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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, 2007


             [ ] 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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]

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: $8,480,330

As of September 28, 2007, there were 18,720,147 shares of the Company's common
stock issued and outstanding, and the aggregate market value of the shares of
common stock held by non-affiliates was approximately $12,513,843, based on the
average bid and ask price of $0.70 of such stock on that date.

DOCUMENTS INCORPORATED BY REFERENCE: The Company's definitive proxy statement
for the annual meeting of stockholders for fiscal year ended June 30, 2007,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the fiscal year 2007, is incorporated by reference in Part
III hereof.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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                            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..........................................21

Item 3.     Legal Proceedings................................................22

Item 4.     Submission of Matters to a Vote of Security Holders..............22

                                     PART II

Item 5.     Market for Common Equity, Related Stockholder Matters and
            Small Business Issuer Purchases of Equity Securities.............22

Item 6.     Management's Discussion and Analysis or Plan of Operations.......23

Item 7.     Financial Statements.............................................31

Item 8.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.........................................31

Item 8A.    Controls and Procedures..........................................31

Item 8B.    Other Information................................................32

                                    PART III

Item 9.     Directors, Executive Officers, Promoters, Control Persons
            and Corporate Governance; Compliance with Section 16(a)
            of the Exchange Act..............................................32

Item 10.    Executive Compensation...........................................35

Item 11.    Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters.......................39

Item 12.**  Certain Relationships and Related Transactions and
            Director Independence............................................41

Item 13.    Exhibits.........................................................41

Item 14.**  Principal Accountant Fees and Services...........................43

SIGNATURES...................................................................44

**   Information contained in Items 12 and 14 of Part III is incorporated by
     reference from the definitive proxy statement for our 2007 annual meeting
     of stockholders, which will be filed with the Securities and Exchange
     Commission within 120 days after the close of the 2007 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 11. 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, 10-QSB and 8-K, 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.

DIVERSIFY CLIENT BASE

We have a goal to continue to diversify our client base, both in terms of the
number of clients and the number of contracts within any particular client. 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. This trend did not continue in the fiscal year ended June 30, 2007, in
which our top two clients represented 33% of our revenue compared to 50% during
the fiscal year ended June 30, 2006. As a result of ongoing business development
and client diversification efforts, we have added 12 new clients to our client
base during the fiscal year ended June 30, 2007, compared to 10

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new clients in fiscal 2006, and we continue to diversify the total number and
types of study contracts. During fiscal 2007, the Company held a total of 100
active contracts, compared to 76 active contracts in fiscal 2006, a 32%
increase. Management believes, therefore, that as a result of these continuing
business development activities, we will incrementally diversify our client base
and spread our revenues across a larger number of clients and a larger number of
individual study contracts.

Despite our efforts to expand our client base, a substantial portion of our
revenues are generated through five large clients. Revenue from our five largest
clients represented approximately 65% and 74% of total revenue in fiscal 2007
and 2006, respectively. Our largest client in fiscal 2007 individually accounted
for approximately 17% of our total revenue in fiscal 2007, while our largest
client in fiscal 2006 accounted for approximately 36% of our total revenue in
fiscal 2006. While on the one hand this reflects an improvement in terms of
decreasing our revenue reliance on a single client, on the other hand it is
important to note that our largest client in fiscal 2007 was not our largest
client in fiscal 2006, which illustrates the risk of significant revenue
variability that we face in our marketplace. 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 2008 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 related inflammatory diseases.

GLOBAL CENTRAL LABORATORY CAPABILITY

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 Quintiles Transnational Corp., 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 2007 we realized significant
financial benefit from our relationship with Quintiles, a trend we expect to
continue during fiscal 2008; although there is no guarantee that the
relationship will generate revenues consistently going forward. In fiscal 2008
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 believe that this joint marketing relationship can
provide a 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.

UPGRADING INFORMATION TECHNOLOGY AND BACK-UP SYSTEMS

We are currently focusing a significant portion of our capital expenditures and
investments in carefully selected hardware and software products, information
technology systems and networks. During fiscal 2007, we invested in our
laboratory information system, including the initial phase implementation of the
Clinaxys II Laboratory

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Information System. The installation of this new system should streamline and
improve our project and data management capabilities. In fiscal 2008, we expect
to complete the Clinaxys II Laboratory Information System implementation and
will continue to invest in the improvement of our information systems. 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 data capacity and efficiency and the overall service to and
communications with our clients.

In fiscal 2006 we acquired and have begun to use a back-up electrical generator
to provide our clients with the confidence that we can minimize the impact of
local power outages.

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, 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 - 2006 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.

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 osteoporosis-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.

