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

                                   FORM 10-KSB

               [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 2005

             [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
             For the transition period from __________ to __________

                         Commission File Number 0-21537

                            PACIFIC BIOMETRICS, INC.
                 (Name of small business issuer in its charter)

          DELAWARE                                               93-1211114
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)
                            220 WEST HARRISON STREET
                            SEATTLE, WASHINGTON 98119
                    (Address of principal executive offices)

                                 (206) 298-0068
                           (Issuer's telephone number)

         Securities registered under Section 12(b) of the Exchange Act:
                                     (none)

         Securities registered under Section 12(g) of the Exchange Act:
                     COMMON STOCK, $0.01 PAR VALUE PER SHARE

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

Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]

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

Issuer's revenue for its most recent fiscal year:  $3,230,375

As of September 21, 2005, there were 13,325,705 shares of the Company's common
stock issued and outstanding, and the aggregate market value of such common
stock held by non-affiliates was approximately $10,390,000, based on the closing
price of $0.92 of such stock on that date.

DOCUMENTS INCORPORATED BY REFERENCE: The Company's definitive proxy statement
for the annual meeting of stockholders, which will be filed with the Securities
and Exchange Commission within 120 days after the close of the fiscal year 2005,
is incorporated by reference in Part III hereof.

Transitional Small Business Disclosure Format (Check one): Yes [_]  No [X]

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                                       -i-

                            PACIFIC BIOMETRICS, INC.

                            Form 10-KSB Annual Report

                                Table of Contents

                                                                            Page
                                                                            ----
                                     PART I

Item 1.     Description of Business............................................2

Item 2.     Description of Property...........................................23

Item 3.     Legal Proceedings.................................................23

Item 4.     Submission of Matters to a Vote of Security Holders...............24

                                   PART II

Item 5.     Market for Common Equity and Related Stockholder Matters..........24

Item 6.     Management's Discussion and Analysis or Plan of Operations........25

Item 7.     Financial Statements..............................................32

Item 8.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..........................................32

Item 8A.    Controls and Procedures...........................................32

Item 8B.    Other Information.................................................33

                                  PART III

Item 9.**   Directors, Executive Officers, Promoters and Control Persons;
            Compliance with Section 16(a) of the Exchange Act.................33

Item 10.**  Executive Compensation............................................33

Item 11.**  Security Ownership of Certain Beneficial Owners and Management,
            and Related Stockholder Matters...................................33

Item 12.**  Certain Relationships and Related Transactions....................34

Item 13.    Exhibits..........................................................34

Item 14.**  Principal Accountant Fees and Services............................36

SIGNATURES....................................................................37

**       Information contained in Items 9 through 12 and Item 14 of Part III are
         incorporated by reference from the definitive proxy statement for our
         2005 annual meeting of stockholders, which will be filed with the
         Securities and Exchange Commission within 120 days after the close of
         the 2005 fiscal year.

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             CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains certain forward-looking statements,
including statements about

     o    our existing working capital and cash flows and whether and how long
          these funds will be sufficient to fund our operations,

     o    the success of our business development efforts and our ability to
          enter into work orders for laboratory services and generate revenue,

     o    the development of new services and products and the expansion of the
          market for our current services and products,

     o    implementing aspects of our business plan and strategies,

     o    financing goals and plans, and

     o    our raising of additional capital through future equity and debt
          financings.

The forward-looking statements in this Annual Report reflect management's
current views and expectations with respect to our business, strategies,
products, future results and events and financial performance. All statements
other than statements of historical fact, including future results of operations
or financial position, made in this Annual Report on Form 10-KSB are forward
looking. In particular, the words "believe," "expect," "intend," "anticipate,"
"estimate," "desire," "goal," "may," "will," variations of such words, and
similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking. These forward-looking statements are
subject to certain risks and uncertainties, including those discussed below. Our
actual results, performance or achievements could differ materially from
historical results as well as those expressed in, anticipated or implied by
these forward-looking statements. We do not undertake any obligation to revise
these forward-looking statements to reflect any future events or circumstances.

For a discussion of some of the factors that may affect our business, results
and prospects, see "ITEM 1. - DESCRIPTION OF BUSINESS - Risk Factors Affecting
the Business of the Company" beginning on page 13. Readers are urged to
carefully review and consider the various disclosures made by us in this Report
and in our other reports previously filed with the Securities and Exchange
Commission, including our periodic reports on Forms 10-KSB and 10-QSB, and those
described from time to time in our press releases and other communications,
which attempt to advise interested parties of the risks and factors that may
affect our business, prospects and results of operations.


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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

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

BUSINESS STRATEGY

Specialty reference and central laboratory service companies like ours typically
derive substantially all of their revenue from the research, development and
marketing expenditures of the pharmaceutical, biotechnology, and diagnostic
industries. Participants in the pharmaceutical, biotechnology, and diagnostic
industries typically outsource a significant quantity of these services to both
central labs and specialty reference labs. In addition, central laboratories
outsource to specialty reference labs some of the specialty testing where the
central laboratory lacks expertise. We believe that such outsourcing will
continue and may increase in the future because of many factors, including
continuing pressures on the pharmaceutical and biotechnology industries to
contain costs, limitations on pharmaceutical companies' internal capacity, a
need for faster development time for new drugs, research in multiple countries
simultaneously, stringent government regulation, and the difficulty in
developing expertise in specialty testing areas internally within pharmaceutical
companies or central labs. We believe the investment and amount of time required
to develop new drugs and diagnostic products has been increasing, and that these
trends create opportunities for companies like ours to provide our expertise and
services to help reduce the time in the drug development and laboratory
diagnostic product development processes and make the processes more efficient.

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

Our primary business strategy is to continue our focus on providing high quality
specialty central laboratory services in our core areas, including
cardiovascular disease and bone and joint diseases because of active drug
development activities. In addition, we also intend to pursue other strategies
identified below to further our business. However, because of the significant
expense associated with some of these strategies, we may not pursue some of
these strategies unless our revenue increases significantly or we are able to
raise equity or debt financing to adequately fund these strategies. There can be
no assurance that we will pursue any or all of the strategies below or, if
pursued, that any of such strategies will be successful.

INFORMATION TECHNOLOGY AND BACK-UP SYSTEMS

We are currently focusing the significant proportion of our capital expenditures
and investments in carefully selected hardware and software products,
information technology systems and networks. During fiscal 2005, we invested in
our laboratory information system, including the initial stages of the
implementation of the ClinAxys II Laboratory Information System. The
installation of this new system should streamline and improve our project and
data management capabilities. In fiscal 2006, we will continue to invest in the
improvement of our information systems and we believe capital improvements in
these areas are important to meet the changing demands of drug development by
improving and facilitating our data reporting, testing capacity and the overall
service to and communications with our clients.

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In fiscal 2006, to provide our clients with the confidence that we can minimize
the impact of local power outages, we anticipate investing in redundant or
back-up systems. In fiscal 2005 we acquired and in fiscal 2006 have begun the
use of a back-up electrical generator. In addition, we anticipate adding
redundant or back-up CO2 systems for our individual freezers to protect samples
stored in those freezers.

DIVERSIFY CLIENT BASE

Another of our goals is to continue to diversify our client base. In fiscal 2005
we adopted a new corporate visual identity and are using this to integrate all
of our marketing efforts and advertising. We have also increased our visibility
at industry trade shows and in industry publications through print
advertisements and publicity campaigns. Historically, our largest two clients in
any individual fiscal year have represented in excess of 50% of our revenue.
However, during the fiscal year ended June 30, 2005, our top two clients
represented 40% of our revenue as compared to 75% during the fiscal year ended
June 30, 2004. Our largest client in fiscal 2005 individually accounted for
approximately 23% and 36% of our total revenue in fiscal 2005 and 2004,
respectively, while our largest client in fiscal 2004 accounted for
approximately 4% and 40% of our total revenue in fiscal 2005 and 2004,
respectively. Revenue from our five largest clients represented approximately
67% and 86% of total revenue in fiscal 2005 and fiscal 2004, respectively.
Because our revenue has historically been concentrated in one or two large
clients, we can be materially adversely impacted by any delays in undertaking
clinical studies or submitting samples for testing services, including any early
termination or reductions in work orders or clinical studies, or any decreases
in the volume or timing of new work orders. In fiscal 2006 we will continue to
actively pursue business development and marketing activities to broaden our
client and revenue base.

INCREASE SPECIALTY AREAS

In addition to our core specialties of cardiovascular disease and bone and joint
diseases, our goal is to further expand our specialty laboratory expertise
within related areas where we have a competitive advantage of existing in-depth
expertise. This includes diabetes, obesity, metabolic syndrome, rheumatoid and
osteo arthritis, and immunogenicity testing for biologic drugs.

CREATE GLOBAL CENTRAL LABORATORY

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

ACQUISITIONS AND STRATEGIC RELATIONSHIPS

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

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SERVICES

SPECIALTY REFERENCE LABORATORY SERVICES

Our specialty reference laboratory in Seattle, Washington has established itself
as a technical leader due to our strong expertise in certain core areas. Our
three general areas of expertise include:

     o    cardiovascular disease (dyslipidemia, atherosclerosis, and coronary
          heart disease),

     o    diabetes, metabolic syndrome, and obesity, and

     o    bone and joint diseases (osteoporosis as well as osteo and
          rheumatoid arthritis).

Management believes that among prospective new drugs, these areas of expertise
represent three of the top ten areas of focus by the pharmaceutical industry.

With respect to cardiovascular disease, we are one of the leaders in lipid
services for clinical drug development in the U.S. Our expertise is concentrated
on the measurement of cardiovascular disease markers, especially cholesterol and
lipoproteins, including HDL, LDL, and HDL and LDL subfractions, remnant
cholesterol, apolipoproteins, Lp(a), and lipoprotein fraction compositions.
Furthermore, the Pacific Biometrics Research Foundation, a non-profit
organization affiliated and co-located with PBI, is one of only three U.S.
standardization centers in the Cholesterol Reference Method Laboratory Network
sponsored by the Centers for Disease Control and the National Heart, Blood &
Lung Institute. There are only ten such laboratories worldwide.

We are enhancing our activities in the area of diabetes and related disorders,
notably obesity and metabolic syndrome. Metabolic syndrome is a collection of
abnormalities that include central obesity, dyslipidemia (low HDL cholesterol
and high triglycerides), insulin resistance, pre-diabetes and pre-hypertension.
In the U.S. the prevalence of metabolic syndrome is estimated at 47 million
individuals (Heart Disease and Stroke Statistics - 2005 Update, American Heart
Association). People with metabolic syndrome are at increased risk for
cardiovascular disease and associated morbidity and mortality and as a result,
this population is coming under increased scrutiny for pharmacological
intervention. Because of our established strengths in testing for lipids,
cardiovascular risk and diabetes, we believe we are well-positioned to take
advantage of this emerging area of pharmaceutical drug development. Moreover, we
are expanding our test menu in areas related to diabetes and metabolic syndrome,
notably in testing for markers of inflammation, such as hsCRP, IL-6,
TNF-(alpha), sCD40L and Lp-PLA2.

As it relates to bone and joint diseases, we are active in promoting the
standardization of bone metabolism biomarkers, and are involved in technologies
for monitoring treatment response in diseases such as osteoporosis. We have used
our expertise in osteoporotic indicating bone biomarker assays to manage the
first proficiency-testing programs for bone-resorption markers. In the areas of
bone metabolism and women's health, we also specialize in the measurement of
hormones, and our menu of biochemical markers includes pyridinolines, various C-
and N- terminal telopeptides, procollagens, osteocalcin and bone-specific
alkaline phosphatase. Moreover, in recent years we have actively expanded our
test menu to include biochemical markers of cartilage turnover as relating to
drug development for arthritis, and we have performed specialty testing to
support clinical drug development of drugs for rheumatoid arthritis and
osteoarthritis. Markers of cartilage turnover on our test menu include CTX-II,
PIIANP, COMP, YKL-40, and hyaluronan.

In connection with these stated areas of expertise, we offer a variety of
services through our specialty reference laboratory, including

     o    clinical study testing services,

     o    development of laboratory reference methods,

     o    development of clinical trial protocols, and

     o    contract research and development.

Our involvement with clients frequently begins at the protocol design stage.
Clinical trial support includes coordinating the collection and receipt of
specimens from investigative sites, processing the samples, generating test
databases and reporting the consolidated data to study sites and sponsors. The
extensive knowledge we have in test

                                      -4-
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development and our close collaboration with diagnostic manufacturers,
frequently allow us to offer novel tests to our clinical research clients before
such tests are commercially available.

CENTRAL LABORATORY SERVICES

Coupled with our expertise in specialty testing we also provide central
laboratory services. The full-service central laboratory support for
multi-center clinical trials includes project management and routine safety lab
tests (general chemistry, hematology and urinalysis). Our operations support
clinical trials by producing study-specific specimen collection supplies,
coordinating collection and the receipt of specimens from clinical sites,
processing the samples, generating test databases, and reporting data to sites
and sponsors.

We generally provide full-service central laboratory services in support of
Phase I and Phase II FDA clinical trials. These trials are typically smaller and
more geographically focused than Phase III trials.

Through our joint marketing relationship with Quintiles in providing centralized
specialty lab testing services, we intend to compete with other central
laboratories that have offices, monitoring sites and laboratories in countries
around the globe, both for Phase I and Phase II trials, as well as Phase III and
Phase IV trials. In fiscal 2006, we expect to build on this relationship with
Quintiles by expanding joint business development efforts and implementing
operational integration in certain areas that will lead to streamlined services.
In fiscal 2005, we did not realize significant financial benefit from our
relationship with Quintiles and there is no guarantee that the relationship will
successfully generate revenue.

TECHNOLOGIES AND PRODUCTS

During fiscal 2004, we formed a new wholly owned subsidiary, PBI Technology,
Inc., for the purpose of holding, developing and seeking commercialization of
certain of our technologies and intellectual property portfolio, including our
isothermal DNA amplification method (LIDA), our Cell Viability technology, and
our Osteopatch(TM) and Saliva Sac(R) diagnostic devices. These technologies are
described in more detail below.

SAIGENE TECHNOLOGIES

In August 2002, we acquired certain technology from Saigene Corporation,
including certain DNA-based proprietary technologies, processes and equipment.
(See "Saigene Investment Transaction" and "Note 15 to the Notes to Consolidated
Financial Statements"). This novel intellectual property (patented and
patent-pending) includes a proprietary isothermal DNA amplification method
(LIDA) and a genetic method for distinguishing live from dead cells.

As of June 30, 2005, these technology assets still require additional
development prior to commercialization and their future value, as well as timing
of their ongoing development, is dependent upon additional capital being
available to fund continuing research and development. We expect to need
additional capital to fund continuing research and development efforts related
to these technologies, and there are no assurances that such funds will be
available to us. In order to develop and commercialize these technologies on our
own, we will likely require a capital infusion in excess of $5 million. We are
actively seeking commercial partners interested in co-development or licensing
of our technologies. If we are unable to find commercial partners or to obtain
suitable financing to continue research and development efforts, commence the
regulatory approval process (where applicable) and commercialization of the
technologies, we are unlikely to continue pursuing development efforts related
to these technologies.

While we intend to continue to pursue development efforts, partnership,
licensing or other means to realize the value of these intangible assets, in
fiscal 2004 we determined that the value of these assets may not be recoverable
over their remaining useful lives, and thus the value of these assets should be
written off on our financial statements. Accordingly, we wrote off the entire
balance ($476,874) of technology assets as of June 30, 2004. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Impairment of Technology Assets."

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Although we believe these technologies are valuable assets, we may not be able
to successfully develop these technologies and they may not generate revenue. In
addition, even if we are ultimately successful in developing products from these
technologies, some of those products would likely be subject to regulatory
approval, and could always be the subject of litigation or other claims from
competitors or others with respect to such products or the patents and
methodologies upon which they are based.

OTHER TECHNOLOGIES

During the 1990's, we developed an intellectual property position in sweat and
saliva collection technologies. In 1998, due to lack of funding and our failure
to obtain FDA approval for resultant products, we suspended all further
development efforts relating to these technologies and products. We subsequently
wrote off the value of these assets on our balance sheet in 1999. During fiscal
2004, as discussed above, we formed a new wholly owned subsidiary, PBI
Technology, Inc., for the purpose of holding, developing and seeking
commercialization of the Saigene Technology and the intellectual property
positions in sweat and saliva collection technologies. We believe there may be
potential commercial application for some of these technologies, and we have
recently engaged outside consultants to resume active development efforts
related to the saliva and sweat collection technologies.

Set forth below is a brief description of some of these technologies:

SALIVASAC(R) - SALIVA COLLECTION & PROCESSING DEVICE. This proprietary device,
developed by us, collects a non-invasive saliva sample that may be able to
replace blood and urine testing in various applications. The SalivaSac(R), which
contains a small quantity of a substance that acts as an osmotic driver, is
placed in the mouth and rapidly fills with an ultrafiltrate of saliva that is
filtered as it passes through the semi-permeable outer membrane. The resulting
fluid is clear, easy to use, and does not contain interfering substances. The
SalivaSac(R), as a sample collection device, can be combined with currently
available testing technologies to permit new, non-invasive diagnostic test
applications. We believe the SalivaSac(R) design has the potential to lend
itself to point-of-care diagnostic applications, including as a screening
product to detect diabetes in the general population, or as a monitoring product
to produce detailed quantitative measurements of blood glucose levels.

OSTEOPATCH(TM) SWEAT COLLECTION DEVICE FOR MONITORING MARKERS OF BONE
METABOLISM. This patented technology involves a method to measure the presence
or absence of markers, typically cross-linked amino acids such as pyridinoline,
from body fluids such as sweat. The presence of these markers can be considered
useful to support the diagnosis of certain bone disease states or conditions,
such as osteoporosis, and as an adjunct to monitor response to treatment in such
bone diseases.

OTHER INTELLECTUAL PROPERTY

In addition to the technologies acquired from Saigene and our patented
technologies, we have developed certain computer software and internal
procedures and products intended to enhance the quality and effectiveness of our
services. Although our intellectual property rights are important to our results
of operations, we believe that such factors as the technical expertise,
knowledge, ability and experience of our laboratory professionals are more
important, and that, overall, these technological capabilities provide
significant benefits to our clients.

CLIENTS / MARKETING

We provide specialty reference and central laboratory services to, among others,
the pharmaceutical, biotechnology, and laboratory diagnostic industries. We also
act as a subcontractor for large central laboratories for our specialty
reference laboratory services. In fiscal years 2005 and 2004, our clients
included companies ranging from the world's largest pharmaceutical companies and
biotechnology companies to small and start-up organizations. Historically, our
largest two clients in any individual fiscal year have represented in excess of
50% of our revenue. However, during the fiscal year ended June 30, 2005, our top
two clients represented 40% of our revenue as compared to 75% during the fiscal
year ended June 30, 2004. Our largest client in fiscal 2005 individually
accounted for approximately 23% and 36% of our total revenue in fiscal 2005 and
2004, respectively, while our largest client in fiscal 2004 accounted for
approximately 4% and 40% of our total revenue in fiscal 2005 and 2004,
respectively. Revenue from our five largest clients represented approximately
67% and 86% of total revenue in fiscal 2005 and fiscal 2004, respectively.

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Our scientific expertise is an integral and interrelated part of our marketing
and sales process. Our Chief Scientific Officer and our Chief Medical Officer
are directly involved in sales and marketing through company capability and
scientific presentations as well as consultation with pharmaceutical clinical
teams beginning at the protocol design stage. Our extensive knowledge in test
development and our close collaboration with diagnostic manufacturers frequently
allow us to offer novel tests to our clinical research clients before such tests
are commercially available. Additionally, our affiliation with the Centers for
Disease Control through our affiliate, Pacific Biometrics Research Foundation,
which allows us to participate in the development of reference methods, creates
further expertise that we can bring to bear on our clients' testing needs. By
marketing and selling our expertise, we believe we have a competitive advantage
over our competitors.

CONTRACTUAL ARRANGEMENTS

Our contracts with clients are, for the most part, either fixed price or
fee-for-service with a cap. To a lesser extent, contracts are fee-for-service
without a cap. In cases where the contracts are fixed price, we generally bear
the cost of overruns, but we benefit if the costs are lower than we anticipated.
In cases where our contracts are fee-for-service with a cap, the contracts
contain an overall budget for the trial based on time and cost estimates. If our
costs are lower than anticipated, the client generally benefits from the
savings. If our costs are higher than estimated, we bear the responsibility for
the overrun unless the increased cost is a result of a change requested by the
client, such as an increase in the number of patients to be enrolled or the type
or amount of data to be collected. Contracts may range from a few months to
several years depending on the nature of the work performed. For most contracts,
a portion of the contract fee is paid at the time the study or trial is started
with the balance of the contract fee payable in installments upon the progress
of the work completed or achievement of milestones over the study or trial
duration. We recognize revenue in the period that we perform the related
services.

We have master contract service agreements with approximately ten of our largest
clients. Under these master service agreements, we perform laboratory research
services based on work orders submitted to us by the client. There is no
guaranteed minimum number of work orders or revenue to us under either
agreement. Each work order is separately negotiated with the client and is
usually limited to a specific project with limited duration.

Most of our contracts may be terminated at any time by the client either
immediately or upon notice. Our contracts typically entitle us to receive
payment for services performed by us up to the time of termination and
reimbursement for out-of-pocket costs incurred prior to termination. In certain
limited instances, our contracts also entitle us to a termination fee or payment
for the costs of winding down the terminated projects.

Most of our contracts also provide for the client to indemnify us for any third
party damages and claims arising from our providing services under the contract.
The typical exception to this indemnification is that no indemnification will be
provided if the damage or claim results from our negligence or intentional
misconduct.

COMPETITION

The specialty reference and central laboratory services industries have many
participants ranging from small, limited-service providers to a limited number
of full-service laboratories with global capabilities.

For specialty reference laboratory services in our areas of expertise, we
primarily compete against other full-service and limited service specialty and
central laboratory services organizations and, to a lesser extent, laboratories
in academic centers. Many of these organizations have significantly greater
resources than we do with somewhat different focus and business targets. Our
significant competitors in specialty reference laboratory services include
Esoterix Inc., Quest Diagnostics, Synarc, Inc., Linco Diagnostics, NW Lipid
Laboratory, and the Mayo Clinic.

