
broker, if any.



6.14 Opinion. On the Closing Date, the Company will deliver to the Purchaser an
opinion acceptable to the Purchaser from the Company’s external legal counsel. The Company will
provide, at the Company’s expense, such other legal opinions in the future as are deemed reasonably
necessary by the Purchaser (and acceptable to the Purchaser) in connection with the conversion of
the Note and exercise of the Warrant.



6.15 Margin Stock. The Company will not permit any of the proceeds of the Note or the
Warrant to be used directly or indirectly to “purchase” or “carry” “margin stock” or to repay
indebtedness incurred to “purchase” or “carry” “margin stock” within the respective meanings of
each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System
as now and from time to time hereafter in effect.



7. Covenants of the Purchaser. The Purchaser covenants and agrees with the Company as
follows:



7.1 Confidentiality. The Purchaser agrees that it will not disclose, and will not
include in any public announcement, the name of the Company, unless expressly agreed to by the
Company or unless and until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement.



7.2 Non-Public Information. The Purchaser agrees not to effect any sales in the
shares of the Company’s Common Stock while in possession of material, non-public information
regarding the Company if such sales would violate applicable securities law.



7.3 Limitation on Acquisition of Common Stock of the Company. Notwithstanding anything
to the contrary contained herein or in any document, instrument or agreement entered into in
connection with the transactions contemplated hereby or any document, instrument or agreement
entered into in connection with any other transaction entered into by and between the Purchaser and
the Company (and/or subsidiaries or affiliates of the Company), the Purchaser shall not acquire
stock in the Company (including, without limitation, pursuant to a contract to purchase, by
exercising an option or warrant, by converting any other security or instrument, by acquiring or
exercising any other right to acquire, shares of stock or other security convertible into shares of
stock in the Company, or otherwise, and such options, warrants, conversion or other rights shall
not be exercisable) to the extent such stock acquisition would cause any interest (including any
original issue discount) payable by the Company to the Purchaser not to qualify as “portfolio
interest”, within the meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as amended
(the “Code”), by reason of Section 881(c)(3) of the Code, taking into account the constructive
ownership rules under Section 871(h)(3)(C) of the Code (the “Stock Acquisition Limitation”). The
Stock Acquisition Limitation shall automatically become null and void without any notice to Company
upon the earlier to occur of either (a) Company’s delivery to the Purchaser of a Notice of
Redemption or (b) an Event of Default under, and as defined in, the Note, so long as, at the time
of the occurrence of an Event of Default, the average closing price of Company’s common stock as
reported by Bloomberg, L.P. on the Principal Market for the immediately preceding five trading days
is greater than or equal to 150% of the Fixed Conversion Price at such time.




8. Covenants of the Company and Purchaser Regarding Indemnification.



8.1 Company Indemnification. The Company agrees to indemnify, hold harmless,
reimburse and defend the Purchaser, each of the Purchaser’s officers, directors, agents,
affiliates, control persons, and principal shareholders, against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by
or imposed upon the Purchaser which results, arises out of or is based upon: (i) any material
misrepresentation by the Company or any of its Subsidiaries or material breach of any warranty by
the Company or any of its Subsidiaries in this Agreement, any other Related Agreement or in any
exhibits or schedules attached hereto or thereto; or (ii) any material breach or default in
performance by Company or any of its Subsidiaries of any covenant or undertaking to be performed by
Company or any of its Subsidiaries hereunder, under any other Related Agreement or any other
agreement entered into by the Company and/or any of its Subsidiaries and Purchaser relating hereto
or thereto.



8.2 Purchaser’s Indemnification. Purchaser agrees to indemnify, hold harmless,
reimburse and defend the Company and each of the Company’s officers, directors, agents, affiliates,
control persons and principal shareholders, at all times against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by
or imposed upon the Company which results, arises out of or is based upon: (i) any material
misrepresentation by Purchaser or breach of any material warranty by Purchaser in this Agreement or
in any exhibits or schedules attached hereto or any Related Agreement; or (ii) any material breach
or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser
hereunder or under any Related Agreement, or any other agreement entered into by the Company and
Purchaser relating hereto.