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,

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     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 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 Laboratories 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 2007, 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 2006, we did not realize significant financial
benefit from our relationship with Quintiles and there is no guarantee that the
relationship will successfully generate expected 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.

MOLECULAR TECHNOLOGIES

PBI Technology owns DNA-based proprietary technologies, processes and equipment.
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 (Cell Viability).

During fiscal 2007, we ceased further research and development expenditures on
these assets. As of June 30, 2007, 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. 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 that 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.

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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.

DIAGNOSTIC DEVICE 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. We believe
there may be potential commercial application for some of these technologies,
and we have recently engaged outside consultants to resume business development
efforts related to the saliva and sweat collection technologies.

OTHER INTELLECTUAL PROPERTY

In addition to the 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 2007 and 2006, 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. During the fiscal year ended June 30, 2007, our top two
clients represented 33% of our revenue as compared to 50% during the fiscal year
ended June 30, 2006. Our largest client in fiscal 2007 individually accounted
for approximately 17% of our total revenue in fiscal 2007, while our largest
client in fiscal 2006 accounted for approximately 36% of our total revenue in
fiscal 2006. Revenue from our five largest clients represented approximately 65%
and 74% of total revenue in fiscal 2007 and 2006, respectively.

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 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

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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.

As of June 30, 2007, we have master contract service agreements with 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 is that no indemnification will be provided if the
damage or claim results from our negligence or intentional misconduct.

For the fiscal year ended June 30, 2007, Fixed Price Contracts amounted to 94%
of revenue or $7,973,428; Contracts Priced as Fee-For-Service with a Cap
amounted to 3% of revenue or $225,976; Contracts Priced as Fee-For-Service
without a Cap amounted to 3% of revenue or $280,926. For the fiscal year ended
June 30, 2006, Fixed Price Contracts amounted to 77% of revenue or $8,267,604;
Contracts Priced as Fee-For-Service with a Cap amounted to 2% of revenue or
$177,375; Contracts Priced as Fee-For-Service without a Cap amounted to 21% of
revenue or $2,305,044.

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
Synarc, Inc., MRL/PPD, MedPace, NW Lipid Laboratory, Esoterix Inc., Linco
Diagnostics, Liposcience, Atherotech, ARUP, 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., ICON Laboratories, Quintiles Transnational Corp., CRL - Medinet,
MDS Inc. and Quest Diagnostics Incorporated, and Lab Corp among others. In
fiscal 2005 we entered into a joint marketing arrangement with Quintiles
Transnational Corp., a major central laboratory with a large established client
base and existing infrastructure for managing clinical studies globally, and
through this relationship 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 2007 we realized significant financial
benefit from our relationship with Quintiles, a trend we expect to continue
during fiscal 2008; although there is no guarantee that the relationship will
generate revenues consistently going forward.

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,

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     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 workplace hazard communications 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.

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

                                       -8-
<PAGE>

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. We have described the complete terms,
modifications and accounting treatment below.

TERMS OF SECURED CONVERTIBLE NOTES

Effective May 28, 2004, we entered into our first debt financing arrangement
with Laurus, consisting of a $2.5 million secured convertible note with a term
of three years (the "2004 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.

The Notes bear interest at an initial rate equal to the prime rate plus two
percent (2%). This is a variable interest rate that was 10.25% and 10.25% for
fiscal years ending June 30, 2007 and 2006, respectively. Under the terms of the
2004 Note, we started making monthly payments of accrued interest only beginning
on July 1, 2004. Under the terms of the 2005 Note, we started making monthly
payments of accrued interest only beginning on March 1, 2005.

Laurus has the option at any time to convert any or all of the outstanding
principal and accrued and unpaid interest on the Notes into shares of our common
stock. The initial conversion price is $1.06 per share for the 2004 Note and
$1.17 per share for the 2005 Note. The conversion price for the Notes 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.

For each monthly payment under the Notes, 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. For any cash payments of principal
we are required to make, the agreement requires an amount equal to 102% of the
principal amount due.

In addition, we can prepay either Note at any time upon payment of an amount
equal to 130% of the then-outstanding principal balance, plus accrued and unpaid
interest.

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 addition, we registered with the SEC for resale the shares of
common stock that are issuable upon conversion of the Notes and upon exercise of
the warrants. We are obligated to maintain the effectiveness of the registration
statement through January 2008. If we fail to comply with the registration
obligations, Laurus will be entitled to certain specified remedies, including
monetary liquidated damages.

WARRANTS

In connection with the 2004 Note financing, we issued to Laurus 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, 2011. For the 2005

                                       -9-
<PAGE>

Note financing, we 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.