In the full-service central laboratory service area, we primarily compete with
much larger full-service central laboratories with significantly greater
resources than we do and many have international operations. Our significant
competitors in central laboratory services include Covance Central Laboratory
Services, Inc., PPD, Inc., Quintiles Transnational Corp., Parexel International
Corporation, MDS Inc. and Quest Diagnostics Incorporated, Lab Corp among others.
As discussed above, in fiscal 2005 we entered into a joint marketing arrangement
with Quintiles

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Transnational and in fiscal 2006 we expect to build on this relationship by
expanding joint business development efforts and implementing operational
integration in certain areas that will lead to streamlined services.

There is significant competition for clients on the basis of many factors for
both specialty reference and full-service central laboratory services, including

     o    technological expertise and efficient drug development processes,

     o    financial stability,

     o    reputation for on-time quality performance,

     o    strengths in various geographic markets and global reach,

     o    ability to manage large-scale clinical trials both domestically and
          internationally,

     o    expertise and experience in specific areas,

     o    scope of service offerings,

     o    price,

     o    ability to acquire, process, analyze and report data in a timely and
          accurate manner,

     o    size, and

     o    expertise and experience in health economics and outcomes services.

While size and global reach are more important competitive factors in the
central laboratory services business, we believe that technological expertise is
more important for specialty reference laboratory services. Except as to size
and international capacity, where we know certain other competitors have an
advantage, we believe we compete very favorably in a majority of these areas,
particularly with respect to our technical expertise in our three specialty
areas.

GOVERNMENT REGULATION

Our laboratory services are subject to various regulatory requirements designed
to ensure the quality and integrity of our laboratory testing in support of
clinical trials. The industry standards for conducting clinical laboratory
testing are embodied in the Clinical Laboratory Improvement Amendments of 1988
("CLIA"). As a medical test site in the State of Washington, we have established
quality assurance programs at our laboratory facilities which monitor ongoing
compliance with CLIA. In addition, we are a College of American Pathologists
("CAP") or CAP-certified test site. This certification provides monitoring for
CAP and CLIA compliance by CAP on a yearly basis.

The industry standards for conducting preclinical laboratory testing are
embodied in the Good Laboratory Practices ("GLP") regulations as defined by the
FDA. Although we do not perform testing related to preclinical research, we do
comply with specific sections of the GLP regulations, at our discretion, when it
is either important to our clients or is determined by management as
advantageous to our quality assurance program.

Our clinical laboratory services are subject to industry standards for the
conduct of clinical research and development of studies that are embodied in the
regulations for Good Clinical Practice ("GCP"). The FDA requires that test
results submitted to such authorities be based on studies conducted in
accordance with GCP. Noncompliance with GCP can result in the disqualification
of some or all of the data collected during the clinical trial, as well as
precipitate a full investigation of all previous and current regulatory
submissions.

We are subject to licensing and regulation under federal, state and local laws
relating to hazard communication and employee right-to-know regulations, the
handling and disposal of medical specimens and hazardous waste and radioactive
materials, as well as the safety and health of laboratory employees. Our
laboratory is subject to applicable federal, state and local laws and
regulations relating to the storage and disposal of all laboratory specimens
including, but not limited to, the regulations of the Environmental Protection
Agency, the Nuclear Regulatory Commission, the Department of Transportation, the
National Fire Protection Agency and the Resource Conservation and Recovery Act.
Although we believe that we are currently in compliance in all material respects
with such federal, state and local laws, failure to comply could subject us to
denial of the right to conduct business, fines, criminal penalties and other
enforcement actions.

                                      -8-
<PAGE>

In addition to its comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers whose
workers may be exposed to blood borne pathogens such as HIV and the hepatitis B
virus, as well as radiation. Our employees receive initial and periodic training
focusing on compliance with applicable hazardous materials regulations and
health and safety guidelines.

In the past few years, both the United States and foreign governments have
become more concerned about the disclosure of confidential personal data. The
European Union prohibits the disclosure of personal confidential information,
including medical information, to any entity that does not comply with certain
security safeguards. The U.S. Department of Health and Human Services recently
promulgated final regulations under the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") that will govern the disclosure of
confidential medical information in the United States. We do not process IIHI
(Individually Identifiable Health Information) during any phase of our business
practices related to clinical testing. We therefore are currently exempt from
HIPAA regulations.

The regulations of the U.S. Department of Transportation, the U.S. Public Health
Service and the U.S. Postal Service apply to the surface and air transportation
of laboratory specimens. We also comply with the International Air Transport
Association regulations, which govern international shipments of laboratory
specimens. Furthermore, when materials are sent to a foreign country, the
transportation of such materials becomes subject to the laws, rules and
regulations of such foreign country.

LAURUS DEBT INVESTMENTS

In fiscal 2004 and 2005, we entered into two financing arrangements with Laurus
Master Fund, Ltd. ("Laurus"), a New York City based investment fund, for a total
of $4 million of secured convertible debt financing. In fiscal 2005, we amended
the terms of these financing arrangements, to extend and defer principal
payments and to waive certain defaults, all as described below.

LAURUS DEBT INVESTMENT--MAY 2004 $2.5 MILLION SECURED CONVERTIBLE NOTE

Effective May 28, 2004, we entered into our first financing arrangement with
Laurus, consisting of a $2.5 million secured convertible note with a term of
three years (the "2004 Note"). In connection with the financing, we also issued
to Laurus a warrant to purchase up to 681,818 shares of common stock at an
exercise price of $1.25 exercisable at any time prior to May 28, 2011.

Under the terms of the 2004 Note, we started making monthly payments of accrued
interest only beginning on July 1, 2004. In addition, the 2004 Note provided for
monthly payments of principal in the amount of $83,333.33, plus accrued
interest, to commence December 1, 2004. The 2004 Note bears interest at an
initial rate equal to the prime rate plus two percent (2%). For any cash
payments we make on the 2004 Note (e.g., any amounts due that are not converted
into common stock), we are required to pay an amount equal to 102% of the
principal amount due (i.e., a payment of $85,000 reduces the principal balance
by $83,333). In addition, we can prepay the 2004 Note at any time upon payment
of an amount equal to 130% of the then-outstanding principal balance, plus
accrued and unpaid interest.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the 2004 Note into shares of our
common stock at an initial conversion price of $1.06 per share. The note
conversion price is subject to certain antidilution adjustments, including full
ratchet antidilution if we issue convertible or equity securities at a price per
share less than the conversion price. In addition, for each monthly payment
under the 2004 Note, Laurus will be obligated to convert a portion of the
monthly payment into common stock at the applicable conversion price, when
certain conditions are present.

As security for the obligation to Laurus, we and each of our subsidiaries
granted Laurus a blanket security interest in all of our assets, and we entered
into a stock pledge with Laurus for the capital stock in all of our
subsidiaries.

In conjunction with the financing, we paid fees and expenses of approximately
$193,500 in cash and reserved $100,000 for potential payments due to Source
Capital, our broker, upon the conversion of principal to common

                                      -9-
<PAGE>

stock. The total amount of $293,500 has been amortized to other expense at the
rate of approximately $8,153 per month over the 36-month life of the 2004 Note,
beginning June 2004. In addition, we issued to our broker a five-year warrant,
exercisable as and to the extent that amounts owing under the 2004 Note are
converted into common stock, for up to 181,818 shares of common stock at an
exercise price of $1.25 per share. See "Note 9 to Notes to Consolidated
Financial Statements."

LAURUS WAIVER RE 2004 NOTE

On December 1, 2004, we owed our first repayment of principal to Laurus on the
2004 Note. Prior to December 1, 2004, we initiated discussions with Laurus for a
six-month deferral on all principal payments and we did not make the principal
payments on either December 1, 2004 or January 1, 2005. On January 31, 2005
Laurus formally agreed to the six-month deferral and also waived all events of
default, including the failure by us to make our scheduled amortization payments
in December and January. Laurus agreed that we would not be required to pay the
principal portion of any monthly amount due for the six-month period from
December 2004 through May 2005, and instead such deferred principal amounts
would be due on May 1, 2007, the maturity date of the 2004 Note. There was no
change in the interest rate charged by Laurus on the unpaid principal.

In consideration for the principal payment deferral and the waiver on the 2004
Note, we issued an additional common stock purchase warrant to Laurus to
purchase up to 200,000 shares of common stock at an exercise price of $1.48. The
warrant expires on January 31, 2009. See "Note 9 to Notes to Consolidated
Financial Statements."

LAURUS DEBT INVESTMENT-- JANUARY 2005 $1.5 MILLION SECURED CONVERTIBLE NOTE

Effective January 31, 2005, we entered into our second debt financing
arrangement with Laurus, consisting of $1.5 million secured convertible note
with a term of three years (the "2005 Note"). The terms of the 2005 Note are
similar to the terms of the 2004 Note. In connection with the financing, we also
issued to Laurus a warrant to purchase up to 326,087 shares of common stock at
an exercise price of $1.37 per share exercisable at any time prior to January
31, 2010.

Under the terms of the 2005 Note, we started making monthly payments of accrued
interest only beginning on March 1, 2005. In addition, the 2005 Note provides
for monthly payments of principal in the amount of $50,000, plus accrued
interest, commencing August 1, 2005. The 2005 Note bears interest at an initial
rate equal to the prime rate plus two percent (2%). For any cash payments made
on the 2005 Note (e.g., any amounts due that are not converted into common
stock), we are required to pay an amount equal to 102% of the principal amount
due (i.e., a payment of $51,000 reduces the principal amount by $50,000).

Laurus has the option to convert any or all of the outstanding principal and
accrued interest on the 2005 Note into shares of our common stock at an initial
conversion price of $1.17 per share. The note conversion price is subject to
certain antidilution adjustments, including full ratchet antidilution if we
issue convertible or equity securities at a price per share less than the
conversion price. In addition, for each monthly payment under the 2005 Note,
Laurus will be obligated to convert a portion of the monthly payment into common
stock at the applicable conversion price, when certain conditions are present.

As security for the obligation to Laurus, we and each of our subsidiaries
granted Laurus a blanket security interest in all of our assets, and we entered
into a stock pledge with Laurus for the capital stock in all of our
subsidiaries.

In conjunction with the financing, we paid fees and expenses of approximately
$108,000 in cash and reserved $60,000 for potential payments due to Source
Capital, our broker, upon the conversion of principal to common stock. The total
amount of $168,000 has been amortized to other expense at the rate of
approximately $3,167 per month over the 36-month life of the 2005 Note,
beginning February 2005. In addition, we issued to our broker a five-year
warrant, exercisable as and to the extent that amounts owing under the 2005 Note
are converted into common stock, for up to 105,263 shares of common stock at an
exercise price of $1.37 per share. See "Note 9 to Notes to Consolidated
Financial Statements."

                                      -10-
<PAGE>

LAURUS DEFERRAL AND EXTENSION - 2004 NOTE AND 2005 NOTE

On May 6, 2005, we and Laurus amended the terms of the 2004 Note and the 2005
Note, to provide for a twelve-month deferral and extension of both. With respect
to 2004 Note, Laurus agreed to (a) extend the term for an additional year, to be
due in full on May 28, 2008, and (b) defer 12 months of principal payments
(originally due June 1, 2005 through May 1, 2006) to be paid monthly beginning
June 1, 2007 through May 1, 2008. With respect to the 2005 Note, Laurus agreed
to (a) extend the term for an additional year, to be due in full on January 31,
2009, and (b) defer 12 months of principal payments (originally due August 1,
2005 through July 1, 2006) to be paid monthly beginning February 1, 2008 through
January 1, 2009, with the balance on the 2005 Note to be paid in full on January
31, 2009.

As a result of these amendments, the first repayments of principal owed to
Laurus on the 2004 and 2005 Notes are now June 1, 2006 and August 1, 2006,
respectively and the maturity dates for the 2004 and 2005 Notes are now May 1,
2008 and January 1, 2009, respectively. There was no change in the interest rate
charged by Laurus on the unpaid principal. Furthermore, commencing as of May 31,
2005 we adjusted the amortization schedules for the 2004 Note and 2005 Note
related to the beneficial conversion feature, stock purchase warrants and
deferred finance costs. Deferred finance costs are now being amortized at $5,509
and $3,422 per month for the 2004 and 2005 Notes, respectively. The amortization
of the beneficial conversion feature and the warrants are now being amortized at
$47,912 and $22,846 per month for the 2004 and 2005 Notes, respectively.

In consideration for the principal payment deferral and the extension of the
2004 and 2005 Notes, we issued an additional common stock purchase warrant to
Laurus to purchase up to 1,000,000 shares of our common stock at an exercise
price of $1.05. The warrant expires on May 6, 2010. See "Note 9 to Notes to
Consolidated Financial Statements."

SAIGENE INVESTMENT TRANSACTION

On August 28, 2002, we purchased certain technology, intellectual property and
equipment assets from Saigene Corporation pursuant to an asset purchase
agreement. The purchased technologies include certain DNA amplification and cell
viability and related technologies and processes.

In consideration for the purchased assets, we issued to Saigene a total of
6,541,430 shares of our common stock, and we issued an additional 458,570 shares
of our common stock to certain of Saigene's designees. In addition, we executed
an option agreement with Saigene whereby we have the right, in our sole
discretion, to purchase certain additional assets from Saigene in exchange for,
at our election, either $5,147,118 in cash, the issuance of an additional
1,715,706 shares of our common stock, or a combination of cash and shares, and
the assumption of additional liabilities associated with such transferred
assets. We have not exercised the option agreement and it continues in full
force and effect.

Further, in connection with the Saigene asset purchase agreement in fiscal 2003
(or the dates otherwise noted), the following additional actions were taken:

     o    We entered into an amended and restated management agreement with
          Saigene, under which Saigene continued to operate and manage our
          laboratory (through August 31, 2004) in exchange for a monthly
          management fee. The original monthly management fee of $90,000 was
          reduced to $70,000 effective July 1, 2003, further reduced from
          $70,000 to $40,000 effective February 1, 2004, and further reduced to
          $20,000 effective June 15, 2004. Subsequently, in July 2004, we and
          Saigene agreed to terminate the management agreement effective August
          31, 2004, thereby eliminating the management fee payable to Saigene
          after that date;

     o    We agreed with Saigene to terminate a prior purchase agreement, dated
          June 22, 2000, for the proposed purchase by Saigene of our laboratory
          operations;

     o    Holders of our Series A preferred stock consented to an amendment of
          the Certificate of Designation with respect to the rights and
          preferences of the Series A preferred stock, and agreed

                                      -11-
<PAGE>

          to convert all accrued dividends (approximately $910,000) on the
          Series A preferred stock into an aggregate of 150,000 shares of our
          common stock;

     o    We entered into consulting arrangements with Paul Kanan and Terry
          Giles, who then were former founders and officers, and are now current
          directors;

     o    Several of our current and former employees agreed to convert $933,472
          of deferred compensation and notes payable into warrants and options
          to purchase an aggregate of 301,541 shares of our common stock; and

     o    Each of Saigene, Paul Kanan, Terry Giles and certain other holders of
          our common stock agreed not to sell any of our securities until August
          28, 2003, except at a price per share equal to or greater than $3.00,
          in a private transaction, in a transaction solely for estate planning,
          or, in the event we completed a private financing, at a per share
          price equal to or greater than the per share price set forth in such
          private financing.

Subsequently, in December 2002, we entered into an investment agreement with
Saigene, reflecting a contribution by Saigene to us toward the development and
commercialization of the technologies we acquired from Saigene. Under the terms
of this investment agreement, Saigene:

     o    executed in our favor a promissory note in the principal amount of
          $200,000 payable on or before September 30, 2003 (the principal amount
          and accrued interest on which was subsequently paid in full by Saigene
          on September 30, 2003 by tender of 72,072 shares common stock held by
          Saigene at an attributed value of $3.00 per share and $2.36 cash);

     o    assumed a creditor obligation (that we had previously assumed pursuant
          to the Saigene asset purchase agreement) in the aggregate amount of
          approximately $229,000;

     o    assumed another creditor obligation in the aggregate amount of
          approximately $150,000; and

     o    surrendered for cancellation 10,000 shares of our common stock held in
          Saigene's name.

EMPLOYEES

At September 19, 2005, we had 41 full-time employees, 1 part-time employee and 3
contract employees for a total of 45 employees, 33 of who were employed in
laboratory operations, laboratory administration and client services (including
our Chief Scientific Officer), 4 were employed in sales, marketing and business
development, and 8 were employed in administrative capacities. One of our
employees holds an M.D. degree, three others hold Ph.D. degrees, and two others
hold masters degrees or other postgraduate degrees. None of our employees are
represented by labor unions. We believe that our relationships with our
employees are good.

AVAILABLE INFORMATION

We make available free of charge on our website at www.pacbio.com, our Annual
Report on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the SEC.

RISK FACTORS AFFECTING OUR BUSINESS

THE FOLLOWING DISCUSSION IN THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS
FORWARD-LOOKING STATEMENTS REGARDING OUR COMPANY, OUR BUSINESS, PROSPECTS AND
RESULTS OF OPERATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS THAT MAY BE ANTICIPATED BY SUCH
FORWARD-LOOKING STATEMENTS AND DISCUSSED ELSEWHERE IN THIS REPORT. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER THE CAPTIONS "BUSINESS"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT. IN EVALUATING
OUR BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS, READERS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS IN ADDITION TO OTHER INFORMATION PRESENTED IN
THIS REPORT AND IN OUR OTHER REPORTS FILED WITH THE SECURITIES

                                      -12-
<PAGE>

AND EXCHANGE COMMISSION THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS
AND FACTORS THAT MAY AFFECT OUR BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS.
SEE "CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS."

RISKS RELATING TO OUR COMPANY AND OUR BUSINESS

         DURING FISCAL 2004 AND FISCAL 2005, WE HAVE EXPERIENCED A SIGNIFICANT
         DECREASE IN REVENUE. OUR REVENUE IS UNPREDICTABLE AND VARIES
         SIGNIFICANTLY FROM QUARTER TO QUARTER.

We have experienced significant quarterly fluctuations and reductions in revenue
during fiscal 2004 and fiscal 2005. For fiscal 2005 compared to fiscal 2004, our
revenue decreased 33% to approximately $3,230,000 from approximately $4,801,000,
and we incurred a net loss for both fiscal 2004 and fiscal 2005. The impact of
the quarterly fluctuations is clearly observed in the first fiscal quarter of
2005 where revenue fell 81% compared to the comparable period in fiscal 2004.
While, for the last nine months of fiscal 2005, our revenue was 12% higher than
for the comparable period of fiscal 2004. The following table shows the
significant swings in our quarterly revenue for each quarter in the current
fiscal year and the past two fiscal years:

          (DOLLARS IN THOUSANDS,                  FISCAL YEAR
          ROUNDED TO NEAREST THOUSAND)     2003       2004       2005

          Q1, ended September 30 ....     $  895     $2,300     $  434
          Q2, ended December 31 .....      1,668        542      1,009
          Q3, ended March 31 ........      2,088        548      1,048
          Q4, ended June 30 .........      1,114      1,411        739

Our revenue depends in large part on receiving new clinical or diagnostic
studies from our clients, and we cannot predict the timing or amount of revenue
we may recognize from quarter to quarter. During fiscal 2006, we are planning to
make additional investments in our business development, technology
infrastructure, operations and other areas of our business in an effort to
become more competitive and to increase our revenue. These efforts will use
significant amounts of time, effort and funding. These efforts may not be
successful in generating additional revenue.

         WE HAVE HISTORICALLY HAD WORKING CAPITAL DEFICITS. IF OUR REVENUE DOES
         NOT INCREASE, OUR LOSSES, CASH AND WORKING CAPITAL POSITION MAY WORSEN.

We regularly have had cash flow shortages and deficiencies in working capital.
Although at June 30, 2005, we had approximately $1,439,000 in cash and a
positive working capital position of approximately $308,000, we also had
significant amounts of debt, including a secured convertible note and notes
payable of $1,647,000 and other liabilities of $2,143,000 and stockholders'
deficit of $362,000. These amounts include $1,500,000 in gross proceeds
($1,386,000 in net proceeds) we realized from our secured debt financing we
closed in January 2005. These amounts also include $2,659,284 in the discount
balance associated with the two Laurus Notes. We also had amounts of past due
debt, including approximately $7,000 of accounts payable that was 90 or more
days old as of June 30, 2005. For the last two fiscal years ended June 30, 2005
and 2004, we had operating losses of approximately $2,159,000 and $1,712,000,
respectively. At June 30, 2005, we had an accumulated deficit of approximately
$26,112,000.

Currently, our cash, cash equivalents, and accounts receivable are being used to
fund our operating losses and investments in capital expenditures. Accordingly,
unless revenue increases, we will likely continue to experience significant
losses and our cash and working capital positions will be adversely impacted
through fiscal 2006. To improve our cash position, we are actively seeking to
(i) increase revenue, (ii) raise debt or equity financing, and (iii) cut certain
expenses. Our efforts to improve our cash position, reduce expenses and generate
revenue may not be successful.

Our future capital requirements depend upon many factors, including, but not
limited to:

     o    the timing and number of clinical trials by clients, the number of
          samples submitted to us for testing, and the amount of revenue
          generated from these tests;

                                      -13-
<PAGE>

     o    our ability to enter into and build relationships with new clients,
          and obtain additional projects from existing clients;

     o    our ability to participate in and win bids from RFPs (requests for
          proposals) for clinical tests;

     o    capital expenditure requirements, including for research and
          development efforts, upgrading or replacing laboratory equipment and
          making investments in information technology;

     o    delays or early terminations of clinical testing agreements with
          clients;

     o    our plans to pursue additional business strategies;

     o    our ability to manage our cash flow, including by managing or reducing
          our expenses, such as insurance and professional fees of our
          accountants and attorneys associated with being a public company; and

     o    other business and economic factors that may occur from time to time.

None of these factors can be predicted with certainty. Additionally, if we
desire to invest in our laboratory technology or research and development, we
will require as much as $1-3 million in additional financing.