9. Conversion of Convertible Note.




9.1 Mechanics of Conversion.




(a) Provided the Purchaser has notified the Company of the Purchaser’s intention to
sell the Note Shares and the Note Shares are included in an effective registration statement
or are otherwise exempt from registration when sold: (i) upon the conversion of the Note or
part thereof, the Company shall, at its own cost and expense, take all necessary action
(including the issuance of an opinion of counsel reasonably acceptable to the Purchaser
following a request by the Purchaser) to assure that the Company’s transfer agent shall
issue shares of the Company’s Common Stock in the name of the Purchaser (or its nominee) or
such other persons as designated by the Purchaser in accordance with Section 9.1(b) hereof
and in such denominations to be specified representing the number of Note Shares issuable
upon such conversion; and (ii) the Company warrants that no instructions other than these
instructions have been or will be given to the transfer agent of the Company’s Common Stock
and that, subject to Section 7(d) of the Registration Rights Agreement, after the
Effectiveness Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be freely transferable subject to the prospectus delivery requirements of the
Securities Act and the provisions of this Agreement, and will not contain a legend
restricting the resale or transferability of the Note Shares.




(b) Purchaser will give notice of its decision to exercise its right to convert the
Note or part thereof by telecopying or otherwise delivering an executed and completed notice
of the number of shares to be converted to the Company (the “Notice of Conversion”). The
Purchaser will not be required to surrender the Note until the Purchaser receives a credit
to the account of the Purchaser’s prime broker through the DWAC system (as defined below),
representing the Note Shares or until the Note has been fully satisfied. Each date on which
a Notice of Conversion is telecopied or delivered to the Company in accordance with the
provisions hereof shall be deemed a “Conversion Date.” Pursuant to the terms of the Notice
of Conversion, the Company will issue instructions to the transfer agent accompanied by an
opinion of counsel within one (1) business day of the date of the delivery to the Company of
the Notice of Conversion and shall cause the transfer agent to transmit the certificates
representing the Conversion Shares to the Holder by crediting the account of the Purchaser’s
prime broker with the Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent
Commission (“DWAC”) system within three (3) business days after receipt by the Company of
the Notice of Conversion (the “Delivery Date”).




(c) The Company understands that a delay in the delivery of the Note Shares in the form
required pursuant to Section 9 hereof beyond the Delivery Date could result in economic loss
to the Purchaser. In the event that the Company fails to direct its transfer agent to
deliver the Note Shares to the Purchaser via the DWAC system within the time frame set forth
in Section 9.1(b) above and the Note Shares are not delivered to the Purchaser by the
Delivery Date, as compensation to the Purchaser for such loss, the Company agrees to pay
late payments to the Purchaser for late issuance of the Note Shares in the form required
pursuant to Section 9 hereof upon conversion of the Note in the amount equal to the greater
of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser’s actual
damages from such delayed delivery. Notwithstanding the foregoing, the Company will not owe
the Purchaser any late payments if the delay in the delivery of the Note Shares beyond the
Delivery Date is solely out of the control of the Company and the Company is actively trying
to cure the cause of the delay. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand and, in the case of actual damages,
accompanied by reasonable documentation of the amount of such damages. Such documentation
shall show the number of shares of Common Stock the Purchaser is forced to purchase (in an
open market transaction) which the Purchaser anticipated receiving upon such conversion, and
shall be calculated as the amount by which (A) the Purchaser’s total purchase price
(including customary brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the Note, for which
such Conversion Notice was not timely honored.



Nothing contained herein or in any document referred to herein or delivered in connection herewith
shall be deemed to establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum amount permitted by
such law, any payments in excess of such maximum shall be credited against amounts owed by the
Company to a Purchaser and thus refunded to the Company.




10. Registration Rights.



10.1 Registration Rights Granted. The Company hereby grants registration rights to
the Purchaser pursuant to a Registration Rights Agreement dated as of even date herewith between
the Company and the Purchaser.



10.2 Offering Restrictions. Except as previously disclosed in the SEC Reports or in
the Exchange Act Filings, or stock or stock options granted to employees or directors of the
Company (these exceptions hereinafter referred to as the “Excepted Issuances”), neither the Company
nor any of its Subsidiaries will issue any securities with a continuously variable/floating
conversion feature which are or could be (by conversion or registration) free-trading securities
(i.e. common stock subject to a registration statement) prior to the full repayment or conversion
of the Note (together with all accrued and unpaid interest and fees related thereto) (the
“Exclusion Period”).