In consideration for the principal payment deferral and the waiver on the 2004
Note, on January 31, 2005 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. For the additional principal
payment deferral and the extension of the 2004 and 2005 Notes, on May 6, 2005 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 12 to Notes to Consolidated Financial
Statements."

FINANCING COSTS

In conjunction with the financing for both Notes, we paid fees and expenses of
approximately $301,500 in cash and reserved $160,000 for potential payments due
to Source Capital, our broker, upon the conversion of principal to common stock.
The total amount of $293,500 expense for the 2004 Note has been amortized to
other expense at the rate of approximately $8,153 per month over the 36-month
life of the Note, beginning June 2004. The total amount of $168,000 expense for
the 2005 Note was added to the amount of the 2004 Note. Furthermore, commencing
as of May 31, 2005 deferral and extension of both Notes, we adjusted the
amortization schedules for the 2004 Note and 2005 Note related to the 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 unamortized
balance as of June 30, 2007 was approximately $107,000.

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. For the 2005 Note 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.

CONVERSION AND PRINCIPAL PAYMENTS

     Through June 30, 2007, Laurus has converted a total of $710,200 in
     principal on the 2004 Note, leaving $1,416,667 remaining principal balance,
     net of conversions and principal payments. There have been no conversions
     of principal on the 2005 Note, leaving a remaining principal balance of
     $950,000, net of principal payments.

For any cash payments we are required to make on the Notes (e.g., any amounts
due that are not converted into common stock), the agreement provides for
monthly payments of principal in the amount of $83,333 for the 2004 Note and
$50,000 for the 2005 Note. With principal conversions and note deferrals and
extensions, repayments of principal on the 2004 Note were deferred. We began
scheduled principal payments beginning in February 2007 with the first partial
payment of approximately $41,000 and $85,000 for each month thereafter for the
2004 Note. Principal payments on the 2005 Note of $51,000 per month commenced
August 2006. 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
and a payment of $51,000 reduces the principal balance by $50,000). Any future
conversions of principal by Laurus on either Note will further reduce our
repayment obligations and defer future payments due.

WAIVER, DEFERRAL AND EXTENSION

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, due date for the first payment on the 2004 Note, 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 payments in December and January. 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.

On May 6, 2005, we amended the terms of the 2004 Note and the 2005 Note with
Laurus' approval to provide for a one year principal payment deferral and
extension of both Notes. With respect to the 2004 Note, Laurus agreed to extend
the term to be due in full on May 28, 2008, and principal payments to be paid
monthly beginning June 1,

                                      -10-
<PAGE>

2006. With respect to the 2005 Note, Laurus agreed to extend the term to be due
in full on January 31, 2009, and principal payments to be paid monthly beginning
August 1, 2006. 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
accretion schedules for the 2004 Note and 2005 Note related to the conversion
feature and stock purchase warrants. The conversion feature and the warrants are
being accreted at $30,858 and $26,625 per month for the 2004 and 2005 Notes,
respectively.

FINANCIAL DERIVATIVES - EMBEDDED CONVERSION, OTHER FEATURES AND WARRANTS

In fiscal years 2004 and 2005, we estimated the valuation of the conversion and
other features and the warrants for the Notes in accordance with EITF 00-27 and
EITF 98-5, using the Black-Scholes pricing model and other assumptions deemed
reasonable by management. We changed our accounting for derivative financial
instruments, for the Notes, to conform to the requirements of Statements of
Accounting Standards No. 133, as amended, and Financial Accounting Standards
Board Emerging Issues Task Force (EITF) No. 00-19. Embedded conversion and other
features that meet the definition of derivative financial instruments have,
where applicable, been bifurcated from host instruments, the May 2004 and
January 2005 Notes, and, in all instances derivative financial instruments have
been recorded as assets or liabilities and are carried at fair value.

EMPLOYEES

At September 28, 2007, we had 54 full-time employees, 1 part-time employee, 3
temporary or contract and 1 inactive employee, for a total of 59 employees, 40
of whom were employed in laboratory operations, laboratory administration and
client services (including our Chief Scientific Officer), 5 were employed in
sales, marketing and business development (including our Chief Medical Officer),
and 9 were employed in administrative capacities. One of our employees holds an
M.D. degree, six 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 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 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. During the fiscal year ended June
30, 2007, however, our top two clients represented 33% of our revenue as
compared to 50% during the fiscal year ended June 30, 2006. Our largest client
in fiscal 2007 individually