         WE CLOSED ON A TOTAL OF $4.0 MILLION IN SENIOR SECURED CONVERTIBLE DEBT
         FINANCINGS IN MAY 2004 AND JANUARY 2005. OUR ABILITY TO MAKE REQUIRED
         PAYMENTS OF PRINCIPAL AND INTEREST ON THE DEBT DEPENDS PRIMARILY ON
         CASH FLOW FROM OPERATIONS, WHICH MAY NOT BE SUFFICIENT TO SERVICE THE
         DEBT.

In fiscal 2004 and 2005, we closed on two debt financings with Laurus Master
Funds Ltd., consisting of $2.5 million effective May 28, 2004 and an additional
$1.5 million effective January 31, 2005. See "Description of Business - Laurus
Debt Investments" above. Each of these financing is subject to the terms of a
three-year convertible term note. For the $2.5 million debt (the 2004 Note), we
are obligated to make monthly payments of interest only through May 2006
(approximately $16,000 per month, based on current interest rates of 7.5%), and
monthly payments of principal and interest thereafter beginning June 1, 2006
(approximately $101,000 per month, based on a 36 month amortization schedule and
current interest rates of 7.5%), with the principal balance due in full on May
1, 2008. For the $1.5 million debt (the 2005 Note), we are obligated to make
monthly payments of interest only through July 2006 (approximately $10,000 per
month, based on current interest rates of 7.5%), and monthly payments of
principal and interest thereafter beginning August 1, 2006 (approximately
$61,000 per month, based on a 36 month amortization schedule and current
interest rates of 7.5%), with the principal balance due in full on January 1,
2009. Our actual required cash payments on the two notes will vary depending on
interest rates and whether amounts under the notes are converted into our common
stock.

Our ability to make scheduled monthly payments under the two notes primarily
depends on our future performance and working capital, including our ability to
increase revenue and cash flows. We currently have other fixed monthly
commitments under various notes payable, equipment and facility leases. See
"Notes 8 and 9 to Notes to Consolidated Financial Statements" for the fiscal
year ended June 30, 2005 included in this Annual Report on Form 10-KSB. To a
certain extent our ability to increase revenue and control costs are subject to
a number of economic, financial, competitive, regulatory and other factors
beyond our control.

However, if our cash flow is insufficient to enable us to service our debt, we
may be forced to find alternative sources of financing, or to take further
drastic measures, including significantly reducing operations, seeking to sell
the company or certain assets, or pursuing a liquidation. Any future alternative
sources of debt or equity financing may not be available to us when needed or in
amounts required. Although we obtained a line of credit with Franklin Funding in
fiscal 2004 for an aggregate amount of $250,000, we have fully utilized that
facility and we currently do not have available to us another bank line of
credit or other general borrowing facility. Alternatively, we may be forced to
attempt to negotiate with our debt holders on our payment terms, which may not
be successful or may be on terms onerous to us.

                                      -14-
<PAGE>

         WE GRANTED A BLANKET SECURITY INTEREST IN ALL OF OUR ASSETS TO THE
         HOLDER OF OUR SECURED CONVERTIBLE DEBT. IF WE ARE UNABLE TO MAKE OUR
         REQUIRED MONTHLY PAYMENTS ON THE DEBT, OR ANY OTHER EVENT OF DEFAULT
         OCCURS, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
         OPERATIONS, AND THE DEBT HOLDER MAY FORECLOSE ON OUR ASSETS.

As part of our two debt financings with Laurus, we granted to Laurus a blanket
security interest in all of our assets, including assets of our subsidiaries.
See "Description of Business - Laurus Debt Investments" above. In the event we
default in payment on the debt, or any other event of default occurs under the
financing documents, 130% of the outstanding principal amount and accrued
interest will accelerate and be due and payable in full.

The cash required to pay such accelerated amounts on the notes following an
event of default would most likely come out of our working capital. As we rely
on our working capital for our day to day operations, such a default could have
a material adverse effect on our business, operating results, or financial
condition to such extent that we are forced to restructure, file for bankruptcy,
sell assets or cease operations. In addition, upon an event of default, the
holders of the secured debt could foreclose on our assets or exercise any other
remedies available to them. If our assets were foreclosed upon, or if we were
forced to file for bankruptcy or cease operations, stockholders may not receive
any proceeds from disposition of our assets and may lose their entire investment
in our stock.

         WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND CONTINUING OPERATIONS.
         IF OUR FINANCING EFFORTS ARE NOT SUCCESSFUL, WE WILL NEED TO EXPLORE
         ALTERNATIVES TO CONTINUE OPERATIONS, WHICH MAY INCLUDE A MERGER, ASSET
         SALE, JOINT VENTURE, LOANS OR FURTHER EXPENSE REDUCTIONS.

Our efforts to reduce expenses and generate revenue may not be successful.
Although we raised $4.0 million in gross proceeds from our two secured
convertible debt financings with Laurus, and approximately $1.9 million in gross
proceeds from our private placement of common stock that closed in March 2004,
if our revenue does not increase we expect to need to raise additional capital
through equity or debt financing or through the establishment of other funding
facilities in order to keep funding operations. However, in the current market
condition, raising capital has been, and will continue to be difficult, and we
may not receive sufficient funding. For instance, under the terms of our May
2004 debt financing with Laurus, we had the right to seek an additional $1.0
million in PARI PASSU debt from an investor acceptable to Laurus within 30 days
of closing of the initial financing; however, we were not successful in closing
on additional funds within such time frame. Any future financing that we seek
may not be available in amounts or at times when needed, or, even if it is
available, may not be on terms acceptable to us. Also, if we raise additional
funds by selling equity or equity-based securities, the ownership of our
existing stockholders will be diluted.

We continually evaluate various other alternatives to enable us to fund
continuing operations, which may or may not occur, including, but are not
limited to, any one or more of the following:

     o    engaging a financial advisor to explore strategic alternatives, which
          may include a merger, asset sale, joint venture or other similar
          transaction;

     o    forming a joint venture with one or more strategic partners to provide
          additional capital resources to fund operations; and

These potential alternatives may not be open to us, or may only be available on
unfavorable terms. If we are unable to obtain sufficient cash either to continue
to fund operations or to locate a strategic alternative, we may be forced to
seek protection from creditors under the bankruptcy laws or cease operations.
Any inability to obtain additional cash as needed could have a material adverse
effect on our financial position, results of operations and ability to continue
in existence. During fiscal 2006, we are planning to make additional investments
in our business development, technology infrastructure, operations and other
areas of our business in an effort to become more competitive and to increase
our revenue. These efforts will use significant amounts of time, effort and
funding.

                                      -15-
<PAGE>

         WE HAVE RECEIVED A GOING-CONCERN OPINION FROM OUR INDEPENDENT
         ACCOUNTANTS. IF WE CANNOT FUND OUR OPERATIONS FROM REVENUE OR FINANCING
         EFFORTS, WE MAY HAVE TO CHANGE OUR BUSINESS PLAN, SIGNIFICANTLY REDUCE
         OR SUSPEND OUR OPERATIONS, SELL OR MERGE OUR BUSINESS, OR FILE A
         PETITION IN BANKRUPTCY.

Our history of working capital deficiencies and any inability to secure
additional financing could have a material adverse effect on whether we would be
able to successfully implement our business plan and our ability to continue as
a going concern. For our fiscal year ended June 30, 2005, our independent
accountants included a "going concern" emphasis paragraph in their report on our
financial statements, stating that we have suffered recurring losses and have
historically had net working capital deficits. We have experienced significant
recent decreases in our revenue, and we have been actively seeking to decrease
our fixed expenses and other fixed costs with the objective of controlling
expenses while minimizing any adverse impact on our future business
opportunities. However, these conditions raise substantial doubt about our
ability to continue as a going concern. If we cannot generate sufficient revenue
from operations or raise additional financing, we may need to change our
business plan, significantly reduce or suspend our operations (which may include
further reducing our operating expenses and downsizing our staff), sell or merge
all or a portion of our business, or file a petition in bankruptcy.

         DURING EACH OF OUR PAST FISCAL YEARS, WE HAVE DEPENDED ON ONE OR TWO
         CLIENTS FOR A SIGNIFICANT PORTION OF OUR REVENUE. ANY DECREASE IN
         REVENUE FROM THESE CLIENTS COULD MATERIALLY ADVERSELY AFFECT US.

Historically, our largest two clients in any individual fiscal year have
represented in excess of 50% of our revenue. However, during the fiscal year
ended June 30, 2005, our top two clients represented 40% of our revenue as
compared to 75% during the fiscal year ended June 30, 2004. Our largest client
in fiscal 2005 individually accounted for approximately 23% and 36% of our total
revenue in fiscal 2005 and 2004, respectively, while our largest client in
fiscal 2004 accounted for approximately 4% and 40% of our total revenue in
fiscal 2005 and 2004, respectively. Revenue from our five largest clients
represented approximately 67% and 86% of total revenue in fiscal 2005 and fiscal
2004, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and see "Description of Business -
Clients/Marketing" above. Because our revenue has been concentrated in one or
two large clients, we can be materially adversely impacted by decreases in work
generated from these clients, including any delays in undertaking clinical
studies or submitting samples for testing services, any early termination or
reductions in work orders or clinical studies, or any decreases in the volume or
timing of new work orders.

We have expanded our business development efforts and have continued to submit
bids and proposals to these and other companies for our services, to increase
our revenue and to diversify our client base. Although we believe that we have
good relations with all of our large clients and other companies in the
industry, and we expect to receive additional work orders in the future, we
cannot predict the timing or amount of any such additional work or whether we
will be successful in further diversifying our client base. If we are
unsuccessful in our sales and business development efforts with our existing
clients and potential clients, our revenue for the fiscal year ending June 30,
2006 will be less than our revenue for the fiscal year ended June 30, 2005. In
addition, unless we are able to attract additional clients for medium to large
studies, we will continue to be dependent on one or two large clients for a
substantial majority of our revenue.

         OUR ABILITY TO ATTRACT AND RETAIN CLIENTS DEPENDS IN LARGE PART ON OUR
         REPUTATION. IF OUR REPUTATION IS HARMED, OUR REVENUE, BUSINESS
         DEVELOPMENT, GROWTH AND OPERATING RESULTS MAY SUFFER.

We compete with other specialty laboratories and central laboratories in large
part on the basis of our reputation for providing quality results in a timely
manner. Accordingly, timely, effective and quality service is essential to
establishing and maintaining our reputation, as well as to generating clients
and revenue. Our reputation may suffer damage, whether from actions outside or
within our control. If our reputation is harmed, our revenue, business
development, growth and operating results may suffer.

         IF WE DO NOT GENERATE NEW CLIENTS AND NEW PROJECTS FROM OUR BUSINESS
         DEVELOPMENT EFFORTS, OUR GROWTH MAY BE LIMITED, SALES OF OUR SERVICES
         MAY DECREASE AND OUR OPERATING RESULTS MAY SUFFER.

We generally do not have long-term contracts with clients for our services. In
addition, any project we undertake may generally be terminated at any time by
the client on short notice. As a result, it is difficult for us to forecast

                                      -16-
<PAGE>

future sales, and our future revenue depends on our ability to generate new
clients and new projects. During fiscal 2006, we are planning on making
additional investments in our business development, technology infrastructure,
operations and other areas of our business in an effort to become more
competitive and to increase our revenue. These efforts will use significant
amounts of time, effort and funding. Our business development efforts are
substantially dependent on our ability to effectively manage our time, personnel
and resources. In particular, our Chief Science Officer and Chief Medical
Officer are often heavily involved in the marketing and business development
process, and time that they spend in this area detracts from their available
time for laboratory and development work. Our success in business development
depends in part on our reputation in the industry and client perceptions
(including as to our laboratory capacity and financial health), and also to a
degree on personal relationships between us and the client. With the significant
consolidation in the pharmaceutical industry, it is often a long and complex
process in finding and meeting with the right person within the client. We also
understand that some companies in the pharmaceutical industry have "preferred
vendor" lists, such that a vendor cannot participate in RFPs (requests for
proposal) or contract with the company unless the vendor is pre-approved on the
list. We are attempting to expand our efforts in this area. If a client or
prospective client has negative perceptions about our capabilities, our
laboratory capacity or our financial health, this may affect our ability to
develop new clients or projects. If our business development efforts are not
successful, our revenue and cash flow may decrease and our operating results may
suffer.

         THE LOSS OF OUR KEY PERSONNEL, INCLUDING OUR CHIEF SCIENTIFIC OFFICER
         AND CHIEF MEDICAL OFFICER, COULD ADVERSELY AFFECT OUR BUSINESS.

Our success depends to a significant extent upon the efforts of our senior
management team and other key personnel, and in particular Dr. Elizabeth Leary,
our Chief Scientific Officer, and Dr. Mario Ehlers, our Chief Medical Officer.
In addition to the services they provide in our laboratory services, Drs. Leary
and Ehlers are also important to our business development efforts, both due to
their reputations and skills, as well as their contacts and relationships with
clients and prospective clients. The loss of the services of such personnel
could adversely affect our business. Also, because of the scientific and
technical nature of our business, our success is dependent upon our ability to
attract and retain technologically qualified personnel. There is substantial
competition for qualified personnel, and an inability to recruit or retain
qualified personnel may impact our ability to grow our business and compete
effectively in our industry.

         OUR OBLIGATIONS UNDER OUR SECURED DEBT TO LAURUS MAY ADVERSELY AFFECT
         OUR ABILITY TO ENTER INTO POTENTIAL SIGNIFICANT TRANSACTIONS WITH OTHER
         PARTIES.

As a result of our debt financings with Laurus in May 2004 and January 2005, we
incurred significant repayment obligations, we granted a blanket security
interest in our assets, and we agreed to certain restrictive covenants. In
particular, for so long as 25% of the original principal is outstanding under
either note, we will need Laurus' consent before we can take certain actions,
including the following:

     o    pay any dividends;

     o    merge, effect a material reorganization, liquidate or dissolve;

     o    materially change the scope of our business; or

     o    create, incur or assume any debt (other than certain trade debt,
          equipment financings and debt for the purchase of assets in the
          ordinary course of business).

Accordingly, unless we obtain Laurus' consent, we may not be able to enter into
certain transactions. In addition, in connection with any potential significant
transaction (such as a merger, sale of substantially all our assets, joint
venture, or similar transaction), it is likely that we would have to pay off the
debt obligations to Laurus and have the security interests released. Although we
have the right at any time to prepay our secured debt obligations, we can only
do so upon payment of 130% of the then principal balance, plus all other amounts
owing under the notes. See "Description of Business - Laurus Debt Investments"
above. Based on a total principal balance of $4.0 million under both notes,
prepayment would require a cash payment of $5.2 million, plus accrued interest.
These provisions could have the practical effect of increasing the costs of any
potential significant transaction, and restrict our ability to enter into any
such transaction.

                                      -17-
<PAGE>

         WE MAY BEAR FINANCIAL LOSSES BECAUSE MOST OF OUR CONTRACTS ARE OF A
         FIXED PRICE NATURE AND MAY BE DELAYED, TERMINATED OR REDUCED IN SCOPE
         FOR REASONS BEYOND OUR CONTROL.

Many of our contracts provide for services on a fixed price or fee-for-service
with a cap basis and they may be terminated, delayed or reduced in scope by the
other party either immediately or upon notice. See "Description of Business -
Contractual Arrangements" above. Contract termination, delay or reduction in
scope may occur for a variety of reasons, most of which are beyond our control,
including:

     o    the failure of the client's products to satisfy safety requirements;

     o    unexpected or undesired results of the client's products;

     o    insufficient patient enrollment by the client;

     o    insufficient investigator recruitment by the client;

     o    the client's decision to terminate the development of a product or to
          end a particular study; and

     o    our failure to perform properly our duties under the contract.

Because we primarily receive revenue on the basis of the number of clinical
samples we test and process, the loss, reduction in scope or delay of a large
contract or the loss or delay of multiple contracts could materially adversely
affect our business, results of operations, financial condition and cash flows.
Our contracts typically entitle us to receive payment for fees earned by us up
to the time of termination and reimbursement for out-of-pocket costs incurred
prior to termination. In certain limited instances, our contracts also entitle
us to a termination fee or payment for the costs of winding down the terminated
projects.

         WE MAY BEAR FINANCIAL RISK IF WE UNDERPRICE OUR CONTRACTS OR OVERRUN
         COST ESTIMATES.

Since our contracts are often structured as fixed price or fee-for-service with
a cap, we bear the financial risk if we initially under price our contracts or
otherwise overrun our cost estimates. Such under pricing or significant cost
overruns could have a material adverse effect on our business, results of
operations, financial condition and cash flows.

         OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS ESSENTIAL TO THE
         GROWTH AND DEVELOPMENT OF OUR PRODUCTS AND SERVICES.

We rely, in part, on patents, trade secrets and know-how to develop and maintain
our competitive position and technological advantage on our existing
intellectual property and any future intellectual property we develop. See
"Description of Business - Technologies and Products" above. We protect our
intellectual property through a combination of license agreements, trademark,
service mark, copyright, trade secret laws and other methods of restricting
disclosure and transferring title. We have and intend to continue entering into
confidentiality agreements with our employees, consultants and vendors; entering
into license agreements with third parties; and generally seeking to control
access to and distribution of our intellectual property.

RISKS RELATING TO OUR INDUSTRY

         FAILURE TO KEEP PACE WITH CHANGES IN THE MARKETPLACE MAY CAUSE US TO
         LOSE MARKET SHARE AND OUR REVENUE MAY DECREASE.

The market for specialty reference and central laboratory services is subject to
rapid technological change and innovation. In particular, laboratories are
regularly developing new assays to incorporate into clinical testing and have to
maintain up-to-date laboratory equipment to stay competitive. In developing and
enhancing our services, we have made, and will continue to make, assumptions
about which features, standards and performance criteria will be attractive to,
or demanded by, our clients. If we implement features, standards and performance
criteria that are different from those required by our clients or if our
competitors introduce products and systems that better address these needs,
market acceptance of our offerings may suffer or may become obsolete. In that
event, our market share and revenue would likely decrease. In addition, clients
are requiring that laboratories maintain secure and sophisticated information
technology systems, as a means for storing data and facilitating communication
between the laboratory and the client. Although we continue to expend efforts
and resources in these areas, we may not be

                                      -18-
<PAGE>

successful in keeping up with client needs or expectations. In addition, if a
client or prospective client has negative perceptions about our abilities based
on our balance sheet and financial strength, this may affect our ability to
develop new clients or projects. Many of our competitors have greater resources
than we do. We are also exploring potential financing to be used to continue to
update our laboratory service capability; if we are unsuccessful in raising
funds as and when needed, we may, or it may be perceived, that we are less
efficient and less economical than our competitors and we may lose business to
our competitors. If this occurs, it would have a material adverse effect on our
revenue and financial performance.

         WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND MARKET NEW SERVICES.

We may seek to develop and market new services that complement or expand our
existing business. If we are unable to develop new services and or create demand
for those newly developed services, our future business, results of operations,
financial condition and cash flows could be adversely affected.

         WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, AND WE MAY LOSE OR FAIL TO
         ATTRACT CLIENTS FOR OUR SERVICES TO OUR COMPETITORS.

Competitors in the specialty reference and central laboratory industry range
from small, limited-service providers to full service global contract research
organizations. Our main competition consists of in-house departments of
pharmaceutical companies, full-service contract research organizations, and, to
a lesser degree, universities. See "Description of Business - Competition"
above. We compete on a variety of factors, including

     o    technological expertise and efficient drug development processes,

     o    reputation for on-time quality performance,

     o    price,

     o    expertise and experience in specific areas,

     o    strengths in various geographic markets and global reach,

     o    ability to manage large-scale clinical trials both domestically and
          internationally,

     o    scope of service offerings,

     o    ability to acquire, process, analyze and report data in a time-saving
          and accurate manner, and

     o    expertise and experience in health economics and outcomes services.

Many of our competitors have greater resources than we do, have global
operations and greater name recognition. If we experience significant
competition which is based on factors which we do not have in our business, such
as global management of projects or size, our business could be materially
adversely affected. Although we have entered into a joint marketing arrangement
with Quintiles in an attempt to improve our competitive position, in fiscal
2005, we did not realize significant financial benefit from this relationship
and this arrangement may not be successful in generating revenue for us or
improving our competitive position.

         CHANGES IN GOVERNMENT REGULATIONS COULD DECREASE THE NEED FOR OUR
         SERVICES.

Governmental agencies throughout the world, but particularly in the United
States, highly regulate the drug development and approval process. See
"Description of Business - Government Regulation" above. Our business involves
performing safety and efficacy laboratory testing during clinical trials of new
pharmaceutical drugs. Clinical trial laboratory data is used by pharmaceutical
and biotechnology companies in the submission process to the FDA for the
marketing approval of a new drug. Changes in regulations, such as a relaxation
in regulatory requirements or the introduction of simplified drug approval
procedures or an increase in regulatory requirements that we have difficulty
satisfying, could eliminate or substantially reduce the need for our services.
Also, government efforts to contain drug costs and pharmaceutical and
biotechnology company profits from new drugs may have an impact on the drug
development and approval process, and our clients may spend less, or reduce
their growth in spending, on research and development.

                                      -19-
<PAGE>

         FAILURE TO COMPLY WITH EXISTING GOVERNMENT REGULATIONS COULD RESULT IN
         A LOSS OF REVENUE OR EARNINGS FROM A PROJECT.

Any failure on our part to comply with applicable government regulations could
result in the termination of on-going research or sales and marketing projects
or the disqualification of data for submission to regulatory authorities. For
example, if we failed to validate analytical test methods performed on samples
collected during and in support of a trial or if we fail to comply with GCP
(Good Clinical Practice) regulations, the generated test data could be
disqualified. If this were to happen, we could be contractually required to
repeat the trial at no further cost to our client, but at substantial cost to
us.

         WE DEPEND ON THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES.

Our revenue depends greatly on the outsourcing expenditures made by the
pharmaceutical and biotechnology industries in research and development.
Accordingly, economic factors and industry trends that affect our clients in
these industries also affect our business. If companies in these industries were
to reduce the number of research and development projects they outsource, our
business could be materially adversely affected.