11. Miscellaneous.



11.1 Governing Law. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER PARTY AGAINST THE OTHER CONCERNING THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE BROUGHT ONLY IN THE
STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK. BOTH PARTIES
AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE RELATED AGREEMENTS ON BEHALF OF THE COMPANY
AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE TRIAL BY JURY. IN THE EVENT THAT ANY
PROVISION OF THIS AGREEMENT OR ANY RELATED AGREEMENT DELIVERED IN CONNECTION HEREWITH IS INVALID OR
UNENFORCEABLE UNDER ANY APPLICABLE STATUTE OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED
INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM
WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR UNENFORCEABLE
UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT.



11.2 Survival. The representations, warranties, covenants and agreements made herein
shall survive any investigation made by the Purchaser and the closing of the transactions
contemplated hereby to the extent provided therein for three (3) years from the Closing Date. All
statements as to factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby
shall be deemed to be representations and warranties by the Company hereunder solely as of the date
of such certificate or instrument.



11.3 Successors. Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, heirs, executors and
administrators of the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Securities from time to time, other than the holders of Common
Stock which has been sold by the Purchaser pursuant to Rule 144 or an effective registration
statement. Purchaser may not assign its rights hereunder to a competitor of the Company.



11.4 Entire Agreement. This Agreement, the Related Agreements, the exhibits and
schedules hereto and thereto and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the subjects hereof and
no party shall be liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.



11.5 Severability. In case any provision of the Agreement shall be invalid, illegal
or unenforceable, the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.




11.6 Amendment and Waiver.




(a) This Agreement may be amended or modified only upon the written consent of the
Company and the Purchaser.




(b) The obligations of the Company and the rights of the Purchaser under this Agreement
may be waived only with the written consent of the Purchaser.




(c) The obligations of the Purchaser and the rights of the Company under this Agreement
may be waived only with the written consent of the Company.



11.7 Delays or Omissions. It is agreed that no delay or omission to exercise any
right, power or remedy accruing to any party, upon any breach, default or noncompliance by another
party under this Agreement or the Related Agreements, shall impair any such right, power or remedy,
nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or of or in any similar breach, default or noncompliance thereafter
occurring. All remedies, either under this Agreement or the Related Agreements, by law or
otherwise afforded to any party, shall be cumulative and not alternative.



11.8 Notices. All notices required or permitted hereunder shall be in writing and
shall be deemed effectively given:




(a) upon personal delivery to the party to be notified;




(b) when sent by confirmed facsimile if sent during normal business hours of the
recipient, if not, then on the next business day;




(c) three (3) business days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or




(d) one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.



All communications shall be sent as follows:



	 	 	 	 	 
	If to the Company, to:
	 	PACIFIC BIOMETRICS, INC.

	 
	 	220 West Harrison Street
	 
	 	Seattle, WA  98119

	 
	 	Attention: Chief Executive  Officer

	 
	 	Facsimile: (206) 298-9838

	 
	 	with a copy to:

	 
	 	Cairncross & Hemplemann, P.S.

	 
	 	524 Second Avenue Suite 500
	 
	 	Seattle, WA  98104

	 
	 	Attention: Timothy M. Woodland, Esq.

	 
	 	Facsimile: (206) 587-2308

	If to the Purchaser, to:
	 	Laurus Master Fund, Ltd.

	 
	 	c/o Ironshore Corporate Services ltd.
	 
	 	P.O. Box 1234 G.T.

	 
	 	Queensgate House, South Church Street

	 
	 	Grand Cayman, Cayman Islands

	 
	 	Facsimile: 345-949-9877

	 
	 	with a copy to:

	 
	 	John E. Tucker, Esq.

	 
	 	825 Third Avenue 14th Floor
	 
	 	New York, NY 10022

	 
	 	Facsimile: 212-541-4434








or at such other address as the Company or the Purchaser may designate by written notice to the
other parties hereto given in accordance herewith.



11.9 Attorneys’ Fees. In the event that any suit or action is instituted to enforce
any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover
from the losing party all fees, costs and expenses of enforcing any right of such prevailing party
under or with respect to this Agreement, including, without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.



11.10 Titles and Subtitles. The titles of the sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in construing this
Agreement.



11.11 Facsimile Signatures; Counterparts. This Agreement may be executed by facsimile
signatures and in any number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.