                                      -11-
<PAGE>

accounted for approximately 17% of our total revenue in fiscal 2007, while our
largest client in fiscal 2006 accounted for approximately 36% of our total
revenue in fiscal 2006. While on the one hand this reflects an improvement in
terms of decreasing our revenue reliance on a single client, on the other hand
it is important to note that our largest client in fiscal 2007 was not our
largest client in fiscal 2006, which illustrates the risk of significant revenue
variability that we face in our marketplace. Revenue from our five largest
clients represented approximately 65% and 74% of total revenue in fiscal 2007
and 2006, 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,
2008 may be less than our revenue for the fiscal year ended June 30, 2007. 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 GAIN 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
future sales, and our future revenue depends on our ability to generate new
clients and new projects. During fiscal 2008, 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 company.
We also understand that some companies in the pharmaceutical industry have
"preferred vendor" lists, such that a vendor cannot participate in 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.

                                      -12-
<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

                                      -13-
<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 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 additional 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 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 HAVE SEEN RECENT CHANGES IN OUR MARKETPLACE.

Management has reviewed recent developments in the dyslipidemia drug development
market that provides a substantial portion of our revenues. These changes -
specifically, the late-stage withdrawal of the HDL-raising drug torcetrapib by
Pfizer in December 2006 - have the potential to significantly impact our future
revenues. We have not experienced a significant impact on current revenues for
the period ended June 30, 2007 from these developments. A limited number of
current studies have been postponed, suspended or terminated. Because of current
uncertainty about the significance of these developments, potential effects on
our future business and revenues, as well as on drug development activities by
other pharmaceutical companies in the lipid / cholesterol market in general, are
unclear. Even if the withdrawal of torcetrapib results in the cessation of
similar drug programs (CETP inhibitors) at other pharmaceutical companies, we
believe we are well positioned in the lab services market for the dyslipidemia
therapeutic area to take advantage of other drug classes coming into the
pipeline. Indeed, we are involved with many top pharmaceutical companies in
providing testing services for drugs related to but distinct from the CETP
inhibitors.

Several factors may adversely affect our future revenues, including the recent
announcements by Pfizer to halt further testing of torcetrapib, the lead
compound in the CETP inhibitor drug class, due to specific safety issues,
Pfizer's plans for cost reductions and layoffs and other large pharmaceutical
companies' cost reduction announcements. We are not certain how the current
issues will affect the clinical development of CETP inhibitors at other
pharmaceutical companies, or the effect on other drug classes currently being
evaluated for their favorable effects on HDL ("good") cholesterol levels and on
reverse cholesterol transport. In a recent press release (April 20, 2007) Pfizer
announced that it is putting a hold on all drugs in the same class as
torcetrapib. There have been no public announcement by other major
pharmaceutical companies about discontinuing development of related drugs, but
we intend to monitor the situation and assess any potential impacts should they
arise.

     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.

                                      -14-
<PAGE>

     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
2007, 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.

     DURING FISCAL 2007, WE HAVE EXPERIENCED A SIGNIFICANT DECREASE IN REVENUE.
     IN FISCAL 2006 WE EXPERIENCED A SIGNIFICANT INCREASE IN REVENUE FROM PRIOR
     YEARS. OUR REVENUE IS UNPREDICTABLE AND VARIES SIGNIFICANTLY FROM QUARTER
     TO QUARTER AND YEAR TO YEAR.

We have experienced significant quarterly fluctuations in revenue during fiscal
2007 and fiscal 2006. For fiscal 2007 compared to fiscal 2006, our revenue
decreased 21% to approximately $8,480,000 from approximately $10,750,000, and we
incurred a net loss for fiscal 2007 and net income for fiscal 2006. The impact
of quarterly fluctuations is clearly observed in the first fiscal quarter of
2007 where revenue increased 42% compared to the comparable period in fiscal
2006. While, for the last nine months of fiscal 2007, our revenue was 34% lower
than for the comparable period of fiscal 2006. 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)                2005        2006       2007

     Q1, ended September 30................     $  434      $1,834     $2,605
     Q2, ended December 31.................      1,009       3,113      2,219
     Q3, ended March 31....................      1,048       3,110      1,755
     Q4, ended June 30.....................        739       2,693      1,901

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 had two large
studies totaling in excess of $2,600,000 that raised revenues to record levels
during Q2, ended December 31 and Q3 ended March 31 as illustrated in the table
above. During fiscal 2008, 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.