Our clients in the pharmaceutical and biotechnology industries have experienced
significant consolidation over the last several years and we expect that trend
to continue. The uncertainty caused by consolidation, before, during and after a
business combination can result in product delays, changes in strategy, and
consolidation and/or elimination of research and development efforts. Any of
these effects can have a materially adverse affect on us if it results in
testing delays, sample volume reductions or termination of tests.

         WE MUST MAINTAIN CERTIFICATIONS FROM OUR CLIENTS IN ORDER TO BE
ELIGIBLE TO BID ON PROJECTS.

Many of our clients require our laboratories to be tested from time to time for
certification that we comply with their internal requirements. If we fail to
comply, we will probably be terminated from existing contracts and we will not
be eligible to bid on that client's future projects. While generally we have
been very successful in maintaining certifications and in gaining new
certifications, if we fail certification tests, especially for our major
clients, our business would be materially adversely affected.

         WE MAY EXPAND OUR BUSINESS THROUGH ACQUISITIONS.

We may review acquisition opportunities. Factors which could affect our ability
to grow successfully through acquisitions include

     o    difficulties and expenses in connection with integrating the acquired
          companies and achieving the expected benefits,

     o    diversion of management's attention from current operations,

     o    the possibility that we may be adversely affected by risk factors
          facing the acquired companies, and

     o    acquisitions could be dilutive to earnings, or in the event of
          acquisitions made through the issuance of our common stock to the
          stockholders of the acquired company, dilutive to the percentage of
          ownership of our existing stockholders.

         WE MAY BE AFFECTED BY POTENTIAL HEALTH CARE REFORM.

In recent years, governments of the United States, Europe and Asia have
considered various types of health care reform in order to control growing
health care costs. We are unable to predict what legislative proposals will be
adopted in the future, if any. Implementation of health care reform legislation
that contains costs could limit the profits that can be made from the
development of new drugs. This could adversely affect research and development
expenditures by pharmaceutical and biotechnology companies which could in turn
decrease the business opportunities available to us. In addition, new laws or
regulations may create a risk of liability, increase our costs or limit our
service offerings.

                                      -20-
<PAGE>

         SPECIAL REFERENCE AND CENTRAL LABORATORY SERVICES CREATE A RISK OF
         LIABILITY.

In contracting to work on drug development trials, we face a range of potential
liabilities, including

     o    errors or omissions in laboratory data being generated relating to the
          safety and efficacy of the drug, that could affect the regulatory
          approval of the drug, and

     o    errors and omissions during a trial that may undermine the usefulness
          of a trial or data from the trial.

While we maintain what we believe is adequate insurance coverage and obtain
contractual indemnifications protecting us against liability arising from our
own actions (other than negligence or intentional misconduct), we could be
materially and adversely affected if we were required to pay damages or bear the
costs of defending any claim which is not covered by a contractual
indemnification provision or which is beyond the level of our insurance
coverage. Due to the rising costs of insurance, we may not be able to maintain
such insurance coverage at levels or on terms acceptable to us.

         WE RELY ON AIR TRANSPORTATION AND OVERNIGHT DELIVERY SERVICES.

Our laboratories are heavily reliant on air travel for transport of clinical
trial kits and other material and people, and disruption to the air travel
system or package delivery system could have a material adverse effect on our
business. We generally receive revenue only on the basis of clinical tests
actually performed. Accordingly, any non-receipt or delay in receiving testing
materials will impact our ability to generate revenue.

RISKS RELATED TO OUR COMMON STOCK

         BECAUSE OUR COMMON STOCK IS TRADED ON THE OTC BULLETIN BOARD AND IS
         CONSIDERED A "PENNY STOCK," OUR STOCKHOLDERS' ABILITY TO SELL SHARES IN
         THE SECONDARY TRADING MARKET MAY BE LIMITED.

Our common stock is currently quoted for trading on the OTC Bulletin Board. As a
result, the liquidity of our common stock is limited, not only in the number of
shares that are bought and sold, but also through delays in the timing of
transactions, and the lack of coverage by security analysts and the news media
of our company.

In addition, because our stock is quoted on the OTC Bulletin Board, our common
stock is subject to certain rules and regulations relating to "penny stock." A
"penny stock" is generally defined as any equity security that has a price less
than $5.00 per share and that is not quoted on the NASDAQ Stock Market or a
national securities exchange. Being a penny stock generally means that any
broker who wants to trade in our shares (other than with established clients and
certain institutional investors) must comply with certain "sales practice
requirements," including delivery to the prospective purchaser of the penny
stock a risk disclosure document describing the penny stock market and the risks
associated therewith. In addition, broker-dealers must take certain steps prior
to selling a "penny stock," which steps include:

     o    obtaining financial and investment information from the investor;

     o    obtaining a written suitability questionnaire and purchase agreement
          signed by the investor; and

     o    providing the investor a written identification of the shares being
          offered and the quantity of the shares.

If these penny stock rules are not followed by the broker-dealer, the investor
has no obligation to purchase the shares. The application of these comprehensive
rules will make it more difficult for broker-dealers to sell our common stock,
and as a practical matter, these requirements may mean that brokers are less
likely to make recommendations on our shares to its general clients.

As a result, for as long as our common stock is quoted on the OTC Bulletin Board
and subject to these penny stock rules, our stockholders may have difficulty in
selling their shares in the secondary trading market. In addition, prices for
shares of our common stock may be lower than might otherwise prevail if our
common stock were quoted on the NASDAQ Stock Market or traded on a national
securities exchange, like The New York Stock Exchange or

                                      -21-
<PAGE>

American Stock Exchange. This lack of liquidity may also make it more difficult
for us to raise capital in the future through the sale of equity securities.

         OUR QUARTERLY OPERATING RESULTS MAY VARY, AND THESE FLUCTUATIONS COULD
         AFFECT THE MARKET PRICE OF OUR STOCK.

Our operating results may vary significantly from quarter to quarter and are
influenced by such factors as:

     o    the commencement, completion or cancellation of large contracts,

     o    the progress of ongoing contracts,

     o    seasonality (particularly in the summer months as patient enrollment
          and participation in clinical testing typically decreases coinciding
          with summer vacations), and

     o    changes in the mix of our services.

We believe that operating results for any particular quarter are not necessarily
a meaningful indication of future results. While fluctuations in our quarterly
operating results could negatively or positively affect the market price of our
common stock, these fluctuations may not be related to our future overall
operating performance.

         OUR STOCK PRICE IS VOLATILE AND A STOCKHOLDER'S INVESTMENT IN OUR
         COMMON STOCK COULD SUFFER A DECLINE IN VALUE.

The trading price of our common stock has fluctuated significantly in the past.
The future trading price of our common stock may continue experiencing wide
price fluctuations in response to a number of factors, some of which are beyond
our control, such as:

     o    actual or anticipated fluctuations in revenue or operating results,

     o    changes in market valuation of companies in our industry generally,

     o    announcements of research activities and technology innovations or new
          products or services by us or our competitors;

     o    failure to meet expectations of performance,

     o    developments in or disputes regarding copyrights, trademarks, patents
          and other proprietary rights, and

     o    general economic conditions.

         THE MARKET FOR OUR STOCK HAS NOT BEEN LIQUID.

The average daily trading volume for our common stock during the three months
prior to June 30, 2005 was less than 15,000 shares. Therefore, holders of our
common stock may have difficulty selling their shares in the public markets. As
a result of our three outstanding resale registration statements that became
effective during fiscal 2005, a significant number of restricted shares have
been registered and are available for sale (including shares that may be issued
in the future upon conversion of amounts due under the Laurus note and upon
exercise of outstanding warrants). Sales of a substantial number of shares of
our common stock in the public market (including the shares offered under this
prospectus, under other registration statements and shares available for resale
under Rule 144 under the Securities Act) or the perception that such sales could
occur, could significantly depress the prevailing market price of our common
stock.

         AS WE ISSUE ADDITIONAL EQUITY SECURITIES IN THE FUTURE, INCLUDING UPON
         CONVERSION OF ANY OF OUR SECURED CONVERTIBLE DEBT, OUR EXISTING
         STOCKHOLDERS WILL BE DILUTED. IN PARTICULAR, THE SECURED CONVERTIBLE
         DEBT HAS A FULL RATCHET ANTI-DILUTION PROVISION THAT COULD
         SIGNIFICANTLY DILUTE OUR STOCKHOLDERS.

In connection with our two debt financings with Laurus, we issued a $2.5 million
secured convertible note, a $1.5 million secured convertible note and warrants
to Laurus. See "Description of Business - Laurus Debt Investment" above. The
$2.5 million note is convertible into shares of our common stock at an initial
conversion price of $1.06 per share, and the $1.5 million note is convertible at
an initial conversion price of $1.17 per share. At these initial conversion
rates, for example, we would issue approximately 3,641,000 shares upon
conversion of the $4.0 million

                                      -22-
<PAGE>

owing under the notes. The actual number of shares to be issued will depend on
the actual dollar amount of principal and interest being converted. In addition,
each note carries a full ratchet anti-dilution provision, such that if we issue
in the future convertible or equity securities (subject to certain exceptions,
including stock option grants and issuances in connection with certain
acquisition transactions) at a price less than the initial conversion price, the
note conversion price will be automatically adjusted down to that lesser price.
In addition to the conversion rights of the convertible debt, as we issue stock
or convertible securities in the future, including for any future equity
financing or upon exercise of any of the outstanding stock purchase warrants and
stock options, those issuances would also dilute our stockholders. If any of
these additional shares are issued and are sold into the market, it could
decrease the market price of our common stock and could also encourage short
sales. Short sales and other hedging transactions could place further downward
pressure on the price of our common stock.

         WE DO NOT INTEND TO PAY CASH DIVIDENDS, SO ANY RETURN ON INVESTMENT
         MUST COME FROM APPRECIATION.

We have not declared dividends on our common stock in the past, and do not
intend to declare dividends on our common stock in the foreseeable future. In
addition, pursuant to our financing agreements with Laurus, for as long as 25%
of the original principal amount is outstanding under the either secured
convertible note to Laurus, we may not declare or pay any dividends without
Laurus' consent. As a result, any investment return in our common stock must
come from increases in the fair market value and trading price of our common
stock.

         WE MAY BE SUBJECT TO FURTHER SANCTIONS FROM THE SEC IF WE FAIL TO
         COMPLY WITH THE MAY 10, 2001 FINAL JUDGMENT.

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

ITEM 2.    DESCRIPTION OF PROPERTY.

We lease approximately 15,000 square feet of office and laboratory space in
Seattle, Washington for our executive offices and laboratory. This lease has a
term of ten years, expiring on October 31, 2007, and carries an average annual
rental of approximately $229,000 through the remainder of the lease term
subsequent to June 30, 2005. In addition, under the terms of the lease, we were
required to place $71,000 security deposit in an interest bearing account in our
name, with interest earned accruing to us. Under the terms of the lease this
$71,000 was returned to us in April 2005.

We believe the leased premises are suitable and adequate for their use. In the
opinion of management, the leased premises are adequately covered by insurance.

We do not own any real property. We do not have a policy pertaining to
investments in real estate. Our current practice is to invest solely in
short-term money market securities.

ITEM 3.    LEGAL PROCEEDINGS.

We are not a party to any pending material legal proceedings.

                                      -23-
<PAGE>

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2005.


                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

COMMON STOCK

Our common stock is currently quoted for trading on the OTC Bulletin Board under
the symbol "PBME." Initially, our common stock began trading in October 1996
(subsequent to the initial public offering) on The NASDAQ Stock Market under the
symbol "PBMI". In March 1999, our securities were delisted from The NASDAQ Stock
Market as it failed to meet the maintenance requirements for tangible net assets
and minimum stock price. The stock subsequently traded and continues to trade on
the OTC Bulletin Board. In March 2003, the ticker symbol for the common stock
was changed to "PBME" from "PBMI" in connection with the 1:3 reverse stock split
approved by our board of directors and stockholders.

The following table shows, for each quarter of fiscal 2005 and 2004, the high
and low closing sales prices as reported by the OTC Bulletin Board. The
quotations from the OTC Bulletin Board reflect inter-dealer prices without
retail mark-up, mark-down, or commissions and may not represent actual
transactions.

                                                          OTC BULLETIN BOARD
                                                            High        Low

          FISCAL 2005:
          Fourth quarter, ended June 30, 2005 ........     $ 1.30     $ 0.73
          Third quarter, ended March 31, 2005 ........       1.33       0.87
          Second quarter, ended December 31, 2004 ....       1.20       0.60
          First quarter, ended September 30, 2004 ....       1.03       0.65

          FISCAL 2004:
          Fourth quarter, ended June 30, 2004 ........     $ 1.25     $ 0.80
          Third quarter, ended March 31, 2004 ........       1.25       0.65
          Second quarter, ended December 31, 2003 ....       2.00       0.75
          First quarter, ended September 30, 2003 ....       2.00       0.90

HOLDERS

As of September 21, 2005, there were 13,325,705 shares of common stock issued
and outstanding, held by approximately 260 holders of record.

DIVIDENDS

We have never declared or paid any cash dividends with respect to our common
stock, and do not plan to do so in the foreseeable future.

There are no dividends accruing on our Series A preferred stock. In September
2002, the holders of Series A preferred stock approved an amendment to the
Certificate of Designation with respect to the rights and preferences of the
Series A preferred stock to, among other things, convert the then-accrued 8%
dividend on the Series A preferred stock into an aggregate of 150,000 shares of
common stock and eliminate any further mandatory dividends on the Series A
preferred stock.

                                      -24-
<PAGE>

We anticipate that we will retain future earnings for use in the operation and
expansion of our business and do not anticipate paying cash dividends on our
equity in the foreseeable future. Any future determination with regard to the
payment of dividends will be at the discretion of our board of directors and
will be dependent upon our future earnings, financial condition, applicable
dividend restrictions and capital requirements and other factors deemed relevant
by the board of directors.

SALES OF UNREGISTERED SECURITIES

Effective January 31, 2005, we signed an agreement with The Investor Resource
Group (IRG) to provide certain investor relations services to us. Pursuant to
the terms of the agreement, we issued a total of 125,000 shares of common stock
to two principals of IRG. The shares of common stock were issued in reliance on
the statutory exemption from registration provided by Section 4(2) of the
Securities Act.


ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR
CONSOLIDATED AUDITED FINANCIAL STATEMENTS AND RELATED NOTES FOR THE FISCAL YEAR
ENDED JUNE 30, 2005, INCLUDED ELSEWHERE IN THIS REPORT. EXCEPT FOR HISTORICAL
INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. SEE
"CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS" AND "RISK FACTORS."

OVERVIEW

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

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

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

We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is not a complete list of all of our accounting policies, and
there

                                      -25-
<PAGE>

may be other accounting policies that are significant to our company. For a
detailed discussion on the application of these and our other accounting
policies, see Note 2 to the Consolidated Financial Statements included in this
Report.

REVENUE RECOGNITION

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

BENEFICIAL CONVERSION FEATURE

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

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

BAD DEBT ALLOWANCE

We endeavor to assess and monitor the creditworthiness of our clients to which
we grant credit terms in the ordinary course of business. We maintain a
provision for doubtful accounts to provide for the possibility that amounts due
to us may not be collected. As of June 30, 2005, the allowance for bad debt was
approximately 4% of our total accounts receivable. This bad debt provision is
monitored on a monthly basis and adjusted as circumstances warrant. As the
recorded bad debt provision is based upon management's judgment, actual bad debt
write-offs may be greater or less than the amount recorded. Historically bad
debt write-offs have not been material.

OPERATING EXPENSES

Historically, we have segregated our recurring operating expenses among three
categories: laboratory and cost of goods sold; selling, general and
administrative expenses; and research and development. For the fiscal period
ended June 30, 2004, operating expenses also included a fourth category,
impairment of technology assets, as described above. Laboratory expenses and
cost of goods sold consist of amounts necessary to complete the revenue and
earnings process, and includes direct labor and related benefits, other direct
costs, and an allocation of facility charges and information technology costs,
and depreciation and amortization. Also, laboratory expenses and cost of goods
sold include shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenue,
tends, and is expected, to fluctuate from one period to another, as a result of
changes in labor utilization and the mix of service offerings involving studies
conducted during any period of time. Selling, general and administrative
expenses include business development activities, sales and marketing expenses
and related commissions, and laboratory administration expenses. Selling,
general and administrative expenses consist primarily of administrative payroll
and related benefit charges, legal and accounting fees, advertising and
promotional expenses, administrative travel and an allocation of facility
charges, information technology costs, and depreciation and amortization.
Research and development expenses consist of direct labor

                                      -26-
<PAGE>

and related benefits, supplies, legal fees for patent applications, travel
expenses, and depreciation and amortization. Impairment of technology assets
resulted from the write-off of our technology assets described above.

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

RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

REVENUE:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
REVENUE                      $  3,230     $  4,801     $ (1,571)          (33)%
--------------------------------------------------------------------------------

Our revenue is primarily generated from clinical pharmaceutical trials testing
services and from diagnostic services. The approximately 33% decrease in fiscal
2005 revenue over fiscal 2004 was primarily attributable to a decrease in the
size and number of clinical pharmaceutical trials testing and diagnostic testing
services we performed. This overall decrease in revenue was partially offset
with the large percentage increase in referral revenues. This category increased
based in part on our joint marketing efforts with other laboratories.

The overall decrease primarily reflects reductions in revenue in the first and
fourth fiscal quarters for the year ended June 30, 2005. Combined revenue for
the first and fourth quarters for the fiscal year ended June 30, 2005 was
$1,173,000 as compared to $3,711,000 for the comparable quarters in the prior
fiscal year. The decrease in revenue observed in these two fiscal quarters was
offset somewhat by the increase in revenue for the second and third quarters for
fiscal 2005. Combined revenue for the second and third quarters for the fiscal
year ended June 30, 2005 was $2,057,000 as compared to $1,090,000 for the
comparable quarters in the prior fiscal year. These quarterly fluctuations in
revenue are primarily explained by the timing between our work on testing and
open work orders, and prior work orders having been completed or terminated.

Historically, our largest two clients in any individual fiscal year have
represented in excess of 50% of our revenue. However, during the fiscal year
ended June 30, 2005, our top two clients represented 40% of our revenue as
compared to 75% during the fiscal year ended June 30, 2004. Our largest single
client in fiscal 2005 accounted for approximately 23% and 36% of our total
revenue in fiscal 2005 and 2004, respectively, while our largest single client
in fiscal 2004 accounted for approximately 4% and 40% of our total revenue in
fiscal 2005 and 2004, respectively. Revenue from our largest five clients
represented approximately 67% and 86% of total revenue in fiscal 2004 and fiscal
2003, respectively.

LABORATORY EXPENSE AND COST OF GOODS SOLD:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
LABORATORY EXPENSE AND
  COST OF GOODS SOLD         $  2,456     $  2,763     $   (307)         (11)%

PERCENTAGE OF REVENUE              76%          58%
--------------------------------------------------------------------------------

For the comparable fiscal years ended June 30, 2005 and 2004, laboratory expense
and cost of goods sold decreased approximately 11%. As a percentage of revenue,
laboratory expense and cost of goods sold increased in fiscal 2005 to
approximately 76% from approximately 58% in fiscal 2004. The relative increase
in laboratory expense and cost

                                      -27-
<PAGE>

of goods sold as a percentage of revenue was primarily the result of the
significant decrease in revenues over the comparable periods and the fixed
components of laboratory expense and cost of goods sold.

Laboratory expense and cost of goods sold consist primarily of payment of
salaries and related benefits to employees performing analysis of clinical trial
samples, the cost of supplies for analysis of clinical trial samples, payments
to subcontractors of laboratory services, and other expenses such as payment of
business and occupation taxes. During the fiscal years ended June 30, 2005 and
2004, respectively, salaries and related benefits accounted for approximately
42% and 35% of total laboratory expense and cost of goods sold, lab supplies
were approximately 30% and 24%, and outside services were approximately 4% and
20%. The 80% decrease in outside services resulted from approximately $537,000
we paid for outside services during fiscal 2004 compared to approximately
$107,000 for all outside services for fiscal 2005. Salaries and related benefits
rose 7% to $1,030,000 from $966,000 for the fiscal years ended June 30, 2005 and
2004, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
SELLING, GENERAL AND
  ADMINISTRATIVE EXPENSE     $  2,819     $  3,145     $   (326)         (10)%

PERCENTAGE OF REVENUE              87%          66%
--------------------------------------------------------------------------------

Our selling, general and administrative expense consists primarily of
compensation for our executive officers, board members and other selling,
general and administrative personnel, compensation income (expense) on our stock
options, legal and accounting fees, and payments under consulting arrangements.

For the comparable years ended June 30, 2005 and 2004, respectively, selling,
general and administrative expense decreased approximately 10% to approximately
$2,819,000 from $3,145,000. As a percentage of revenue, selling, general and
administrative expenses were approximately 87% and 66%, respectively, for the
comparable fiscal years ended June 30, 2005 and 2004.

The reduction in our selling, general and administrative expenses for the
comparable periods is due in large part to the termination of our prior
management agreement with Saigene Corporation, effective August 31, 2004.
Accordingly, for the comparable fiscal years ended June 30, 2005 and 2004,
respectively, management fees decreased 94% to approximately $40,000 from
$680,000.

Excluding Saigene management fees, selling, general and administrative expenses
were approximately $2,779,000 and $2,465,000 (approximately 86% and 51% as a
percentage of revenue), respectively, for the comparable fiscal years ended June
30, 2005 and 2004. The dollar increase in our selling, general and
administrative expenses for the comparable periods is due in large part to
salaries and benefits for management, sales and administrative personnel, which
increased approximately $234,000. The increase in our selling, general and
administrative expenses for the comparable periods is also due to the investor
relations program with IRG and outside consulting services. We had decreased
expenses for board of director, legal and accounting fees, while expenses
associated with bonuses, recruiting, trade shows and travel all increased.