11.12 Broker’s Fees. Except as set forth on Schedule 11.12 hereof, each party hereto
represents and warrants that no agent, broker, investment banker, person or firm acting on behalf
of or under the authority of such party hereto is or will be entitled to any broker’s or finder’s
fee or any other commission directly or indirectly in connection with the transactions contemplated
herein. Each party hereto further agrees to indemnify each other party for any claims, losses or
expenses incurred by such other party as a result of the representation in this Section 11.12 being
untrue.



11.13 Construction. Each party acknowledges that its legal counsel participated in
the preparation of this Agreement and the Related Agreements and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting party shall not be
applied in the interpretation of this Agreement to favor any party against the other.



[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK






3






IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of
the date set forth in the first paragraph hereof.



	 	 	 	 	 	 	 
	COMPANY:

	 	 	 	PURCHASER:
	 	

	 
	 	 	 	 	 	 
	PACIFIC BIOMETRICS, INC.
	 	Laurus Master Fund, Ltd.

	 
	 	 	 	 	 	 
	By:

	 	/s/ Ronald R. Helm
	 	By:
	 	/s/
	
 
	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	Name:

	 	Ronald R. Helm
	 	Name:
	 	

	
 
	 	 
	 	

	 	

	 
	 	 	 	 	 	 
	Title:

	 	Chief Executive Officer
	 	Title:
	 	

	
 
	 	 
	 	

	 	








4




EXHIBIT A




5




FORM OF CONVERTIBLE NOTE

EXHIBIT B




FORM OF WARRANT




6




EXHIBIT C




FORM OF OPINION




1. Each of the Company and each of its Subsidiaries is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware [other jurisdiction]
and has all requisite corporate power and authority to own, operate and lease its properties and to
carry on its business as it is now being conducted.



2. Each of the Company and each of its Subsidiaries has the requisite corporate power and
authority to execute, deliver and perform its obligations under the Agreement and the Related
Agreements. All corporate action on the part of the Company and each of its Subsidiaries and its
officers, directors and stockholders necessary has been taken for: (i) the authorization of the
Agreement and the Related Agreements and the performance of all obligations of the Company and each
of its Subsidiaries thereunder; and (ii) the authorization, sale, issuance and delivery of the
Securities pursuant to the Agreement and the Related Agreements. The Note Shares and the Warrant
Shares, when issued pursuant to and in accordance with the terms of the Agreement and the Related
Agreements and upon delivery shall be validly issued and outstanding, fully paid and non
assessable.



3. The execution, delivery and performance by each of the Company and each of its Subsidiaries
of the Agreement and the Related Agreements to which it is a party and the consummation of the
transactions on its part contemplated by any thereof, will not, with or without the giving of
notice or the passage of time or both:




(a) Violate the provisions of their respective Charter or bylaws; or




(b) Violate any judgment, decree, order or award of any court binding upon the Company
or any of its Subsidiaries; or




(c) Violate any [insert jurisdictions in which counsel is qualified] or federal law



4. The Agreement and the Related Agreements will constitute, valid and legally binding
obligations of each of the Company and each of its Subsidiaries (to the extent such person is a
party thereto), and are enforceable against each of the Company and each of its Subsidiaries in
accordance with their respective terms, except:




(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights; and




(b) general principles of equity that restrict the availability of equitable or legal
remedies.



5. To such counsel’s knowledge, the sale of the Note and the subsequent conversion of the Note
into Note Shares are not subject to any preemptive rights or rights of first refusal that have not
been properly waived or complied with. To such counsel’s knowledge, the sale of the Warrant and
the subsequent exercise of the Warrant for Warrant Shares are not subject to any preemptive rights
or, to such counsel’s knowledge, rights of first refusal that have not been properly waived or
complied with.



6. Assuming the accuracy of the representations and warranties of the Purchaser contained in
the Agreement, the offer, sale and issuance of the Securities on the Closing Date will be exempt
from the registration requirements of the Securities Act. To such counsel’s knowledge, neither the
Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to buy and security
under circumstances that would cause the offering of the Securities pursuant to the Agreement or
any Related Agreement to be integrated with prior offerings by the Company for purposes of the
Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder approval provisions.