                                      -15-
<PAGE>

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

Although we received gross proceeds of approximately $4,300,000 in a private
placement of our common stock and warrants in March and April 2006, we have had
cash flow shortages and deficiencies in working capital in previous fiscal
years. At June 30, 2007, we had approximately $4,220,000 in cash and a positive
working capital position of approximately $$827,000, both representing a
significant decrease from the previous fiscal year; we also had significant
amounts of debt, including secured convertible notes, the derivative liabilities
associated with the notes and notes payable of approximately $3,577,000 and
other liabilities of approximately $2,282,000 and stockholders' equity of
approximately $1,513,000. For the last fiscal year ended June 30, 2007 we had an
operating loss of approximately $565,000. For the previous fiscal year ended
June 30, 2006 we had an operating income of approximately $1,846,000. At June
30, 2007, we had an accumulated deficit of approximately $27,133,000.

Previously, our cash, cash equivalents, and accounts receivable have been used
to fund our operating losses and investments in capital expenditures. However,
unless revenue remains at the current level or continues to increase, we will
likely experience losses and our cash and working capital positions may be
adversely impacted through fiscal 2008. To improve our cash position, we are
actively seeking to increase revenue and improve operating income. As noted
above, we raised gross proceeds of approximately $4,300,000 in a private
placement of our common stock and warrants in March and April 2006. This private
placement has improved our cash position and reduced the risk associated with
our revenue fluctuations and growth. However, our continuing 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;
     o    our ability to enter into and build relationships with new clients,
          and obtain additional projects from existing clients;
     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
may require additional financing.

     OUR ABILITY TO MAKE REQUIRED PAYMENTS OF PRINCIPAL AND INTEREST ON OUR
     SENIOR SECURED DEBT DEPENDS PRIMARILY ON AVAILABLE CASH BALANCES, CASH FLOW
     FROM OPERATIONS, FUNDS FROM FINANCING EFFORTS AND EARLY CONVERSION OF THE
     DEBT, ALL OF 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. Through June 30, 2007, Laurus has converted a total of
$710,200 in principal on the 2004 Note and we made payments totaling $373,133
leaving a remaining principal balance on the 2004 Note of $1,416,667. Through
June 30, 2007, no conversion of principal has taken place on the 2005 Note and
we have made payments totaling $550,000 leaving a remaining principal balance of
$950,000. On the 2005 Note we paid a reduced initial payment of approximately
$41,000 for March 2006 and approximately $85,000 per month of which $83,000
applies to the principal net of interest, for each month thereafter. Payments on
the 2005 Note of approximately $51,000 per month, of which $50,000 applies to
the principal net of interest, commenced in August 2006. Any future additional
conversions of principal by Laurus on either Note will further reduce our
repayment

                                      -16-
<PAGE>

obligations. 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 current cash balance, future performance and working capital,
including our ability to increase revenue and improve 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, 2007 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 have to utilize the funds raised from our private placement of common stock
and warrants, be forced to find alternative sources of financing, or to take
further measures, including significantly reducing expenses or scope of
operations. 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
new non-revolving line of credit with Franklin Funding in November 2005 for an
aggregate amount of up to $500,000 for equipment financing, of which we have
borrowed $350,000 as of June 30, 2006 and we raised gross proceeds of
approximately $4,300,000 in a private placement of our common stock and warrants
in March and April 2006, we 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.

     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.

     EVEN WITH OUR PRIVATE PLACEMENT OF COMMON STOCK AND WARRANTS IN MARCH AND
     APRIL 2006, WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OPERATIONS IN
     THE FUTURE. 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 EXPENSE REDUCTIONS.

We have been successful in achieving our second highest revenue level in the
company's history for the fiscal year ended June 30, 2007, although this result
was 21% below the revenue level for the fiscal year ended June 30, 2006. Our
efforts to continue revenue increases and control expenses may not be
successful. If we continue to experience significant quarterly fluctuations in
our revenue or if our revenue does not continue to increase, we may need to
raise additional capital through equity or debt financing or through the
establishment of other funding facilities in order to keep funding operations.
Even with our recent private placement in March and April 2006, in the current
market condition, raising capital has been, and may continue to be difficult,
and we may not receive sufficient funding. 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.

                                      -17-
<PAGE>

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.

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 2008, 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.

     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 approximately $2,367,000 under both
notes as of June 30, 2007, prepayment would require a cash payment of
approximately $3,077,000, 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.

                                      -18-
<PAGE>

     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.

     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 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.

                                      -19-
<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.

RISKS RELATED TO OUR COMMON STOCK

     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 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.

                                      -20-
<PAGE>

     RISKS RELATED TO OUR COMMON STOCK INCLUDE, BUT ARE NOT LIMITED TO THE
     FOLLOWING:

          o Our quarterly operating results may vary, and these fluctuations
          could affect the market price of our stock.

          o Our stock price is volatile and a stockholder's investment in our
          common stock could suffer a decline in value. o The market for our
          stock has not been liquid.