Selling, general and administrative expenses also include compensation income
(expense) resulting from the May 2002 repricing of all outstanding stock options
to the then-current market price of $0.06. For the comparable fiscal years ended
June 30, 2005 and 2004, respectively, we recognized approximately $1,500 and
$35,000 in income. As of June 30, 2005, 7,902 repriced options remained
outstanding. In the future, the amount of compensation expense (income) we
recognize will fluctuate based on the value of our common stock and the number
of options that are outstanding as of each valuation date. (See "Note 12 to
Notes to Consolidated Financial Statements").

                                      -28-
<PAGE>

RESEARCH AND PRODUCT DEVELOPMENT:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
RESEARCH AND PRODUCT
  DEVELOPMENT                $    114     $    129     $    (15)         (12)%

PERCENTAGE OF REVENUE               4%           3%
--------------------------------------------------------------------------------

Research and development expenses consist mainly of our expenditures incurred in
connection with development of our LIDA and cell viability technology that is
held by our subsidiary, PBI Technology.

For the comparable fiscal years ended June 30, 2005 and 2004, research and
product development expenses decreased approximately 12% to approximately
$114,000 from $129,000. The decrease was primarily the result of decreased
compensation expense as a result of fewer employees in research and product
development in the current year period over the comparable prior year period.
For the fiscal year ended June 30, 2005, the decrease was partially offset by
increased costs of $85,000 associated with our agreement with Utek Corporation,
which we entered into September 30, 2004, for Utek to assist us in identifying
one or more licensing, royalty or asset sale opportunities for the technology
assets held by PBI Technology. We terminated this agreement in June 2005. Under
this agreement, we paid no cash compensation to Utek, but issued to Utek 129,730
unregistered shares of common stock as compensation, with 1/12th of the shares
(10,810 shares) vesting each month during the term of the agreement, of which
91,885 shares were vested as of the date of termination of the agreement.

We anticipate that we will continue to incur research and development expenses
related to the technology held by PBI Technology. However, if we are unable to
increase revenue or raise additional funding to continue to fund our existing
research and development efforts, we will seek to further reduce our research
and development efforts and expenses.

IMPAIRMENT OF TECHNOLOGY ASSETS:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
IMPAIRMENT OF TECHNOLOGY
  ASSETS                     $      0     $    477     $   (477)        (100)%

PERCENTAGE OF REVENUE               0%          10%
--------------------------------------------------------------------------------

As of June 30, 2004, we re-assessed impairment issues on our technology assets
and we concluded that the recorded value of those assets should be written off.
Accordingly, as of June 30, 2004, we wrote off the entire balance of $476,874 of
technology assets as an operating expense, "Impairment of technology assets" (in
accordance with SFAS 144- "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS"). (See "Note 2 to Notes to Consolidated Financial Statements"
- Summary of Significant Accounting Policies - Technology Assets ). We had no
comparable expense in fiscal 2005.

OTHER EXPENSE:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
OTHER EXPENSE                $   (834)    $   (172)    $   (662)          385%

PERCENTAGE OF REVENUE             (26)%         (4)%
--------------------------------------------------------------------------------

Total other expense increased 385% to approximately $834,000 from expense of
$172,000 during the fiscal years ended June 30, 2005 and 2004, respectively.
There were two major components of other expense in the year ended June 30, 2005
associated with the Laurus 2004 and 2005 Notes. First, in the year ended June
30, 2005, we had

                                      -29-
<PAGE>

approximately $672,000 of interest expense on the Laurus 2004 and 2005 Notes,
other notes payable and lease obligations. Of this amount, approximately
$229,000 was cash interest paid on the 2004 and 2005 Notes, while we recorded
$423,407 and $21,746 of non-cash expense related to the amortization of the
intrinsic value of the beneficial conversion features of the 2004 and 2005 Notes
for the years ended June 30, 2005 and 2004. As of June 30, 2005, $2,659,000 of
the beneficial conversion feature and warrant discount remained unamortized.
Because of the extension and deferral of interest on the 2004 and 2005 Notes, we
adjusted the amortization schedule of the intrinsic value of the beneficial
conversion and will be amortized at approximately $71,000 per month, using the
straight-line method, over the remaining life of the 2004 and 2005 Notes or upon
their earlier conversion. (See Note 9 to Notes to Consolidated Financial
Statements -- DEFERRAL & EXTENSION OF SECURED CONVERTIBLE NOTES). We entered
into the financing arrangements with Laurus effective May 28, 2004 and January
31, 2005, so we had only $21,746 in comparable expenses related to the May 2004
secured convertible note for the comparable twelve month period ended June 30,
2004.

The second major component of other expense associated with Laurus related to
the approximately $293,500 in fees and expenses in the fourth quarter of fiscal
2004, related to the 2004 Note, and approximately $168,000 in fees and expenses
in the year ended June 30, 2005, related to the 2005 Note. We are amortizing
these fees to deferred financing costs over the amended 48-month life of each
note, resulting in approximately $116,000 of expense recognized for the fiscal
year ended June 30, 2005 compared to approximately $5,000 of expense recognized
as of June 30, 2004. For fiscal 2006, we expect to continue to amortize these
expenses at the rate of approximately $9,000 per month, or $27,000 per quarter.

For fiscal 2004, our net "other expense" included approximately $42,000 in
Washington state sales and business and occupation tax refunds from a review of
past years tax remittances, approximately $155,000 of interest expense on notes
payable and lease obligations (net of interest income), and approximately
$72,000 from a loss on the receipt of common stock instead of cash in payment of
a $200,000 note receivable from a related party (Saigene) and approximately
$16,000 in accrued interest income.

NET LOSS:
                                  YEARS ENDED
--------------------------------------------------------------------------------
Dollars in thousands,
rounded to nearest thousand         JUNE 30,              $             %
                             ---------------------     ----------------------
                               2005         2004        Change        Change
                             --------     --------     --------      --------
NET LOSS                     $ (2,993)    $ (1,884)    $ (1,109)          (59)%

PERCENTAGE OF REVENUE             (93)%        (39)%
--------------------------------------------------------------------------------

We had a net loss of approximately $2,993,000 in fiscal 2005 compared to a net
loss of approximately $1,884,000 in fiscal 2004. This increase in loss is
reflective of our significant decrease in revenue during fiscal 2005. In
addition, the increase in net loss from fiscal 2004 to fiscal 2005 was
significantly as a result of increase in other expenses and the increase in our
selling, general and administrative expenses (net of the Saigene management
fees).

LIQUIDITY AND CAPITAL RESOURCES:

We had significant net operating losses for the fiscal years ended June 30, 2005
and 2004. Revenues for the fiscal years ended June 30, 2005 and 2004 were
significantly lower than those in the comparable prior fiscal years. We did,
however, see improvements in revenues during the second and third quarters of
the 2005 fiscal year. Unless revenues increase, we will likely continue to
experience significant losses and our cash and working capital positions will be
adversely impacted. Our operations historically have been funded through
revenues generated from operations and from the sale and issuance of our common
stock, preferred stock and debt.

At June 30, 2005, our cash and cash equivalents were approximately $1,439,000,
compared to approximately $2,941,000 at June 30, 2004. The decrease in our cash
and equivalents is primarily attributable to our net operating loss. To a lesser
degree the net decrease in our cash and cash equivalents is the result of: (a)
payments made for prepaid expenses, (b) interest payments made on our notes
payable, (c) an increase in our accounts receivables, and (d) our purchases of
capital equipment. These items were offset to some degree as a the result of:
(i) increases in advances from our clients, (ii) increases in deferred
compensation, and (iii) the return of our restricted cash security

                                      -30-
<PAGE>

deposit from our landlord. We previously had restricted cash of approximately
$71,000 which represented a security deposit in connection with our office lease
in Seattle, Washington that expires in July 2007. During the fourth quarter of
fiscal 2005 our landlord returned this restricted cash security deposit. Our
prepaid expenses and other assets increased by approximately $524,000 primarily
from the acquisitions of our laboratory information system and our backup power
generator.

At June 30, 2005, we had approximately $608,000 in accounts receivable, compared
to approximately $367,000 as of June 30, 2004, reflecting the timing of revenues
billed and collected. We generally have a high collectibility rate on our
accounts receivable, and our allowance for doubtful accounts is only $22,100
which we believe is reasonable based on our past experience. Our accounts
receivable generally reflect our billings, and may include one or several
individually large customer receivables from time to time. For example, as of
June 30, 2004, approximately 41% of our receivables balance of approximately
$367,000 was from one clinical service contract, which was subsequently paid in
full in the quarter ended September 30, 2004. We had no such single receivable
that represented a significant portion of our accounts receivable balance as of
June 30, 2005.

Total liabilities recorded on our balance sheet as of June 30, 2005 were
approximately $3,789,000 compared to approximately $3,519,000 as of June 30,
2004. The slight increase in liabilities was the result of an increase in
customer advances, an increase in accrued liabilities, and a slight increase in
our secured Laurus convertible debt net of the beneficial discount for the 2004
and 2005 Notes. This was offset by decreases in our other notes payable,
accounts payable and capital lease obligations. Significant components of our
liabilities include the 2004 and 2005 Notes with Laurus, and, to a lesser
degree, our prior borrowings in fiscal 2004 under our $250,000 credit facility
with Franklin Funding. As required by U.S. generally accepted accounting
principles, the liability we recorded for the 2004 and 2005 Notes reflected a
discount from the face value of the notes by approximately $2,659,000, related
to the valuation of the beneficial conversion feature and the warrants. During
the fiscal year ended June 30, 2005, Laurus converted $63,600 of the principal
amount due on the 2004 Note and as of June 30, 2005 the remaining principal
balance on the 2004 Note was $2,436,400. No amounts of the 2005 Note have been
converted, and as of June 30, 2005 the remaining principal balance on the 2005
Note was $1,500,000. Accordingly, if the discount to face value is disregarded,
our total liabilities as of June 30, 2005 and June 30, 2004, respectively, would
be approximately $6,449,000 and $4,755,000.

At June 30, 2005, we had working capital of approximately $308,000, compared to
working capital of approximately $1,415,000 at June 30, 2004. The approximately
$1,107,000 decrease in working capital is attributable to several changes in the
components of working capital. Changes providing favorable impact include
increases in accounts receivable, prepaid expenses, deferred financing costs
related to the 2004 and 2005 Notes, along with decreases in accounts payable,
and decreases in our current notes payable and the current portion (net of
discounts), payable on our 2004 and 2005 Notes. Changes negatively impacting our
working capital since June 30, 2004 include decreases in our cash, along with
increases in our advances from customers and accrued liabilities. In addition,
our working capital position at June 30, 2005 and June 30, 2004, respectively,
gives effect to approximately $0 and $304,000 of discounts recorded on the
current portions of our 2004 and 2005 Notes, as required by U.S. generally
accepted accounting principles. If this discount were disregarded, we would have
working capital surpluses of approximately $308,000 and $1,111,000,
respectively, at June 30, 2005 and June 30, 2004.

Net cash used in operating activities was approximately $2,397,000 for the
fiscal year ended June 30, 2005, primarily to fund our net loss and changes in
our working capital. For the fiscal year ended June 30, 2005, net cash used in
operations included the effect of approximately $423,000 of amortization related
to the 2004 and 2005 Notes, approximately $152,000 in depreciation and
amortization, and $1,000 in income recognized in accordance with accounting for
stock options under variable pricing rules as it relates to our May 2002
repricing of stock options. Our investing activities used approximately $182,000
for the fiscal year ended June 30, 2005 primarily for the purchase of capital
equipment related to our laboratory information system discussed above. Cash
flows provided in financing activities included approximately $1,077,000
consisting primarily of approximately $1,500,000 in borrowings under our January
2005 secured convertible note with Laurus (net of approximately $168,000 in
deferred finance charges) and approximately $71,000 in payments from the return
of our cash security deposit with our landlord. We made payments of
approximately $386,000 on notes payable and on capital lease obligations.

                                      -31-
<PAGE>

As described above, we experienced a significant decrease in revenue for the
year ended June 30, 2005, and we incurred significant net losses. Except for the
proceeds from our 2004 and 2005 Notes with Laurus, we have realized a
degradation of our cash and working capital position from operations. We expect
these trends will continue during fiscal 2006, although possibly at a lower
rate. In an effort to become more competitive and to increase our revenues, we
have been actively increasing our business development activities, and are
planning to continue making additional investments in our technology
infrastructure, operations and other areas of our business. These efforts will
use significant amounts of time, effort and funding. Our efforts to control
expenses, generate revenue and raise sufficient capital may not be successful.
Because of the extension and deferral of interest on the 2004 and 2005 Notes, we
expect that our current cash, current assets and any cash flows from operations
will be sufficient to fund operations through fiscal 2006 (See "Note 9 to
Consolidated Financial Statements" included in this Report). However, any
further decreases in revenue would adversely affect our financial condition, and
we may need to seek additional capital during fiscal 2006. We may not be able to
raise sufficient financing, whether debt or equity. We have no additional
amounts available to us under our Franklin Funding credit facility, and we do
not have any other credit facility in place. In addition, based on the terms of
the Laurus debt financings, raising additional capital may be difficult or
highly dilutive to existing stockholders.

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

ITEM 7.    FINANCIAL STATEMENTS.

Financial Statements are listed in the Index to Financial Statements and filed
and included elsewhere herein as a part of this Annual Report on Form 10-KSB,
beginning at page F-1.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE.

None

ITEM 8A.   CONTROLS AND PROCEDURE

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

A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems no

                                      -32-
<PAGE>

evaluation of controls can provide absolute assurance that all control issues if
any, within a company have been detected.

On September 20, 2004, our prior independent registered public accounting firm
orally notified our management and audit committee that they had identified a
significant deficiency regarding our internal controls. The deficiency noted was
the lack of segregation of duties within the accounting department. This
significant deficiency was not believed to be a material weakness. To correct
such deficiency, we documented and instituted formal internal policies, and we
assigned specific roles and responsibilities.

Other than the actions we have taken to correct the significant deficiency as
described above, during the fourth quarter of fiscal 2005, there have been no
changes in our internal controls over financial reporting or in other factors
that could significantly affect internal controls over financial reporting. In
response to the Sarbanes-Oxley Act of 2002, we are continuing a comprehensive
review of our disclosure procedures and internal controls and expect to make
minor modifications and enhancements to these controls and procedures.

ITEM 8B.   OTHER INFORMATION

Not applicable

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

We have a Code of Ethics that applies to our principal executive officer,
principal financial officer, controller and other employees performing similar
functions. We previously filed a copy of the Code of Ethics with the SEC as an
exhibit to our annual report on Form 10-KSB for our fiscal year ended June 30,
2004.

The other information called for by Part III, Item 9, will be included in our
proxy statement relating to our 2005 annual meeting of stockholders, and is
incorporated herein by reference. The proxy statement will be filed within 120
days of June 30, 2005, our fiscal year end.

ITEM 10.   EXECUTIVE COMPENSATION

Information called for by Part III, Item 10, will be included in our proxy
statement relating to our 2005 annual meeting of stockholders, and is
incorporated herein by reference.


ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND
           RELATED STOCKHOLDER MATTERS.

Certain information called for by Part III, Item 11, will be included in our
proxy statement relating to our 2005 annual meeting of stockholders, and is
incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information as of June 30, 2005, regarding our common
stock that may be issued upon the exercise of options, warrants and other rights
under our equity compensation plans. See also "Notes 12 and 13 to Consolidated
Financial Statements" included in this Report.

                                      -33-
<PAGE>

<TABLE><CAPTION>
                                        (a)                     (b)                      (c)
                                  No. of Shares
                                   to be Issued          Weighted Average      No. of Shares Available
                                 Upon Exercise of        Exercise Price of       for Future Issuance,
                                Outstanding Options,    Outstanding Options,      excluding securities
Plan Category                   Warrants and Rights      Warrants and Rights    reflected in Column (a)
-------------                   -------------------      -------------------    -----------------------
<S>                                   <C>                       <C>                     <C>
Equity Compensation Plans
Approved by Stockholders (1)          1,216,109                 $0.78                   583,891

Equity Compensation Plans Not
Approved by Stockholders              3,085,713                 $1.08                      --

   TOTAL                              4,301,931                 $1.00                   583,891
</TABLE>

--------------
(1)      Consists solely of the Pacific Biometrics, Inc. 1996 Stock Incentive
         Plan.

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information called for by Part III, Item 12, will be included in our proxy
statement relating to our 2005 annual meeting of stockholders, and is
incorporated herein by reference.

ITEM 13.   EXHIBITS.


  EXHIBIT
    NO.                                DESCRIPTION
------------        ------------------------------------------------------------
   3.1       (1)    Amended and Restated Certificate of Incorporation of the
                    Company, as amended - includes (a) Amended and Restated
                    Certificate of Incorporation dated July 9, 1996, (b)
                    Certificate of Amendment to Certificate of Designation for
                    Series A Convertible Preferred Stock, dated as of August 28,
                    2002, (c) Certificate of Amendment to Restated Certificate
                    of Incorporation, dated February 14, 2003, and (d)
                    Certificate of Designation for Series B Convertible
                    Preferred Stock, dated as of March 6, 2003
   3.2       (2)    Amended and Restated By-Laws of the Company
   4.1       (2)    Specimen Stock Certificate
  10.1A      (3)    1996 Stock Incentive Plan, as amended
  10.1B      (11)   Form of stock option agreement (for employees and officers)
                    under 1996 Stock Incentive Plan
  10.1C      (11)   Form of stock option agreement (for directors) under 1996
                    Stock Incentive Plan
  10.2       (15)   Executive Employment Agreement, dated June 1, 2005, between
                    Pacific Biometrics, Inc. and Ronald R. Helm
  10.3 ++    (12)   Employment Agreement, dated October 1, 2004, by and between
                    the Company and Dr. Elizabeth Leary
  10.4       (12)   Agreement with Chicago Partners, LLC dated November 5, 2004
                    re Michael L. Hartzmark
  10.5       (6)    Consulting Agreement, dated as of August 28, 2002, between
                    Terry M. Giles and the Company
  10.6       (4)    Office Lease, dated April 23, 1997, between Tom Kane and
                    Elsa Kane and the Company
  10.7       (5)    Asset Purchase Agreement, dated as of June 27, 2002, among
                    the Company, PBI-WA and Saigene Corporation
  10.8       (6)    Amendment Number One to Asset Purchase Agreement, dated as
                    of August 28, 2002, among the Company, Saigene Corporation,
                    and PBI-WA
  10.9       (3)    Option Agreement, dated August 28, 2002, between the Company
                    and Saigene Corporation
  10.10      (10)   Common Stock Purchase Warrant issued by the Company in favor
                    of Source Capital Group, Inc.
  10.11      (7)    Amended and Restated Financing Agreement, dated as of
                    October 1, 2002, among the Company, Transamerica Technology
                    Finance Corporation, successor in interest to

                                      -34-
<PAGE>

                    Transamerica Business Credit Corporation, and Saigene
                    Corporation
  10.12      (7)    Restructure Agreement, dated as of October 1, 2002, among
                    the Company, Transamerica Technology Finance Corporation,
                    successor in interest to Transamerica Business Credit
                    Corporation, and Saigene Corporation
  10.13      (7)    Amendment to Warrant Agreements, dated as of October 1,
                    2002, among the Company, Transamerica Technology Finance
                    Corporation, successor in interest to Transamerica Business
                    Credit Corporation, and Saigene Corporation
  10.14      (7)    Promissory Note, dated as of October 1, 2002, in the
                    principal amount of $245,000 in favor of Transamerica
                    Technology Finance Corporation
  10.15      (7)    Investment Agreement, dated as of December 19, 2002, between
                    Saigene Corporation and the Company
  10.16      (3)    Settlement Agreement, dated May 31, 2003, among Makena
                    Commercentre II, LLC, Makena Partners, the Company, PBI-WA,
                    and Saigene Corporation
  10.17      (3)    Promissory Note, dated May 31, 2003, in favor of Makena
                    Commercentre II, LLC, by the Company, PBI-WA, and Saigene
                    Corporation
  10.18      (3)    Escrow Agreement, dated May 2003, among U.S. Bank Trust
                    National Association, the Company, Makena Commercentre II,
                    LLC, and Makena Partners
  10.19      (3)    Loan and Security Agreement, dated August 5, 2003, between
                    the Company and Franklin Funding, Inc.
  10.20      (8)    Securities Purchase Agreement, dated May 28, 2004 between
                    the Company and Laurus Master Fund, Ltd.
  10.21      (8)    $2.5 Million Secured Convertible Term Note, dated May 28,
                    2004, made by the Company in favor of Laurus Master Fund,
                    Ltd.
  10.22      (8)    Master Security Agreement dated May 28, 2004, among the
                    Company, BioQuant, Inc., Pacific Biometrics, Inc., a
                    Washington corporation, PBI Technology, Inc., and Laurus
                    Master Fund, Ltd.
  10.23      (8)    Registration Rights Agreement, dated May 28, 2004, between
                    the Company and Laurus Master Fund, Ltd.
  10.24      (8)    Common Stock Purchase Warrant, dated May 28, 2004, issued by
                    the Company in favor of Laurus Master Fund, Ltd. for 681,818
                    shares of common stock.
  10.25      (8)    Subsidiary Guaranty dated May 28, 2004, among Pacific
                    Biometrics, Inc., a Washington corporation, BioQuant, Inc.,
                    and PBI Technology, Inc.
  10.26      (8)    Stock Pledge Agreement dated May 28, 2004, between the
                    Company and Laurus Master Fund, Ltd.
  10.27      (13)   Amendment No. 1 and Waiver, dated January 31, 2005, between
                    the Company and Laurus Master Fund, Ltd.
  10.28      (13)   Amendment No. 2, dated January 31, 2005, among the Company,
                    Pacific Biometrics, Inc., a Washington corporation,
                    BioQuant, Inc., PBI Technology, Inc. and Laurus Master Fund,
                    Ltd.
  10.29      (13)   Securities Purchase Agreement, dated January 31, 2005
                    between the Company and Laurus Master Fund, Ltd.
  10.30      (13)   $1.5 Million Secured Convertible Term Note, dated January
                    31, 2005, made by the Company in favor of Laurus Master
                    Fund, Ltd.
  10.31      (13)   Registration Rights Agreement, dated January 31, 2005,
                    between the Company and Laurus Master Fund, Ltd.
  10.32      (13)   Common Stock Purchase Warrant, dated January 31, 2005,
                    issued by the Company in favor of Laurus Master Fund, Ltd.
                    for 326,087 shares of common stock.
  10.33      (14)   Amendment No. 1, dated May 6, 2005, between Pacific
                    Biometrics, Inc. and Laurus Master Fund, Ltd.
  10.34      (14)   Amendment No. 2, dated May 6, 2005, between Pacific
                    Biometrics, Inc. and Laurus Master Fund, Ltd.
  10.35      (14)   Common Stock Purchase Warrant, dated May 6, 2005, issued by
                    Pacific Biometrics, Inc. in favor of Laurus Master Fund,
                    Ltd. for 1,000,000 shares of common stock.
  14.1       (11)   Code of Ethics for Financial Officers
  21.1       (9)    Subsidiaries of Pacific Biometrics, Inc.
  23.1       **     Consent of Williams & Webster P.S.
  23.2       **     Consent of Grant Thornton LLP