7. There is no action, suit, proceeding or investigation pending or, to such counsel’s
knowledge, currently threatened against the Company or any of its Subsidiaries that prevents the
right of the Company or any of its Subsidiaries to enter into this Agreement or any of the Related
Agreements, or to consummate the transactions contemplated thereby. To such counsel’s knowledge,
the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality; nor is there any action, suit,
proceeding or investigation by the Company currently pending or which the Company intends to
initiate.



8. The terms and provisions of the Master Security Agreement and the Stock Pledge Agreement
create a valid security interest in favor of Laurus, in the respective rights, title and interests
of the Company and its Subsidiaries in and to the Collateral (as defined in each of the Master
Security Agreement and the Stock Pledge Agreement). Each UCC-1 Financing Statement naming
the Company or any Subsidiary thereof as debtor and Laurus as secured party are in proper form for
filing and assuming that such UCC-1 Financing Statements have been filed with the Secretary of
State of [Delaware], the security interest created under the Master Security Agreement will
constitute a perfected security interest under the Uniform Commercial Code in favor of Laurus in
respect of the Collateral that can be perfected by filing a financing statement. After giving
effect to the delivery to Laurus of the stock certificates representing the ownership interests of
each Subsidiary of the Company (together with effective endorsements) and assuming the continued
possession by Laurus of such stock certificates in the State of New York, the security interest
created in favor of Laurus under the Stock Pledge Agreement constitutes a valid and enforceable
first perfected security interest in such ownership interests (and the proceeds thereof) in favor
of Laurus, subject to no other security interest. No filings, registrations or recordings are
required in order to perfect (or maintain the perfection or priority of) the security interest
created under the Stock Pledge Agreement in respect of such ownership interests.



7




EXHIBIT D




8




FORM OF ESCROW AGREEMENT

SCHEDULE OF EXCEPTIONS

to

Securities Purchase Agreement, dated as of January 31, 2005,

by and between Pacific Biometrics, Inc., a Delaware corporation,

and Laurus Master Fund, Ltd., a Cayman Islands company




Schedule 4.2 Subsidiaries.



The following are direct subsidiaries of the Company. There are no indirect subsidiaries.



	 	 	 	 	 
	Subsidiary	 	Percentage Ownership
	BioQuant, Inc., a Michigan corporation
	 	 	100	%
	Pacific Biometrics, Inc., a Washington corporation
	 	 	100	%
	PBI Technology, Inc., a Washington corporation
	 	 	100	%







Schedule 4.3 Capitalization; Voting Rights.



(a) The authorized capital stock of the Subsidiaries is as follows:



	 	 	 
	Subsidiary	 	Authorized Capital
	BioQuant, Inc.

	 	2,900,000 shares of common stock,

no par value per share; 1,260,000

shares of preferred stock, no par

value per share
	 
	 	 
	Pacific Biometrics, Inc.

	 	10,000,000 shares of common

stock, no par value per share
	 
	 	 
	PBI Technology, Inc.

	 	10,000 shares of common stock,

$0.001 par value per share








	 	(b)	 	In addition to such options, warrants and rights described in the Exchange Act Filings, the
following options, warrants and other rights are outstanding:






	 	•	 	The Company is a party to a broker agreement with Source Capital Group, Inc.,
pursuant to which, in connection with the financing contemplated by the Securities
Purchase Agreement, the Company will be obligated to (i) make certain cash payments to
Source Capital, including a fee equal to 3% of the loan upon the Closing, and (ii)
grant to Source Capital certain warrants to purchase shares of common stock.





Schedule 4.6 Agreements; Action.




	 	(a)	 	The Company is a party to a broker agreement with Source Capital Group, Inc., pursuant to
which, in connection with the financing contemplated by the Securities Purchase Agreement, the
Company will be obligated to (i) make certain cash payments to Source Capital, including a fee
equal to 3% of the loan upon the Closing, and (ii) grant to Source Capital certain warrants to
purchase shares of common stock.





	 	 	 	 	 
	Schedule 4.7	 	Obligations to Related Parties.








	 	•	 	The Company has a business relationship with Pacific Biometrics
Research Foundation, a non-profit corporation under Section 501(c)(3) of
the Internal Revenue Code (“PBRF”). PBRF is one of five laboratories in
the Centers for Disease Control / NHLBI-sponsored Cholesterol Reference
Method Laboratory Network. Dr. Elizabeth Leary, Chief Scientific Officer
of the Company, also sits on the board of directors of PBRF. The Company
provides laboratory testing services, invoicing and collection services in
connection with PBRF’s service offerings. Currently, the Company owes
PBRF $11,000 pursuant to this relationship.