     AS WE ISSUE ADDITIONAL EQUITY SECURITIES IN THE FUTURE, INCLUDING UPON
     CONVERSION OF ANY OF OUR SECURED CONVERTIBLE DEBT, THE OWNERSHIP OF OUR
     EXISTING STOCKHOLDERS WILL BE DILUTED. IN PARTICULAR, THE SECURED
     CONVERTIBLE DEBT HAS A FULL RATCHET ANTI-DILUTION PROVISION THAT COULD
     SIGNIFICANTLY DILUTE THE OWNERSHIP OF 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 2,148,000 shares upon
conversion of the $2,367,000 million owed under the notes at June 30, 2007. 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.

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. In April 2007 we
entered into an amendment to the lease to extend its term through October 31,
2012. The current monthly rent under the lease is $19,513. Effective November 1,
2007, the monthly rental rate will increase to $20,361, with an increase of
approximately three percent on each November 1 thereafter for the remainder of
the term.

We believe the leased premises are suitable and adequate for their current
intended 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.

                                      -21-
<PAGE>

ITEM 3. LEGAL PROCEEDINGS.

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


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, 2007.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
        ISSUER PURCHASES OF EQUITY SECURITIES.

COMMON STOCK

Our common stock is currently quoted for trading on the OTC Bulletin Board under
the symbol "PBME."

The following table shows, for each quarter of fiscal 2007 and 2006, 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 2007:
     Fourth quarter, ended June 30, 2007.............     $0.90          $0.42
     Third quarter, ended March 31, 2007.............      1.07           0.75
     Second quarter, ended December 31, 2006.........      1.16           0.90
     First quarter, ended September 30, 2006.........      1.23           0.85

     FISCAL 2006:
     Fourth quarter, ended June 30, 2006.............     $1.46          $1.03
     Third quarter, ended March 31, 2006.............      1.98           1.15
     Second quarter, ended December 31, 2005.........      1.20           0.90
     First quarter, ended September 30, 2005.........      1.01           0.77

HOLDERS

As of September 28, 2007, there were 18,720,147 shares of common stock issued
and outstanding, held by approximately 214 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.

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.

                                      -22-
<PAGE>

ISSUER REPURCHASES OF COMMON STOCK

On August 25, 2006, our board of directors authorized the repurchase of shares
of common stock of the Company up to an aggregate value of $500,000 for shares
at a maximum price of $1.17 per share. The repurchase plan expired on August 31,
2007. Under this repurchase program, we repurchased 187,200 shares for a total
of $201,544. No purchases of shares of common stock were made during the fourth
quarter of the fiscal year ended June 30, 2007. Shares purchased through June
30, 2007 are represented in the following table:

             Period                   Total number   Average price   Total value
                                        of shares       paid per      of shares
                                        purchased        share        purchased

August 25, 2006 - October 31, 2006           --            --              --

November 1, 2006 - November 30, 2006      59,900         $1.12         $67,032
                                                         =====
December 1, 2006 - December 31, 2006     127,300         $1.06        $134,512
                                                         =====
January 1, 2007 - June 30, 2007              --            --              --
--------------------------------------------------------------------------------
     Total                               187,200                      $201,544
                                         =======                      ========

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, 2007, 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

                                      -23-
<PAGE>

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 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

Under fixed-price contracts, we recognize revenue as services are performed,
with performance generally assessed using output measures, such as units-of-work
performed to date compared to the total units-of-work contracted. Our client
contracts may be delayed or cancelled at anytime. Uncertainty surrounding
continuation of existing revenues during any period is high. We believe that
recognizing revenue as services are performed is the most appropriate method for
our business as it directly reflects services performed in the laboratory. We
would expect material differences in reporting of our revenues to occur if we
changed our assumptions for revenue recognition from services performed to other
methods such as percent complete or completed contract methods. While both other
methods are allowed under GAAP, they would introduce more variables and
estimates into our revenue recognition process. The percent complete method
introduces estimated costs early in the process that may drive revenues higher
in early periods. The completed contract method may recognize revenues in future
contract periods, such as the first quarter after a fiscal year close and
subsequent to completion of the services rendered.