                                      -35-
<PAGE>

  31.1       **     Certification by Ronald R. Helm, Chief Executive Officer
  31.2       **     Certification by Michael L. Hartzmark, Interim Chief
                    Financial Officer
  32.1       **     Certification by Ronald R. Helm, Chief Executive Officer,
                    pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002
  32.2       **     Certification by Michael L. Hartzmark, Interim Chief
                    Financial Officer, pursuant to 18 U.S.C. Section 1350, as
                    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002

**       Filed herewith
++       Portions of the marked exhibit have been omitted pursuant to a request
         for confidential treatment filed with the SEC.
(1)      Incorporated by reference to Exhibits of Registrant's Quarterly Report
         on Form 10-QSB for the quarter ended March 31, 2003, filed on May 15,
         2003.
(2)      Incorporated by reference to Exhibits of Registrant's Registration
         Statement on Form SB-2, Registration No. 333-11551, filed on September
         6, 1996.
(3)      Incorporated by reference to Exhibits of Registrant's Annual Report on
         Form 10-KSB for the fiscal year ended June 30, 2003, filed on September
         29, 2003.
(4)      Incorporated by reference to Exhibits of Registrant's Annual Report on
         Form 10-KSB for the fiscal year ended June 30, 1997, filed on September
         29, 1997.
(5)      Incorporated by reference to Exhibits of Registrant's Current Report on
         Form 8-K filed on July 3, 2002.
(6)      Incorporated by reference to Exhibits of Registrant's Current Report on
         Form 8-K filed on September 6, 2002.
(7)      Incorporated by reference to Exhibits of Registrant's Quarterly Report
         on Form 10-QSB for the quarter ended December 31, 2002, filed on
         February 14, 2003.
(8)      Incorporated by reference to Exhibits of Registrant's Current Report on
         Form 8-K filed on June 7, 2004. (9) Incorporated by reference to
         Exhibits of Registrant's Quarterly Report on Form 10-QSB for the
         quarter
         ended March 31, 2004, filed on May 14, 2004.
(10)     Incorporated by reference to Exhibits of Registrant's Registration
         Statement on Form SB-2, Registration No. 333-116968, filed on June 29,
         2004.
(11)     Incorporated by reference to Exhibits of Registrant's Annual Report on
         Form 10-KSB for the fiscal year ended June 30, 2004, filed on September
         23, 2004.
(12)     Incorporated by reference to Exhibits of Registrant's Quarterly Report
         on Form 10-QSB for the quarter ended September 30, 2004, filed on
         November 15, 2004.
(13)     Incorporated by reference to Exhibits of Registrant's Current Report on
         Form 8-K filed on February 1, 2005.
(14)     Incorporated by reference to Exhibit of Registrant's Current Report on
         Form 8-K filed on May 10, 2005.
(15)     Incorporated by reference to Exhibit of Registrant's Current Report on
         Form 8-K filed on June 7, 2005.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information called for by Part III, Item 14, will be included in our proxy
statement relating to our 2005 annual meeting of stockholders, and is
incorporated herein by reference.

                                      -36-
<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on September 28, 2005.

                                       PACIFIC BIOMETRICS, INC.



                                       By:  /s/ Ronald R. Helm
                                          --------------------------------------
                                          Ronald R. Helm
                                          President and Chief Executive Officer

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

          SIGNATURE                    CAPACITIES                    DATE


/s/ Ronald R. Helm                   Chief Executive          September 28, 2005
--------------------------------     Officer, President,
Ronald R. Helm                       and Director (PRINCIPAL
                                     EXECUTIVE OFFICER)


/s/ Michael L. Hartzmark             Interim Chief            September 28, 2005
--------------------------------     Financial Officer
Michael L. Hartzmark                 (PRINCIPAL FINANCIAL
                                     OFFICER AND PRINCIPAL
                                     ACCOUNTING OFFICER)


/s/ Terry M. Giles                   Director                 September 28, 2005
--------------------------------
Terry M. Giles


/s/ Paul G. Kanan                    Director                 September 28, 2005
--------------------------------
Paul G. Kanan


/s/ Richard W. Palfreyman            Director                 September 28, 2005
--------------------------------
Richard W. Palfreyman

                                      -37-
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                            Form 10-KSB Annual Report

                          Index to Financial Statements



                                                                            Page
                                                                            ----

Report of Independent Registered Public Accounting Firm for year ended
    June 30, 2005                                                            F-2

Report of Independent Registered Public Accounting Firm for year ended
    June 30, 2004                                                            F-3

Consolidated Financial Statements:

     Consolidated Balance Sheets as of June 30, 2005 and 2004                F-4

     Consolidated Statements of Operations for the years ended
         June 30, 2005 and 2004                                              F-5

     Consolidated Statements of Cash Flows for the years ended
         June 30, 2005 and 2004                                              F-6

     Consolidated Statement of Stockholders' Equity (Deficit) for
         the years ended June 30, 2005 and 2004                              F-7


     Notes to Consolidated Financial Statements                              F-8
























                                       F-1
<PAGE>


            Report of Independent Registered Public Accounting Firm
            -------------------------------------------------------

                            WILLIAMS & WEBSTER, P.S.
             Certified Public Accountants and Business Consultants

Audit Committee and Shareholders
Pacific Biometrics, Inc.
Seattle, Washington

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying consolidated balance sheet of Pacific
Biometrics, Inc. as of June 30, 2005, and the related consolidated statements of
operations and comprehensive loss, stockholders' deficit and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The financial
statements of the Company as of June 30, 2004 were audited by other auditors
whose report dated September 10, 2004 expressed an unqualified opinion on those
statements.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Biometrics,
Inc. as of June 30, 2005 and the results of its operations, stockholders'
deficit and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has generated recurring net
losses and cash flow shortages. This condition raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans
regarding this issue are also discussed in Note 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



/s/ Williams & Webster, P.S.
------------------------------------
Williams & Webster, P.S.
CERTIFIED PUBLIC ACCOUNTANTS
Spokane, Washington
September 16, 2005

                                       F-2
<PAGE>

            Report of Independent Registered Public Accounting Firm
            -------------------------------------------------------

Board of Directors and Shareholders
Pacific Biometrics, Inc.

We have audited the accompanying balance sheet of Pacific Biometrics, Inc. as of
June 30, 2004 and the related statements of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Biometrics, Inc. as of
June 30, 2004, and the results of its operations and its cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced significant losses from
operations and has experienced cash flow shortages. Additionally, the Company
has reported deficiencies in working capital and stockholders' equity. These
matters, among others, as discussed in note 3 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ GRANT THORNTON LLP
---------------------------------

Seattle, Washington
September 10, 2004


                                      F-3
<PAGE>

                            PACIFIC BIOMETRICS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 AS OF JUNE 30,



<TABLE><CAPTION>
                                                                                  2005            2004
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
                                    ASSETS
Current assets:
    Cash and cash equivalents                                                 $  1,438,543    $  2,941,014
    Accounts receivable, net of allowance for doubtful accounts of
      $22,100 and $22,100, respectively                                            607,867         367,449
    Prepaid expenses and other assets                                              603,464          78,999
    Deferred financing cost on secured convertible note - current portion          107,170          64,500
                                                                              ------------    ------------
          Total current assets                                                   2,757,044       3,451,962

Property and equipment, net                                                        437,436         407,548
                                                                              ------------    ------------

Other assets:
    Deferred financing cost on secured convertible note - long-term portion        232,787         123,625
    Restricted cash                                                                     --          71,395
                                                                              ------------    ------------
          Total assets                                                        $  3,427,267    $  4,054,530
                                                                              ============    ============


                  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
    Accounts payable                                                          $    438,342    $    479,446
    Accrued liabilities                                                            846,267         647,986
    Advances from clients                                                          697,561         210,922
    Capital lease obligations - current portion                                     51,994          48,253
    Note payable to related party - current portion                                     --          22,183
    Secured convertible note - current portion, net of unamortized fair
      value assigned to beneficial conversion feature and warrants of $0
      and $304,349, respectively                                                    83,333         278,982
    Other notes payable - current portion                                          331,429         349,002
                                                                              ------------    ------------
          Total current liabilities                                              2,448,926       2,036,774

Capital lease obligations - long term portion                                      108,493         160,487
Secured convertible note - long term portion, net of unamortized fair value
    assigned to beneficial conversion feature and warrants of $2,659,284
    and $931,133, respectively                                                   1,193,783         985,536
Other notes payable - long term portion                                             38,148         336,510
                                                                              ------------    ------------
          Total liabilities                                                      3,789,350       3,519,307
                                                                              ------------    ------------

Commitments and contingencies                                                           --              --

Stockholders' equity (deficit):
    Preferred stock, Series A convertible $0.01 par value, 5,000,000 shares
      authorized, 1,550,000 shares issued and outstanding, liquidation
      preference of $2.00 per share, aggregating $3,100,000                         15,500          15,500
    Common stock, $0.01 par value, 30,000,000 shares authorized, 13,325,705
      and 13,048,820 shares issued and outstanding, respectively                   304,985         302,214
    Additional paid-in capital                                                  25,430,844      23,338,016
    Accumulated deficit                                                        (26,111,988)    (23,119,084)
    Treasury stock                                                                  (1,423)         (1,423)
                                                                              ------------    ------------
          Total stockholders' equity (deficit)                                    (362,083)        535,223
                                                                              ------------    ------------
          Total liabilities and stockholders' equity (deficit)                $  3,427,267    $  4,054,530
                                                                              ============    ============
</TABLE>

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

                                       F-4
<PAGE>
                              PACIFIC BIOMETRICS, INC.
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                                YEARS ENDED JUNE 30,



<TABLE><CAPTION>
                                                   2005            2004
                                               ------------    ------------
<S>                                            <C>             <C>
Revenues                                       $  3,230,374    $  4,801,248
                                               ------------    ------------

Laboratory expense and cost of goods sold         2,456,295       2,762,849
                                               ------------    ------------

          Gross Profit                              774,079       2,038,399
                                               ------------    ------------

Operating expenses:
    Research and product development                113,741         128,677
    Impairment of technology assets                      --         476,874
    Selling, general and administrative           2,819,249       3,144,726
                                               ------------    ------------

Operating loss                                   (2,158,911)     (1,711,878)
                                               ------------    ------------

Other income (expense):
    Interest expense                               (317,267)       (133,751)
    Interest expense from amortization of
      beneficial conversion feature                (423,407)        (21,746)
    Interest income                                   7,385          16,670
    Other income                                     15,463          44,437
    Amortization of deferred financing costs       (116,167)         (5,375)
    Loss on settlement of note receivable
      from related party                                 --         (72,072)
                                               ------------    ------------
                                                   (833,993)       (171,837)
                                               ------------    ------------

Net loss before tax expense                      (2,992,904)     (1,883,715)
                                               ------------    ------------

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

Net loss                                       $ (2,992,904)   $ (1,883,715)
                                               ============    ============

Preferred stock dividend                                 --          (7,421)
                                               ------------    ------------

Net loss applicable to common stockholders     $ (2,992,904)   $ (1,891,136)
                                               ============    ============

Net loss per share:
    Basic loss per share                       $      (0.24)   $      (0.19)
                                               ============    ============
    Diluted loss per share                     $      (0.24)   $      (0.19)
                                               ============    ============

Weighted average common shares outstanding:
    Basic                                        12,643,180      10,149,127
                                               ============    ============
    Diluted                                      12,643,180      10,149,127
                                               ============    ============
</TABLE>

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

                                       F-5
<PAGE>
                            PACIFIC BIOMETRICS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              YEARS ENDED JUNE 30,



<TABLE><CAPTION>
                                                                                                    2005            2004
                                                                                                ------------    ------------
<S>                                                                                             <C>             <C>
Cash flows from operating activities:
    Net earnings (loss)                                                                         $ (2,992,904)   $ (1,883,715)

    Adjustment to reconcile net loss to net cash provided by operating activities:
       Depreciation and amortization                                                                 152,505         121,846
       Interest income on note receivable from related party settled by common stock                      --         (16,218)
       Amortization of fair value assigned to beneficial conversion feature and warrants             423,408          21,746
       Amortization of deferred financing costs on secured convertible note                          (43,832)             --
       Loss on settlement of note receivable from related party                                           --          72,072
       Compensation (income) expense from fair value adjustment to re-priced employee options         (1,457)        (35,294)
       Stock options granted at less than fair market value                                               --           2,584
       Impairment of technology assets                                                                    --         476,874
       Changes in assets and liabilities:
          Accounts receivable, net                                                                  (240,418)         99,160
          Inventories                                                                                     --         158,104
          Prepaid expenses and other assets                                                         (338,222)         (6,657)
          Advances from clients                                                                      486,639        (100,026)
          Accounts payable                                                                           (41,104)       (312,974)
          Accrued liabilities                                                                        198,281         109,049
                                                                                                ------------    ------------
             Net cash used in operating activities                                                (2,397,105)     (1,293,449)
                                                                                                ------------    ------------

Cash flows from investing activities:
    Purchases of capital equipment                                                                  (182,393)        (90,959)
                                                                                                ------------    ------------
             Net cash used in investing activities                                                  (182,393)        (90,959)
                                                                                                ------------    ------------

Cash flows from financing activities:
    Payments on notes payable                                                                       (315,935)       (207,576)
    Payments on notes payable to related parties                                                     (22,183)       (113,168)
    Transfer to restricted cash                                                                       71,395            (321)
    Net proceeds loan and security agreement                                                              --         250,000
    Payments on capital lease obligation                                                             (48,253)        (58,216)
    Payment of cash dividends                                                                             --          (5,685)
    Proceeds from exercise of stock options and warrants                                                  --           2,963
    Net proceeds from private placement of common stock                                                   --       1,710,599
    Proceeds from secured convertible note payable, net of financing cost -
       Laurus Master Funds                                                                         1,392,000       2,306,500
                                                                                                ------------    ------------
             Net cash provided by financing activities                                             1,077,024       3,885,096
                                                                                                ------------    ------------

Net increase (decrease) in cash and cash equivalents                                              (1,502,471)      2,500,688
Cash and cash equivalents, beginning of year                                                       2,941,014         440,326
                                                                                                ------------    ------------

Cash and cash equivalents, end of year                                                          $  1,438,543    $  2,941,014
                                                                                                ============    ============

Cash paid during the year for interest                                                          $    272,914    $    143,611
                                                                                                ============    ============

Non-Cash Activities:
    Warrants issued in conjunction with Laurus Funds amendments to secured convertible notes    $  1,170,853    $         --
    Preferred stock dividends                                                                   $         --    $      7,421
    Value of common stock received in settlement of note receivable from related party          $         --    $    144,144
    Shares released from escrow under restructure agreement with prior landlord                 $         --    $        833
    Warrants issued in consideration of issuance costs for private placement                    $         --    $    191,477
    Common stock issued in exchange for Series B preferred stock and accrued dividends          $         --    $      3,294
    Common stock issued to Laurus Master Funds - convertible feature                            $     63,600    $         --
    Common stock issued in prepayment of R&D costs to UTEK                                      $     84,993    $         --
    Common stock issued in prepayment of public relations costs to IRG                          $    101,250    $         --
    Value allocated to beneficial conversion feature and warrants issued in convertible
       conjunction with secured note                                                            $    676,627    $  1,257,228
</TABLE>

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

                                       F-6
<PAGE>
                            PACIFIC BIOMETRICS, INC.
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   YEARS ENDED JUNE 30, 2005 AND JUNE 30, 2004

<TABLE><CAPTION>
                              Series A          Series B                                                                  Total
                           Preferred Stock   Preferred Stock      Common Stock               Additional                Stockholders'
                         ------------------  ----------------  ------------------- Treasury    Paid-in    Accumulated     Equity
                           Shares   Amount    Shares  Amount     Shares    Amount    Stock     Capital      Deficit     (Deficit)
                         --------- --------  ------- --------  ---------- --------  -------  -----------  ------------  -----------
<S>                      <C>       <C>       <C>     <C>       <C>        <C>       <C>      <C>          <C>           <C>
Balance June 30, 2003    1,550,000 $ 15,500   33,666 $    337   9,218,458 $263,189  $  (702) $20,421,642  $(21,094,843) $  (394,877)

Net loss for year ended
June 30, 2004                   --       --       --       --          --       --       --           --    (1,883,715)  (1,883,715)

Fair value adjustment
to options                      --       --       --       --          --       --       --      (35,294)           --      (35,294)

Cancellation of common
stock released from
escrow, previously held
in trust as security for
note payable                    --       --       --       --     (83,333)    (833)      --           --            --         (833)

Common stock received
from related party in
settlement of note
receivable                      --       --       --       --     (72,072)      --     (721)      (2,897)     (140,526)    (144,144)

Exercise of stock options       --       --       --       --      31,664      317       --        1,583            --        1,900

Exercise of stock
warrants                        --       --       --       --       3,809       38       --        1,025            --        1,063

Stock options granted at
less than fair market
value                           --       --       --       --          --       --       --        2,583            --        2,583

Board compensation paid
by stock options                --       --       --       --          --       --       --       24,840            --       24,840

Proceeds from common
stock, net of issuance
costs of $21,101 and
broker commissions of
$192,300                        --       --       --       --   3,846,000   38,460       --    1,672,139            --    1,710,599

Preferred stock dividends       --       --       --       --          --       --       --       (7,421)           --       (7,421)

Issuance of common stock
and $0.84 in cash in
exchange for Series B
preferred stock and
accrued dividends payable       --       --  (33,666)    (337)    104,294    1,043       --        2,588            --        3,294

Fair value of warrants
issued to lender in
conjunction with secured
convertible note payable        --       --       --       --          --       --       --      573,266            --      573,266

Fair value of beneficial
conversion feature on
secured convertible note
payable                         --       --       --       --          --       --       --      683,962            --      683,962
                         --------- --------  ------- --------  ---------- --------  -------  -----------  ------------  -----------
Balance June 30, 2004    1,550,000   15,500       --       --  13,048,820 $302,214   (1,423)  23,338,016   (23,119,084)     535,223

Net loss for year ended
June 30, 2005                   --       --       --       --          --       --       --           --    (2,992,904)  (2,992,904)

Fair value adjustment
to options                      --       --       --       --          --       --       --       (1,457)           --       (1,457)

Common stock issued to
UTEK Corporation for
strategic alliance
agreement-cancelled
6/23/05                         --       --       --       --      91,885      919       --       84,075            --       84,993

Common stock issued to
Laurus Master Funds for
note payment                    --       --       --       --      60,000      600       --       63,000            --       63,600

Common stock issued to
IRG Corporation for
public relations services
agreement                       --       --       --       --     125,000    1,250       --      100,000            --      101,250

Fair value of warrants
issued to lender in
conjunction with secured
convertible note payable        --       --       --       --
                                                                       --       --       --      279,191            --      279,191
Fair value of beneficial
conversion feature on
secured convertible note
payable                         --       --       --       --          --       --       --      397,436            --      397,436

Adjustment to fair value
of beneficial conversion
feature and warrants in
conjunction with
amendments to secured
convertible note payable        --       --       --       --          --       --       --    1,170,583            --    1,170,583

Miscellaneous adjustment        --       --       --       --         (34)      --       --           --            --           --
                         --------- --------  ------- --------  ---------- --------  -------  -----------  ------------  -----------
Balance June 30, 2005    1,550,000 $ 15,500       -- $     --  13,325,705 $304,985  $(1,423) $25,430,844  $(26,111,988) $  (362,083)
                         ========= ========  ======= ========  ========== ========  =======  ===========  ============  ===========
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                       F-7
<PAGE>

                            PACIFIC BIOMETRICS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc., a Delaware corporation ("PBI" or the "Company"),
provides specialty reference laboratory services to the pharmaceutical and
diagnostics industries. The Company was incorporated in Delaware in May 1996.
The Company conducts its business primarily through its wholly owned subsidiary,
Pacific Biometrics, Inc., a Washington corporation ("PBI-WA"). The Company's
other wholly owned subsidiaries include PBI Technology, Inc., a Washington
corporation, and BioQuant, Inc., a Michigan corporation.

The Company had previously been engaged in the development and commercialization
of non-invasive diagnostics to improve the detection and management of chronic
diseases. Due to a lack of significant resources, the Company has suspended such
activities for the foreseeable future. The Company has developed two patented
platform technologies that permit the use of sweat and saliva as diagnostic
fluids. Except for the revenues from laboratory services, nominal revenues have
been generated from the Company's products. Laboratory services now constitute
the majority of the Company's commercial efforts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include consolidated financial position,
results of operations, and statement of stockholders' equity and cash flows of
Pacific Biometrics, Inc. and its subsidiaries. All material intercompany
balances and transactions have been eliminated in the accompanying consolidated
financial statements.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.

ACCOUNTS RECEIVABLE

Accounts receivable are stated at amounts due from and billed to clients net of
an allowance for doubtful accounts. Credit is extended based on evaluation of a
client's financial condition, and collateral is not required. In determining the
adequacy of the allowance, management identifies specific receivables for which
collection is not certain and estimates the potentially uncollectible amount
based on the most recently available information. The Company writes off
accounts receivable when they are determined to be uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. For the years ended June 30, 2005 and 2004, the Company wrote
off $0 and $1,865, respectively of accounts receivable deemed uncollectible.