	 	•	 	The Company is a party to a broker agreement with Source Capital
Group, Inc. and has previously engaged the services of Source Capital
Group, Inc. in connection with certain other financings. The Company is
aware that one of its stockholders is a broker with Source Capital Group,
Inc. and certain of his family members are also stockholders in the
Company.
	 
	 	 	 	Schedule 4.9 Title to Properties and Assets; Liens, Etc.
—





The Company has certain existing liens on its properties, as described in UCC financing statements
with the following entities:





	 	•	 	Transamerica Finance






	 	•	 	Franklin Funding






	 	•	 	Roche
	 
	 	 	 	Schedule 4.13Tax Returns and Payments.
—






	 	•	 	The Company has a 401(k) Plan, which had fallen out of compliance with the Internal Revenue
Service due to prior year filing delinquencies. Subsequent to year end, the Company engaged a
consultant to assist in regaining compliance through the IRS Delinquent Filer Voluntary
Compliance Program (the “DFVCP”) and has filed all returns which had been delinquent. The
Company believes that it is now in compliance with the IRS reporting regulations, and, under
the DFVCP, will incur no additional material expenses associated with late filings.






	 	•	 	The Washington State Department of Revenue has notified the Company that it intends to audit
the Company with respect to sales, use and B&O taxes. The audit is ongoing.
	 
	 	 	 	Schedule 4.15Registration Rights and Voting Rights.
—






	 	•	 	The Company has granted outstanding registration rights to the following persons:






	 	•	 	Holders of the Company’s Series A convertible preferred stock, with respect to the
 shares of common stock into which the preferred stock may be converted (currently
approximately 516,665 shares of common stock);






	 	•	 	Holders of up to 3,846,000 shares of Company common stock who purchased the shares
in the Company’s PIPE offering that closed in March 2004;






	 	•	 	Holders of stock purchase warrants for the purchase of up to approximately 228,297
shares of Company common stock






	 	•	 	The Company currently has an effective
registration statement on Form SB-2 (No.
333-113822) on file with the Securities and
Exchange Commission with respect to the
re-sale of up to 11,343,140 shares of common
stock. The Company included in that
registration statement restricted shares held
by other holders of Company securities, in
addition to shares held by certain holders of
outstanding registration rights listed above.






	 	•	 	Pursuant to the Registration Rights Agreement
dated as of May 28, 2004, as amended, the
Company granted outstanding registration
rights to Laurus Master Fund, Ltd. with
respect to shares of common stock underlying
the convertible note and warrants described
therein.






	 	•	 	The Company currently has an effective
registration statement on Form SB-2 (No.
333-116968) on file with the Securities and
Exchange Commission with respect to the
re-sale of up to 4,269,361 shares of common
stock underlying convertible notes and
warrants described therein.






	 	•	 	In addition, the Company has granted
registration rights to its brokers for the
 shares of common stock underlying certain
warrants that may be issued to the brokers in
the future, in connection with their
assistance in placing the $2.5 million debt
investment with Laurus in May 2004, and the
$1.5 million debt investment with Laurus in
January 2005.






	 	•	 	As described in the Schedule 13D filings made
by Saigene Corporation, the Company is aware
that Saigene Corporation has received proxies
from certain third parties granting to
Saigene the power to vote the shares of
Company common stock held by such persons.
	 
	 	 	 	Schedule 4.17Environmental and Safety Laws.
—






	 	•	 	In the ordinary course of operations of the
Company’s clinical testing laboratory, the
Company receives, tests, processes and
disposes of blood, urine, serum, human
samples, various chemicals and other similar
hazardous materials.
	 
	 	 	 	Schedule 11.12Broker’s Fees.
—






	 	•	 	The Company is a party to a broker agreement
with Source Capital Group, Inc., pursuant to
which, in connection with the financing
contemplated by the Securities Purchase
Agreement, the Company will be obligated to
(i) make certain cash payments to Source
Capital, including a fee equal to 3% of the
loan upon the Closing, and (ii) grant to
Source Capital certain warrants to purchase
 shares of common stock.






9