USEFUL LIVES OF TANGIBLE AND INTANGIBLE ASSETS

The assets we acquire are subject to our best estimates of useful lives of the
asset for depreciation purposes. Due to the uncertainty of current studies which
are subject to cancellation, which may occur at any time, as well as changes in
scientific methods for our testing, we may no longer have use for certain
tangible and intangible assets and may take a charge against current earnings
should changes in our estimated asset lives occur. 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. Software costs incurred in connection with
obtaining and developing internal use software ("software costs"), are
capitalized in accordance with Statement of Position (SOP) No. 98-1 ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE.
Software costs are amortized over a period not to exceed three years and are
included in Property and Equipment (see Note 5).
The amount of depreciation and amortization expense we record in any given
period will change if our estimates of the useful life of our equipment,
computers, software or leasehold interests were to increase or decrease. We use
the discounted cash flow method according to SFAS 144 to test our assets for
impairment. The current balance of our depreciable assets at June 30, 2007 is
$835,934, net of depreciation and amortization. We currently do not carry
material amounts of intangible assets on our balance sheet.

FINANCIAL DERIVATIVES - CONVERSION, OTHER FEATURES AND WARRANTS

Embedded conversion and other features that meet the definition of derivative
financial instruments have, where applicable, been bifurcated from host
instruments (secured convertible notes - see Note 8. Notes Payable) and, in all
instances derivative financial instruments have been recorded as assets or
liabilities and are carried at fair value, using the Black-Scholes pricing
model. We record the value allocated to warrants issued with the convertible
instruments, measured at fair value, using the Black-Scholes pricing model and
recognized by allocating a portion of the proceeds to a derivative liability
with an offset to discount on the convertible instrument.
For convertible debt and related warrants, the recorded discount is accreted as
interest expense using the effective interest method over the life of the debt.

                                      -24-
<PAGE>

STOCK-BASED COMPENSATION

We have traditionally applied APB Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and related interpretations in accounting for our stock-based
employee compensation plan. Beginning with the quarter ended March 31, 2006, we
adopted the provisions of SFAS No. 123(R), "ACCOUNTING FOR STOCK-BASED
COMPENSATION." For the fiscal year ended June 30, 2006 and June 30, 2005, we
granted 125,000 (granted prior to March 31, 2006) and 253,000, respectively, of
incentive-based stock options under incentive compensation plans. For prior
reporting periods, 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, our net loss and loss per share would have been changed to the pro
forma amounts as reported in our financial statements the fiscal year ended June
30, 2007 and June 30, 2006. We will continue to disclose on a pro forma basis
according to SFAS No. 123 during the transition period to be in accordance with
SFAS No. 123(R).

ALLOWANCE FOR DOUBTFUL ACCOUNTS

While the company has historically experienced very low levels of bad debt, we
constantly monitor our current accounts receivable for past due accounts. If we
have specific knowledge of a current account that may be uncollectible, we will
add that amount to our allowance for doubtful accounts. We are susceptible to
changes in the pharmaceutical market as well as changes in the overall economy.
A downturn in the market or cost reductions and consolidation such as the market
is currently experiencing, may change how we estimate our allowance. The company
had not experienced any bad debt in the prior two fiscal years. We incurred one
significant bad debt in the current fiscal year for approximately $24,000.
However, based on the current changes in our marketplace, we may need to
increase our bad debt allowance in future periods, which would reduce our
operating and net profits. The balance of the bad debt allowance was
approximately $29,000 and $32,000 for the fiscal year ended June 30, 2007 and
June 30, 2006, respectively.

OPERATING EXPENSES

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

RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 2007 AND 2006

REVENUE:

-------------------------------------------------------------------------------
                                   YEARS ENDED
                                     JUNE 30,
                               ------------------------------------------------
DOLLARS IN THOUSANDS,                                      $             %
ROUNDED TO NEAREST THOUSAND      2007        2006        Change        Change
-------------------------------------------------------------------------------
REVENUE                         8,480       10,750       (2,270)        (21)
-------------------------------------------------------------------------------

Our revenue is primarily generated from clinical pharmaceutical trials testing
services and from diagnostic services. The approximately 21% decrease in fiscal
2007 revenue from fiscal 2006 was primarily attributable to a decrease in

                                      -25-
<PAGE>

the size and number of clinical pharmaceutical trials testing and diagnostic
testing services we performed. This decrease is contrary to the significant
increases in revenue and open work orders we experienced in fiscal 2006. Over
the last three fiscal years, we have made significant investments in our
business development initiatives that have been responsible for a significant
portion of the revenue increase in fiscal 2006. However, our quarterly and
annual revenues are subject to fluctuations. The clinical pharmaceutical trials
testing and diagnostic testing services that we provide are many times subject
to setup and initiation delays, or early termination of studies, which impact
our revenues. In particular, in fiscal 2007 we had expected a large prospective
study contract to close for over $2,000,000 in the third quarter of fiscal 2007;
however, this study was delayed until the fourth quarter and eventually
cancelled before the end of the fiscal year 2007. The cancellation of this study
had a significant impact on our revenue for fiscal 2007. We did not have a
similar study cancellation during fiscal 2006. Also, in the second and third
quarters of fiscal 2006, we recognized revenue in excess of $2,600,000 from
several large studies; however, we did not have any comparable large studies in
fiscal 2007. However, we did see a significant rebound in referral business from
other laboratories during fiscal 2007, compared to fiscal 2006.