RESTRICTED CASH

During 1997, in connection with the signing of an operating lease for laboratory
and office facilities in Seattle, Washington, the Company was required to set
aside $100,000 as a security deposit, throughout the first seven years of the
ten-year term of the lease. This amount was reduced to $71,395 as of June 30,
2004 and was further reduced to $0 as of June 30, 2005.

LONG -LIVED ASSETS

Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method over the useful lives of the related assets, which range
from three to five years. Leasehold improvements are

                                      F-8
<PAGE>

amortized over the shorter of the estimated useful life of the improvements or
the remaining term of the lease. The cost and related accumulated depreciation
of property or equipment sold or otherwise disposed of are removed from the
accounts and the resulting gains or losses are included in the statement of
operations.

In accordance with the Financial Accounting Standards Board's Statements of
Financial Accounting Standards Statement No. 144 - "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), all of the Company's
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount may not be recovered. If the sum of
the expected future cash flows is less than the carrying amount of the asset, a
loss is recognized.

TECHNOLOGY ASSETS

PBI Technology, Inc., a wholly owned subsidiary of the Company, has been
established to hold certain technologies and intellectual property, including
isothermal DNA amplification method (LIDA), Cell Viability technology,
Osteopatch and Saliva Sac(R). The Company wrote off the entire balance of
$476,874 related to the technology assets to operations as impairment of
technology assets as of June 30, 2004.

BENEFICIAL CONVERSION FEATURE

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

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

CLIENT ADVANCES

The Company receives advances from certain clients to perform consulting,
laboratory services, and clinical studies. These advances are applied as
payments to invoices as work is completed until the amounts advanced are
exhausted. Advances are also applied to invoices for setup and administrative
fees, billed upon contract approval. These setup and administrative fees are
deferred as unearned income when billed and amortized over the life of the
project.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax laws and rates that are expected to be in effect when the
differences are expected to be recovered. The Company provides a valuation
allowance for deferred tax assets due to the uncertainty of realization.

FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents approximate fair value due to
the short-term maturities of these instruments. The carrying value of the
Company's secured convertible note is recorded net of the unamortized fair value
assigned to beneficial conversion feature and warrants, representing its
estimated fair value. (See Note 9.) The carrying value of the Company's other
debt approximates their estimated fair values because the rates of interest on
the debt approximate current interest rates for similar obligations with like
maturities.

STOCK-BASED COMPENSATION

The Company has a stock-based employee compensation plan, which is described
more fully in Note 12. The Company applies APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations in accounting for its plan. The
Company has adopted the disclosure-only provisions of

                                       F-9
<PAGE>

SFAS No. 123 - "ACCOUNTING FOR STOCK-BASED COMPENSATION". During the years ended
June 30, 2005 and 2004, the Company granted 253,000 and 1,086,340, respectively,
of incentive-based stock options under incentive compensation plans. Had
compensation cost been determined based on the fair value of stock options
granted in a manner consistent with the method promulgated by SFAS No. 123, the
Company's net earnings and earnings per share would have been changed to the pro
forma amounts below:

                                                       Years Ended June 30,
                                                       --------------------
                                                      2005             2004
                                                      ----             ----

     Net loss, as reported                        $(2,992,904)     $(1,883,715)

     Adjust:  Total stock-based employee
     compensation expense determined under
     fair value based method for all awards,
     net of related tax effects                       241,500          260,304
                                                  -----------      -----------
     Pro forma net loss                           $(3,234,404)     $(2,144,019)
                                                  ===========      ===========

     Net loss per share:

       Basic - as reported                         $   (0.24)       $   (0.19)
                                                   =========        =========
       Diluted - as reported                       $   (0.24)       $   (0.19)
                                                   =========        =========

       Basic - pro forma                           $   (0.26)       $   (0.21)
                                                   =========        =========
       Diluted - pro forma                         $   (0.26)       $   (0.21)
                                                   =========        =========

To estimate compensation expense, the Company uses the Black-Scholes
option-pricing model and assumptions deemed reasonable by management. The
options are valued as of the date of grant. If the date of grant had been June
30, 2005, the following assumptions would have been used to compute the fair
value of option grants for the year ended June 30:

                                                   2005           2004
                                                 --------       --------
                     Expected volatility             108%           186%
                     Expected dividend yield           0%             0%
                     Risk-free interest rate        3.94%          3.83%
                     Expected life               10 years       10 years


REVENUE RECOGNITION

The Company recognizes revenue in the period that the related services are
performed and collectibility is reasonably assured. Currently, the Company
derives substantially all of its revenues from laboratory services. Service
contracts generally take the form of fixed-price contracts. Under fixed-price
contracts, revenue is recognized as services are performed, with performance
generally assessed using output measures, such as units-of-work performed to
date as compared to the total units-of-work contracted. Changes in the scope of
work generally result in a renegotiation of contract pricing terms and/or a
contract amendment. Renegotiated amounts are not included in net revenues until
earned, and realization is assured. Advance payments on service contracts are
treated as a deposit and applied to periodic billing during the contract period.
Setup and Administrative fees are billed upon contract approval. Revenues from
Setup and Administrative fees are amortized over the life of the contract.
Historically, costs are not deferred in anticipation of work on contracts after
they are awarded, but instead are expensed as incurred. All out-of-pocket costs
are included in expenses.

RESEARCH AND DEVELOPMENT EXPENSES

Expenditures for research and development are expensed as incurred.

LOSS PER SHARE

Basic loss per share is based upon the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding stock
options and warrants using the "treasury stock" method and the effect of
preferred stock on an as-converted basis. All per share calculations exclude
treasury shares, and shares held in trust as security for a note payable. Net
loss applicable to common stockholders includes cumulative dividends on the
Series B convertible preferred stock of $7,421 for the year ended June 30, 2004.
There

                                      F-10
<PAGE>

were no comparable dividends for the fiscal year ended June 30, 2005 as
all of the Series B preferred shares were converted into common stock, effective
May 31, 2004.

As of June 30, 2005, vested, in-the-money options to purchase 812,123 shares of
common stock and in-the-money warrants to purchase 570,727 shares of common
stock were outstanding, but were not included in the computation of diluted loss
per share because the effect would be antidilutive. In addition, 1,550,000
shares of Series A preferred stock convertible into 516,667 shares of common
stock were also not included in the computation of diluted loss per share
because the effect would be antidilutive.

As of June 30, 2004, vested, in-the-money options to purchase 583,439 shares of
common stock and in-the-money warrants to purchase 585,727 shares of common
stock were outstanding, but were not included in the computation of diluted loss
per share because the effect would be antidilutive. In addition, 1,550,000
shares of Series A preferred stock convertible into 516,667 shares of common
stock were also not included in the computation of diluted loss per share
because the effect would be antidilutive. In June 2004, the holders of the
Series B preferred stock exchanged their Series B preferred stock and accrued
dividends into 104,294 shares of common stock, effective May 31, 2004. Prior to
that date, the Series B preferred stock was convertible into 33,666 shares of
common stock. Accordingly, as of June 30, 2004, there were no outstanding shares
of Series B preferred stock, and no further shares of common stock into which it
would be convertible.

USE OF ESTIMATES

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153 (hereinafter "SFAS No. 153"). This
statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that opinion,
however, included certain exceptions to that principle. This statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this statement is issued. During the year
ended June 30, 2005, the Company adopted SFAS No. 153. The Company has
determined that there was no financial impact from the adoption of this
statement.

In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs-- an
amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this statement will have any
immediate material impact on the Company.

                                      F-11
<PAGE>

In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. This statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This statement does not
change the accounting guidance for share based payment transactions with parties
other than employees provided in Statement of Financial Accounting Standards No.
123. This statement does not address the accounting for employee share ownership
plans, which are subject to AICPA Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." The Company has not yet
determined the impact to its financial statements from the adoption of this
statement.

3. MANAGEMENT'S PLANS AND GOING CONCERN

The Company had net losses in fiscal 2005 and 2004. The Company has historically
experienced recurring losses from operations and has had cash flow shortages.
While the Company currently has a positive working capital position, it has
significant amounts of notes payable and other liabilities, and negative
stockholders' equity. Historically, the Company has had deficiencies in working
capital and stockholders' equity and has had significant amounts of current and
past due debt. These matters raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term. These steps include expansion of
business development efforts, and the implementation of new information
technology systems to automate certain processes and improve client service, and
raising $1.5 million in gross proceeds from a secured debt financing effective
January 2005. Prior, the Company raised $2.5 million in gross proceeds from a
secured debt financing effective May 2004 and approximately $1.9 million in
gross proceeds from a private placement of common stock that closed in March
2004.

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

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

INFORMATION TECHNOLOGY AND BACK-UP SYSTEMS

The Company is currently focusing the significant proportion of its capital
expenditures and investments in carefully selected hardware and software
products, information technology systems and networks. During fiscal 2005, the
Company invested in its laboratory information system, including the initial
stages of the implementation of the ClinAxys II Laboratory Information System.
The installation of this new system should streamline and improve the Company's
project and data management capabilities. In fiscal 2006, the Company
anticipates it will continue to invest in the improvement of its information
systems and the Company believes capital improvements in these areas are
important to meet the changing demands of drug development by improving and
facilitating its data reporting, testing capacity and the overall service to and
communications with its clients.

                                      F-12
<PAGE>

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

DIVERSIFY CLIENT BASE

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

INCREASE SPECIALTY AREAS

In addition to its core specialties of cardiovascular disease and bone and joint
diseases, the Company's goal is to further expand its specialty laboratory
expertise within related areas where it has a competitive advantage of existing
in-depth expertise. This includes diabetes, obesity, metabolic syndrome,
rheumatoid and osteoarthritis, and immunogenicity testing for biologic drugs.

CREATE GLOBAL CENTRAL LABORATORY

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

ACQUISITIONS AND STRATEGIC RELATIONSHIPS

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

4. CONCENTRATION OF CREDIT RISK

The largest client in fiscal 2005 individually accounted for approximately 23%
and 36% of the Company's total revenues in fiscal 2005 and 2004, respectively,
while the Company's largest client in fiscal 2004 accounted for approximately 4%
and 40% of the Company's total revenues in fiscal 2005 and 2004, respectively.
Revenues from the Company's five largest clients represented approximately 67%
and 86% of total revenues in fiscal 2005 and fiscal 2004, respectively. As of
June 30, 2005 and 2004, respectively, approximately 60% and 39% of the Company's
accounts receivable balance was from the two largest clients at that time.

The Company maintains its cash in one commercial account at a major financial
institution. At June 30, 2005, the Company's cash balance in one account
exceeded Federal Deposit Insurance Corporation (FDIC)

                                      F-13
<PAGE>

limits by $1,338,543 and at June 30, 2004, the Company's cash balance in one
account exceeded (FDIC) limits by $2,841,014.

5. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses consist of the following at June 30:

                                                           2005         2004
                                                         --------     --------
     Laboratory Information System Software..........    $216,405     $     -
     Backup Power Generator..........................     132,585           -
     Investor Relations..............................      59,063           -
     Laboratory Equipment............................      47,725           -
     Insurance.......................................      47,140       36,617
     Commissions.....................................      25,187           -
     Taxes...........................................      24,731       24,122
     Service Contracts...............................      22,378           -
     Trade Show and Conference Fees..................      19,000           -
     Prepaid Finance Costs...........................          -         5,833
     Other...........................................       9,250       12,427
                                                         --------     --------
                                                         $603,464     $ 78,999
                                                         ========     ========

6. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30:

                                                          2005         2004
                                                       ----------   ----------
     Laboratory equipment............................  $  773,389   $  714,027
     Computer equipment..............................     255,028      169,938
     Office furniture and equipment..................     101,480       63,539
     Leasehold improvements..........................      73,541       73,541
                                                       ----------   ----------
     Total property and equipment....................   1,203,438    1,021,045
     Less: accumulated depreciation and
      amortization...................................     766,002      613,497
                                                       ----------   ----------
     Net property and equipment......................  $  437,436   $  407,548
                                                       ==========   ==========

At June 30, 2005 and 2004, respectively, these amounts included assets under
capital leases of $160,487 and $358,856, and related accumulated amortization of
$232,106 and $179,727. Depreciation expense for the fiscal period at June 30,
2005 and 2004, respectively was $152,505 and $116,471.

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following at June 30:

                                                       2005           2004
                                                     --------       --------
     Accrued Laurus Note Costs PBIDE                 $160,000       $     -
     Accrued payroll and related payroll taxes        121,819         86,974
     Accrued vacation                                 116,032         78,884
     Accrued professional services                     88,390         83,877
     Accrued consulting expense                        65,000         95,000
     Accrued software expense                          43,281             -
     Accrued audit fees                                41,002         83,877
     Accrued interest expense                          31,689          3,197
     Accrued 401(k)                                    24,853             -
     Accrued board of directors fees                   13,635         92,785
     Accrued commissions                               13,443         91,902
     Accrued supply expense reimbursement under
       Saigene Management Agreement                        -          17,996
     Accrued fees due to PBRF                           7,835          7,835
     Other                                            119,287          5,659
                                                     --------       --------
                                                     $846,267       $647,986
                                                     ========       ========

                                      F-14
<PAGE>

8. CAPITAL LEASE OBLIGATIONS

The Company leases laboratory and other equipment under capital lease
arrangements. The obligations under capital leases have interest rates ranging
from approximately 7.5% to 17.64% and mature at various dates through 2008.
Annual future minimum lease payments for years subsequent to June 30, 2005 are
as follows:

         2006                                        $  62,253
         2007                                           62,253
         2008                                           35,981
         2009 thereafter                                    -
                                                     ---------
         Total minimum payments                        160,487
         Less: amount representing interest            (19,268)
                                                     ---------
         Obligations under capital leases              141,219

         Total minimum payments                        160,487
         Less: current portion                          51,994
                                                     ---------
         Long term portion                           $ 108,493
                                                     =========

9.  NOTES PAYABLE

LAURUS DEBT INVESTMENTS

Effective May 28, 2004, the Company entered into a financing arrangement with
Laurus Master Fund, Ltd., a New York City based investment fund ("Laurus"). The
financing consisted of a $2.5 million secured convertible note with a term of
three years. In connection with the financing, the Company also issued Laurus a
warrant to purchase up to 681,818 shares of common stock at an exercise price of
$1.25, exercisable at any time prior to May 28, 2011. The note bears interest at
an initial rate equal to the prime rate plus two percent (2%) for a total of six
percent (6%), subject to reduction on a month to month basis if certain
specified conditions are met.

Under the terms of the note, the Company is obligated to make monthly payments
of accrued interest beginning July 1, 2004 and, commencing December 1, 2004,
monthly payments of $85,000 to reduce the principal amount by $83,333.33.

For any cash payments made on the note, the Company is required to pay an amount
equal to 102% of the principal amount due. In addition, the Company can prepay
the note at any time upon payment of an amount equal to 130% of the
then-outstanding principal balance, plus accrued and unpaid interest.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the note into shares of common
stock at an initial conversion price of $1.06 per share. In addition, for each
monthly payment under the note, Laurus will be obligated to convert a portion of
the monthly payment into common stock at the applicable conversion price, if
certain specified conditions are met. As of June 30, 2005, Laurus had converted
$63,600 in principal into 60,000 shares of the Company's common stock.
Therefore, as of June 30, 2005 the principal balance owing to Laurus was
$2,436,400.

The initial note conversion price ($1.06 per share) is subject to certain
anti-dilution adjustments, including full ratchet anti-dilution if the Company
issues convertible or equity securities at a price per share less than the
conversion price. As security for the obligations to Laurus, the Company and
each of its subsidiaries granted a blanket security interest in all of their
respective assets to Laurus, and the Company entered into a stock pledge with
Laurus for the capital stock in each of its subsidiaries. The Company was
obligated to register with the SEC for resale the shares of common stock that
are issuable upon conversion of the note and upon exercise of the warrant. The
registration was deemed effective by the SEC on September 28, 2004. To date, the
Company has maintained the effectiveness of the registration statement and is
obligated to maintain it effective for up to three years from the closing date.
If the Company fails to comply with the registration obligations, Laurus will be
entitled to certain specified remedies, including monetary liquidated damages.

In conjunction with the financing, the Company incurred and recorded fees of
$293,500 as deferred financing costs, which are being amortized to other expense
over the life of the note. This amount includes

                                      F-15
<PAGE>

a potential payment to the Company's broker of up to $100,000 should Laurus
convert all or a portion of the 2004 Note. At June 30, 2005, the unamortized
balance of the deferred financing costs was $192,802. As of May 6, 2005, the
Company modified the amounts being amortized to other expense to account for the
extension of 12 months in the term of the 2004 Note.

As of May 2004, the Company also recorded discounts to the secured convertible
note in the amount of $683,962 and $573,266, respectively, representing the
value of the beneficial conversion feature and value allocated to the warrant to
purchase 681,818 shares. As of May 6, 2005, the Company modified the discount
balance of the loan to account for the warrants issued as of January 31, 2005
for the postponement of principal payments due and for the warrants issued as of
May 6, 2005 as consideration for the deferral and extension of the 2004 Note. In
accounting for the issuance of the new warrants, the Company recorded discounts
to the secured convertible note of $1,084,906, $452,076, $120,445 and $383,013,
respectively, representing the value of the beneficial conversion feature, the
value allocated to the warrant to purchase 681,818 shares issued on May 28,
2004, the value allocated to the warrant to purchase 200,000 shares issued on
January 31, 2005, and the value allocated to the warrant to purchase 625,000
shares issued on May 6, 2005. The warrant to purchase 625,000 shares represents
the pro-rata share of the May 2004 Note related to the warrant to purchase a
total of 1,000,000 shares issued on May 6, 2005.

At June 30, 2005, of the total $2,040,440 discount balance, $363,524 had been
amortized as interest expense, and $1,676,916 remained unamortized and will be
amortized at $47,912 per month over the remaining life of the secured
convertible note or upon earlier conversion, using the straight-line method. The
balance due under the secured convertible note is shown net of the remaining
unamortized discount on the accompanying balance sheet. The Company estimated
the valuation of the beneficial conversion feature, the warrant for 681,818
shares, the warrant for the 200,000 shares and the warrant for the pro-rata
share of the 1,000,000 shares in accordance with EITF 00-27 and EITF 98-5, using
the Black-Scholes pricing model and other assumptions deemed reasonable by
management. The following assumptions were used to determine the fair market
value of the warrants issued Laurus on January 31, 2005 and May 6, 2005,
respectively: a) volatility of the stock price was 124% and 104%, b) discount
rate was 3.94% and 3.83%, c) call option value was $0.9083 and $0.9243.

Upon conversion of any amounts owing under the note, the Company is obligated to
issue warrants for up to a maximum of 181,818 shares of common stock to its
broker, in the amount of 8% of amounts converted, at an exercise price of $1.25
per share, exercisable for five years.

Effective January 31, 2005, the Company entered into a second financing
arrangement with Laurus for a $1.5 million secured convertible note with a term
of three years. In connection with the financing, the Company issued Laurus a
warrant to purchase up to 326,087 shares of common stock at an exercise price of
$1.37, exercisable at any time prior to January 31, 2012. The note bears
interest at an initial rate equal to the prime rate plus two percent (2%) for a
total of six percent (6%), subject to reduction on a month to month basis if
certain specified conditions are met.

Under the terms of the note, the Company is obligated to make monthly payments
of accrued interest beginning March 1, 2005 and, commencing August 1, 2005,
monthly payments of $51,000 to reduce the principal amount by $50,000.

For any cash payments made on the note, the Company is required to pay an amount
equal to 102% of the principal amount due. In addition, the Company can prepay
the note at any time upon payment of an amount equal to 130% of the
then-outstanding principal balance, plus accrued and unpaid interest.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the note into shares of common
stock at an initial conversion price of $1.17 per share. In addition, for each
monthly payment under the note, Laurus will be obligated to convert a portion of
the monthly payment into common stock at the applicable conversion price, if
certain specified conditions are met.

The initial note conversion price ($1.17 per share) is subject to certain
anti-dilution adjustments, including full ratchet anti-dilution if the Company
issues convertible or equity securities at a price per share less than the
conversion price.

                                      F-16
<PAGE>

As security for the obligations to Laurus, the Company and each of its
subsidiaries granted a blanket security interest in all of their respective
assets to Laurus, and the Company entered into a stock pledge with Laurus for
the capital stock in each of its subsidiaries. The Company was obligated to
register with the SEC for resale the shares of common stock that are issuable
upon conversion of the note and upon exercise of the warrant. The registration
was deemed effective by the SEC on April 1, 2005. To date, the Company has
maintained the effectiveness of the registration statement and is obligated to
maintain it effective for up to three years from the closing date. If the
Company fails to comply with the registration obligations, Laurus will be
entitled to certain specified remedies, including monetary liquidated damages.

In conjunction with the January 2005 financing, the Company incurred and
recorded fees of $168,000 as deferred financing costs, which are being amortized
to other expense over the life of the note. This amount includes a potential
payment to the Company's broker of up to $60,000 should Laurus convert all or a
portion of the 2005 Note. At June 30, 2005, the unamortized balance of the
deferred financing costs was $147,156. As of May 6, 2005, the Company modified
the amounts being amortized to other expenses to account for the extension of 12
months in the term of the 2004 Note.

As of January 2005, the Company also recorded discounts to the secured
convertible note of $397,436 and $279,191, respectively, representing the value
of the beneficial conversion feature and value allocated to the warrant to
purchase 326,087 shares. As of May 6, 2005, the Company modified the discount
balance of the loan to account for the warrants issued as of January 31, 2005
for the warrants issued as of May 6, 2005 for the deferral and extension of the
2005 Note. In accounting for the issuance of the new warrants, the Company
recorded discounts to the secured convertible note of $589,743, $229,898, and
$244,356, respectively, representing the value of the beneficial conversion
feature, the value allocated to the warrant to purchase 326,087 shares issued on
January 31, 2005, and the value allocated to the warrant to purchase 375,000
shares issued on May 6, 2005. The warrant to purchase 375,000 shares represents
the pro-rata share of the January 2005 Note related to the warrant to purchase a
total of 1,000,000 shares issued on May 6, 2005.

At June 30, 2005, of the total $1,063,997 discount balance, $81,629 had been
amortized as interest expense, and $982,368 remained unamortized and will be
amortized at $22,846 per month over the remaining life of the secured
convertible note or upon earlier conversion, using the straight-line method. The
balance due under the secured convertible note is shown net of the remaining
unamortized discount on the accompanying balance sheet. The Company estimated
the valuation of the beneficial conversion feature, the warrant for 326,087
shares, and the warrant for the pro-rata share of the 1,000,000 shares in
accordance with EITF 00-27 and EITF 98-5, using the Black-Scholes pricing model
and other assumptions deemed reasonable by management.

Upon conversion of any amounts owing under the note, the Company is obligated to
issue warrants for up to a maximum of 105,263 shares of common stock to its
broker, in the amount of 8% of amounts converted, at an exercise price of $1.37
per share, exercisable for five years.

LAURUS WAIVER -- MAY 2004 $2.5 MILLION SECURED CONVERTIBLE NOTE

On January 31, 2005, Laurus formally agreed that the Company would not be
required to pay the principal portion of any monthly amount due for the
six-month period from December 2004 through May 2005, and instead such deferred
principal amounts would be due on May 1, 2007, the maturity date of the 2004
Note. There was no change in the interest rate charged by Laurus on the unpaid
principal.

In consideration for the principal payment deferral and the waiver, the Company
issued a warrant to Laurus to purchase up to 200,000 shares of the common stock
of the Company at an exercise price of $1.48. The warrant expires on January 31,
2010. The cost to the Company associated with the issuance of this warrant was
attributed to the discount balance on the May 2004 Note.

LAURUS DEFERRAL AND EXTENSION -- MAY 2004 $2.5 MILLION AND JANUARY 2005 $1.5
MILLION SECURED CONVERTIBLE NOTES

On May 6, 2005, Laurus and the Company amended the terms of the 2004 Note and
the 2005 Note, to provide for a twelve-month deferral and extension of both.
With respect to 2004 Note, Laurus agreed to

                                      F-17
<PAGE>

(a) extend the term for an additional year, to be due in full on May 28, 2008,
and (b) defer 12 months of principal payments (originally due June 1, 2005
through May 1, 2006) to be paid monthly beginning June 1, 2007 through May 1,
2008. With respect to the 2005 Note, Laurus agreed to (a) extend the term for an
additional year, to be due in full on January 31, 2009, and (b) defer 12 months
of principal payments (originally due August 1, 2005 through July 1, 2006) to be
paid monthly beginning February 1, 2008 through January 1, 2009, with the
balance on the 2005 Note to be paid in full on January 31, 2009.

As a result of these amendments, the first repayments of principal owed to
Laurus on the 2004 and 2005 Notes are now due on June 1, 2006 and August 1,
2006, respectively, and the maturity dates for the 2004 and 2005 Notes are now
May 1, 2008 and January 1, 2009, respectively. There was no change in the
interest rate charged by Laurus on the unpaid principal. Furthermore, commencing
as of May 31, 2005 the Company adjusted the amortization schedules for the 2004
Note and 2005 Note related to the beneficial conversion feature, stock purchase
warrants and deferred finance costs.

In consideration for the principal payment deferral and the extension of the
2004 and 2005 Notes, the Company issued an additional common stock purchase
warrant to Laurus to purchase up to 1,000,000 shares of the Company's common
stock at an exercise price of $1.05. The warrant expires on May 6, 2010. The
cost to the Company associated with the issuance of this warrant was attributed
to the discount balances of the May 2004 and January 2005 Notes based on the
pro-rata amounts of the respective Notes.

LOAN AND SECURITY AGREEMENT WITH FRANKLIN FUNDING

On August 5, 2003, the Company entered into a loan and security agreement (the
"Loan Agreement") under which the Company borrowed $250,000 during the first and
second quarters of fiscal 2004. Amounts borrowed under the Loan Agreement bear
interest at 17.64% and are amortized over 36 months, with monthly payments
beginning September 2003 and a final balloon payment due at maturity on August
5, 2006, and are secured by specific equipment. In the event of default, among
other remedies, the lender may declare the entire amount under the Loan
Agreement to be immediately due and payable, and may take possession of the
equipment provided as security. Pursuant to the terms of the Loan Agreement, the
Company granted to the lender warrants to purchase 25,000 shares of common stock
(at the rate of 5,000 per $50,000 borrowed, with exercise prices as of the date
of borrowing), consisting of warrants for 5,000 shares at $1.10 per share, 5,000
shares at $1.00 per share, 10,000 shares at $0.95 per share, and 5,000 shares at
$0.85 per share.

NOTE PAYABLE TO RELATED PARTY

The Company had the following note payable to a related party as of June 30:

                                                           2005        2004
                                                         --------    --------
     Promissory note to Saigene Corporation,
       original principal of $223,697, dated
       August 28, 2002, 8% interest, monthly
       payments of $10,000 including interest
       until paid in full                                $     -     $ 22,183
                                                         --------    --------
     Less: Current Portion                                     -       22,183
                                                         --------    --------
                                                         $     -     $     -
                                                         ========    ========

                                      F-18
<PAGE>

OTHER NOTES PAYABLE
<TABLE><CAPTION>

The Company had the following other notes payable as of June 30:
                                                                                           2005           2004
                                                                                        ----------     ----------
<S>                                                                                     <C>            <C>
     May 2004 Secured Convertible Note Payable:

     Secured convertible note to Laurus, secured by all assets, interest at
         prime plus 2% (subject to reduction upon specified conditions), monthly
         payments
         of $83,333 plus interest beginning May 1, 2006, due May 1, 2008                $2,500,000     $2,500,000
     Less: Principal amount converted into common stock                                    (63,600)            -
     Less: Unamortized fair value assigned to beneficial conversion feature and
         warrants                                                                       (1,676,916)    (1,235,482)
                                                                                           759,484      1,264,518
                                                                                        ----------     ----------
     Less: Current Portion                                                                 (83,333)      (278,982)
                                                                                        ----------     ----------
     Long Term Portion                                                                  $  676,151     $  985,536
                                                                                        ==========     ==========

     January 2005 Secured Convertible Note Payable:

     Secured convertible note to Laurus, secured by all assets, interest at
         prime plus 2% (subject to reduction upon specified conditions), monthly
         payments
         of $51,000 plus interest beginning August 1, 2006, due February 1, 2009        $1,500,000             -

     Less: Unamortized fair value assigned to beneficial conversion feature and
         warrants                                                                         (982,368)            -
                                                                                           517,632             -
                                                                                        ----------     ----------
     Less: Current Portion                                                                      -              -
                                                                                        ----------     ----------
     Long Term Portion                                                                  $  517,632     $       -
                                                                                        ==========     ==========

     Other Notes Payable:

     Loan and security agreement, secured by specific equipment, 17.64% interest,
         monthly payments of $8,709, balloon payment of $30,000 due August 2006         $  127,188     $  201,925

     Promissory note to prior landlord, secured by common stock held in escrow, 10%
         interest, quarterly payments of $25,000, due July 31, 2005 (See Note 14)          181,670        240,624

     Promissory note to creditor, 9% interest, monthly payments of $4,000, balloon
         payment of $7,912 due December 2004                                                    -          27,416

     Note payable to Transamerica, secured by security interest in previously
         leased assets, 8% interest October 1, 2003 to February 28, 2004,
         14.123% beginning March 1, 2004, monthly payments including interest of
         $2,000 through
         February 28, 2004 and $14,500 thereafter, due October 1, 2005                      47,719        202,547

     Demand notes payable, 18% interest, current monthly payments of interest only          13,000         13,000
                                                                                        ----------     ----------
                                                                                           369,577        685,512
                                                                                        ----------     ----------
     Less: Current Portion                                                                 331,429        349,002
                                                                                        ----------     ----------
     Long Term Portion                                                                  $   38,148     $  336,510
                                                                                        ==========     ==========
</TABLE>

Aggregate maturities of notes payable (at face value, gross of the unamortized
fair value assigned to beneficial conversion feature and warrants related to the
secured convertible note financing with Laurus) are approximately as follows for
the years ending June 30:

                          2006                     $   83,333
                          2007                      1,549,996
                          2008                      1,953,071
                          Thereafter                  350,000
                                                   ----------
                                                   $3,936,400
                                                   ==========

                                      F-19
<PAGE>

10. PREFERRED AND COMMON STOCK

The Company's common stock currently is quoted on the OTC Bulletin Board in the
over-the-counter market under the symbol "PBME".

SERIES A PREFERRED STOCK

The Company's Series A convertible preferred stock (the "Series A") is
convertible into shares of the Company's common stock at the option of the
holders at any time on a three-for-one basis. The Series A no longer carries a
mandatory dividend. The Company has the right to force conversion of the Series
A in the event the price per share of the common stock is $6.00 or more for 20
consecutive trading days. The Series A has a liquidation preference of $2.00 per
share. The Company has agreed to use commercially reasonable efforts to effect
the registration of the common stock into which the Series A is convertible.

SERIES B PREFERRED STOCK

In March through July 2003, the Company sold 33,666.66 shares of Series B, 8%
convertible, cumulative redeemable $0.01 par value preferred stock at $3.00 per
share (the "Series B") for total net proceeds of $72,920. In June 2004, the
holders of the Series B preferred stock accepted the Company's conversion offer
and canceled their Series B and accrued and unpaid dividends in exchange for
104,294 shares of common stock, and approximately $1 in cash for payment of
fractional shares. As of June 30, 2005 and 2004, there were no shares of Series
B issued and outstanding.

COMMON STOCK

Effective September 30, 2004, the Company issued to Utek Technologies ("Utek")
129,730 unregistered shares of common stock for services, with 1/12th of the
shares (10,810 shares) vesting each month during the term of the agreement.
Effective June 23, 2005 the agreement with Utek was terminated. As of the date
of termination, 91,885 shares of the Company's common stock had vested to Utek
and 37,845 shares of the Company's common stock had been returned.

Effective January 30, 2005, the Company entered into a one-year agreement with
Investor Relations Group, Inc. ("IRG") to provide the Company investor relations
and public relations services. The Company issued to IRG as compensation 125,000
unregistered shares of common stock that vested immediately. In accordance with
Financial Accounting Standards Board Emerging Issues Task Force Issue (EITF) No.
96-18, the Company recorded a prepaid expense of $101,250 related to the
issuance of 125,000 shares of unregistered common stock over the 12-month term
of the agreement. The Company has been amortizing this expense at $8,438 per
month.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the May 2004 and January 2005 Notes
into shares of common stock at an initial conversion price of $1.06 or $1.17 per
share, respectively. On various dates throughout fiscal 2005, Laurus converted
at a price of $1.06 a total of $63,600 of the principal amount due under the May
2004 Note into 60,000 shares of the Company's common stock.

As of June 30, 2005, the Company held treasury common stock in the amount of
142,300 shares. For the fiscal years ended June 30, 2005 and 2004, there were 0
and 72,072, respectively shares of common stock added to the treasury stock.

                                      F-20
<PAGE>

11. INCOME TAXES

The income tax expense reconciled to the tax expense computed at the statutory
rate was approximately as follows during the years ended June 30:

                                                            2005         2004
                                                         ---------    ---------
     Tax benefit computed at federal statutory rate      $(620,000)   $(640,000)
     Permanent differences                                   2,000        2,000
     Valuation allowance (tax benefit of recognizing
       prior year net operating loss carryforward)       $ 618,000    $ 638,000
                                                         ---------    ---------
                                                         $      -     $      -
                                                         =========    =========

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax assets are approximately as follows at June 30:

                                                        2005            2004
                                                      --------        --------
     Net deferred tax asset:
       Net operating loss carryforward               $5,930,000     $4,624,000
       Research and experimentation credit               39,000        324,000
       Impairment of technology assets                       -         162,000
       Effect of stock option variable pricing               -          50,000
       Accrued liabilities                               67,000         55,000
       Allowance for bad debts                               -           8,000
       Depreciation and amortization                    (32,000)        67,000
                                                     ----------     ----------
                                                      6,004,000      5,290,000
     Less valuation allowance                        (6,004,000)    (5,290,000)
                                                     ----------     ----------
                                                     $       -      $       -
                                                     ==========     ==========

At June 30, 2004, operating loss carryforwards of approximately $14 million
expiring through 2024 are available to offset future taxable income. For
financial reporting purposes, a valuation allowance of approximately $6,004,000
has been recognized to offset the deferred tax asset due to the uncertainty of
future utilization of net operating loss carryforwards and realization of other
deferred tax assets. For the fiscal years ended June 30, 2005 and 2004, the
valuation allowance was increased by approximately $618,000 and $638,000,
respectively.

Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
greater than 50% change in ownership). As a result of these provisions,
utilization of the NOL and credit carryforwards may be limited.

12. STOCK OPTION PLAN

1996 STOCK INCENTIVE PLAN

The Company has a Stock Incentive Plan (the "Plan") with 1,800,000 shares of
common stock reserved for issuance under this Plan. Options granted under the
Plan may be either incentive stock options within the meaning of Section 422(b)
of the Internal Revenue Code, or nonqualified options. The Company may also
award stock appreciation rights, restricted stock, performance shares, loans or
tax offset payments. The option price of each incentive stock option granted
shall not be less than the fair value of the underlying common stock, and will
expire no later than ten years following the date of grant. With respect to
nonqualified options, the exercise price and term will be determined at the
discretion of the Board. However, the exercise price will not be less than 85%
of the fair value of the underlying stock, and the term will not exceed a period
of ten years. The options generally vest over a range of immediately to five
years. As of June 30, 2005, 583,891 shares of common stock remained available
for future grant under the Plan.

                                      F-21
<PAGE>

On May 3, 2002, the Company's board of directors voted to reduce the exercise
price of all then outstanding options to $0.06 per share. No initial expense was
recognized on this repricing, as the new exercise price equaled the market value
of the Company's stock on that date. For the periods ended June 30, 2005 and
2004, in accordance with accounting for options under variable pricing rules,
the Company recognized approximately $3,352 and $35,000, respectively, in
compensation income representing the decrease in the market price of the
Company's common shares to $0.94 and $1.03 per share, as well as the reduction
of 3,327 in the number of outstanding options due to either expiration or
exercise. As long as any of the repriced options remains outstanding, the
Company will recognize compensation expense in the future for all outstanding
repriced stock options if the market value of the common stock increases, and
will recognize income if the market value decreases.

The following is a summary of the activity in the Plan for the years ended June
30, 2005 and 2004:
<TABLE><CAPTION>
                                                          Shares Under Option
                                              ------------------------------------------
                                                                              Weighted
                                                               Weighted       Average
                                                                Average        Fair
                                                 Number        Exercise       Value of
                                                   Of          Price per      Options
                                                 Shares          share        Granted
                                              ------------------------------------------
<S>                                           <C>             <C>            <C>
     Options outstanding at June 30, 2003        281,111          0.35

          Granted                              1,086,340          0.81        $ 0.81
          Exercised                              (31,664)         0.06
          Terminated                             (54,391)      $  0.06
                                               ---------       -------
     Options outstanding at June 30, 2004      1,281,396       $  0.77

          Granted                                253,000          1.01        $ 1.01
          Exercised                              (10,017)         0.81
          Terminated                            (148,270)      $  0.79
                                               ---------       -------
     Options outstanding at June 30, 2005      1,376,109       $  0.81
                                               =========       =======
</TABLE>

The weighted average contractual life remaining of options outstanding at June
30, 2005 is approximately 8.6 years.

As of June 30, 2005, outstanding options had exercise periods which expired over
the following time periods:

                                         Weighted Average
     Exercise           Number            Remaining Life            Number
      Price          Outstanding           (in years)             Exercisable
      -----          -----------           ----------             -----------
      $0.06               7,902                0.2                    7,902
      $0.51             183,917                7.2                  183,917
      $0.70               3,000                9.2                    3,000
      $0.8075            60,761                8.4                   60,761
      $0.81             855,529                8.6                  550,544
      $0.90               6,000                8.7                    6,000
      $0.96              90,000                9.5                   90,000
      $1.01               3,000                9.0                    3,000
      $1.04             160,000               10.0                    4,444
      $1.75               6,000                8.4                    6,000
                      ---------               ----                  -------
                      1,376,109                8.6                  915,567
                      =========               ====                  =======


                                      F-22
<PAGE>

13. STOCK PURCHASE WARRANTS

The following is a summary of outstanding warrants as of June 30, 2005 and 2004:

                                                       Weighted Average
                                       Exercise Price   Exercise Price
                                          per Share        per Share     Number
                                          ---------        ---------     ------

Warrants outstanding at June 30, 2004   $0.1875-$3.00        $0.97     1,457,728

Warrants outstanding at June 30, 2005   $0.1875-$1.48        $1.08     3,085,713

In May 2005, in connection with the extension and deferral of principal payments
on the $2.5 million secured convertible note and the $1.5 million secured
convertible note and, the Company granted the lender a warrant to purchase up to
1,000,000 shares of common stock at an exercise price of $1.05 per share,
exercisable at any time prior to May 28, 2010.

In January 2005, in connection with a $1.5 million secured convertible note, the
Company granted the lender a warrant to purchase up to 326,087 shares of common
stock at an exercise price of $1.37 per share, exercisable at any time prior to
May 28, 2010. In addition, we issued to our broker a five-year warrant,
exercisable as and to the extent that any amounts owing under the convertible
note are converted into common stock, for up to 105,263 shares of common stock
at an exercise price of $1.37 per share. Also in January 2005, in connection
with a the deferral of principal on the $2.5 million secured convertible note,
the Company granted the lender a warrant to purchase up to 200,000 shares of
common stock at an exercise price of $1.48 per share, exercisable at any time
prior to January 31, 2010.

In June 2004, in connection with a $2.5 million secured convertible note, the
Company granted the lender a warrant to purchase up to 681,818 shares of common
stock at an exercise price of $1.25 per share, exercisable at any time prior to
May 28, 2009. In addition, we issued to our broker a five-year warrant,
exercisable as and to the extent that any amounts owing under the convertible
note are converted into common stock, for up to 181,818 shares of common stock
at an exercise price of $1.25 per share.

In March 2004, in connection with a private placement of common stock, the
Company granted warrants to the placement agents covering 384,600 shares of
unregistered common stock at $0.60 per share.

14.  COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into non-cancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense was $240,575 and $256,997 for the years ended June 30, 2005 and 2004,
respectively.

Future minimum lease payments are as follows:

              Year Ended June 30,
              -------------------

                     2006                       $  225,264
                     2007                          231,192
                     2008                           78,052
                     2009                               -
                                                $  534,508

PROMISSORY NOTE TO PRIOR LANDLORD

In May 2003, the Company's prior landlord, the Company, and Saigene entered into
a settlement agreement confirming amounts due the prior landlord. Under the
terms of the settlement agreement, the Company and Saigene jointly and severally
entered into a promissory note dated May 31, 2003 to the landlord for $320,315.
In conjunction with the promissory note and settlement agreement, and to secure

                                      F-23
<PAGE>

performance thereunder, the Company also entered into an escrow agreement,
providing for 666,666 shares of the Company's common stock to be held in escrow
for the benefit of the landlord. As of June 30, 2005, the balance of the
promissory note was $181,670 and the Company had made payments sufficient to
release 83,333 of escrow shares to the Company, which shares have been cancelled
and are no longer outstanding.

15. RELATED PARTY TRANSACTIONS

CONSULTING AGREEMENTS

On August 28, 2002, the Company entered into a consulting agreement with Mr.
Terry M. Giles, a former director of the Company and greater than 5%
stockholder. Pursuant to the consulting agreement, the Company agreed to engage
Mr. Giles as a consultant and to pay Mr. Giles compensation of $10,000 per month
until the conversion of Mr. Giles shares of Series A preferred stock into common
stock, and until such shares are either (a) registered pursuant to an effective
registration statement, or (b) deemed tradable pursuant to Rule 144. As of June
30, 2005, accrued expenses and accounts payable included $65,000 related to this
consulting agreement.

On August 28, 2002, the Company entered into a consulting agreement with Mr.
Paul G. Kanan, a director and former officer of the Company. Pursuant to the
consulting agreement, the Company agreed to engage Mr. Kanan as a consultant for
a period of 12 months beginning September 1, 2002, and to pay Mr. Kanan $3,000
per month. The consulting arrangement was extended on a month-to-month basis for
up to 12 additional months until such time as the shares of common stock held by
Mr. Kanan have been registered for resale pursuant to an effective registration
statement filed with the SEC. The consulting agreement was not extended beyond
the additional 12 months, and expired on August 31, 2004. As of June 30, 2005,
no amounts were owed to Mr. Kanan under this consulting agreement.

PACIFIC BIOMETRICS RESEARCH FOUNDATION

The Company is affiliated with Pacific Biometrics Research Foundation ("PBRF"),
one of five laboratories in the CDC (Centers for Disease Control) /NHLBI
sponsored Cholesterol Reference Method Laboratory Network. PBRF is organized as
a non-profit organization corporation under Section 501(c)(3) of the Internal
Revenue Code. The Company provides laboratory testing services, invoicing and
collection services in connection with PBRF's service offerings. In
consideration for this arrangement, the Company receives 85% of the revenues
generated through the testing services offered by PBRF. For the fiscal years
ended June 30, 2005 and 2004, the Company recorded approximately $49,720 and
$37,000, respectively, in revenues related to services provided for PBRF. As of
June 30, 2005 and 2004, the Company had approximately $13,940 and $9,600,
respectively, in accounts receivable from PBRF.

16. RETIREMENT PLAN

The Company has a 401(k) Plan, which had fallen out of compliance with the
Internal Revenue Service (the "IRS") due to prior year filing delinquencies.
During fiscal 2004, the Company engaged a consultant to assist in regaining
compliance through the IRS Delinquent Filer Voluntary Compliance Program (the
"DFVCP") and filed the 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 Company made no matching contributions to the 401(k) Plan during fiscal 2004
or 2003. The Company reopened the 401(k) plan to employees in May 2005. As of
June 30, 2005, the Company's matching expense was $5,107 and 401(k) payable
balance was $24,853.



                                      F-24