The overall revenue decrease for the fiscal year ended June 30, 2007 reflects
revenue decreases that occurred in the fiscal year after the first quarter.
Combined revenue for the first quarter for the fiscal year ended June 30, 2007
showed an increase of approximately $770,000 over the comparable quarter in the
prior fiscal year. Each successive quarter for fiscal 2007, second through
fourth, showed a decrease in revenue of at least $790,000 over the comparable
quarters in the prior fiscal year. We have previously experienced quarterly
fluctuations in revenue that were above or below previous fiscal years'
revenues. Typically our revenue fluctuations 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. During the fiscal year ended June
30, 2007, our top two clients represented 33% of our revenue as compared to 50%
during the fiscal year ended June 30, 2006. Our largest client in fiscal 2007
individually accounted for approximately 17% of our total revenue in fiscal
2007, while our largest client in fiscal 2006 accounted for approximately 36% of
our total revenue in fiscal 2006. Revenue from our five largest clients
represented approximately 65% and 74% of total revenue in fiscal 2007 and 2006,
respectively.

LABORATORY EXPENSE AND COST OF GOODS SOLD:

-------------------------------------------------------------------------------
                                      YEARS ENDED
                                        JUNE 30,
                                   --------------------------------------------
DOLLARS IN THOUSANDS,                                       $          %
ROUNDED TO NEAREST THOUSAND          2007      2006       Change     Change
-------------------------------------------------------------------------------
LABORATORY EXPENSES AND
COST OF GOODS SOLD                  5,153     5,161        (8)         (0)
-------------------------------------------------------------------------------
PERCENTAGE OF REVENUE                61%       48%
-------------------------------------------------------------------------------

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. For the comparable fiscal years ended June 30,
2007 and 2006, laboratory expense and cost of goods sold was essentially
unchanged, primarily due to increases in salaries and benefits and rent expense,
offset by a decrease in costs of supplies. As a percentage of revenue,
laboratory expense and cost of goods sold increased in fiscal 2007 to
approximately 61% from approximately 48% in fiscal 2006. The relative increase
in laboratory expense and cost of goods sold as a percentage of revenue was
primarily the result of the significant decrease in revenues over the comparable
periods and the components of laboratory expense and cost of goods sold. The
following table illustrates changes in Laboratory Expenses and Cost of Goods
Sold in fixed and variable expense categories:

                                      -26-
<PAGE>

<TABLE><CAPTION>
----------------------------------------------------------------------------------------------------
                                                  YEARS ENDED
                                                    JUNE 30,
                                   ------------------------------------------
DOLLARS IN THOUSANDS,                           % of                   % of         $          %
ROUNDED TO NEAREST THOUSAND          2007      revenue      2006      revenue     Change     Change
----------------------------------------------------------------------------------------------------
<S>                               <C>            <C>     <C>            <C>       <C>         <C>
        FIXED COST DETAIL

Rent, Utilities, Certain Taxes     $   503        6%      $   387        4%        $ 116       30

       VARIABLE COST DETAIL

Wages, Taxes, Benefits               2,052       24%        1,791       17%          261       15
Reagent Chemicals                    1,647       19%        2,153       20%         (506)     (24)
Other Variable Costs                   951       11%          830        8%          121       15
                        Total        4,650       55%        4,774       44%         (124)      (3)

TOTAL COST OF GOODS SOLD           $ 5,153       61%      $ 5,161       48%        $  (8)      (0)
----------------------------------------------------------------------------------------------------
</TABLE>

The largest component of laboratory expense during fiscal 2007 was salaries and
related benefits. During the fiscal years ended June 30, 2007 and 2006,
respectively, salaries and related benefits accounted for approximately 40% and
35% of total laboratory expense and cost of goods sold. Laboratory salaries and
related benefits increased approximately 15% to $2,052,000 from $1,791,000 for
the fiscal years ended June 30, 2007 and 2006, respectively. The majority of
hiring in the laboratory area began in fiscal 2006, for laboratory technicians,
data managers, and project managers to address the significant increase in
testing volume and clinical studies during fiscal 2006, which we expected to
continue into fiscal 2007. At the beginning of fiscal 2006 we had a staff of 25
FTE in the Laboratory and Project Management areas. By the end of fiscal 2006,
we had increased staff to 36 FTE, and by the end of fiscal 2007 we had 39 FTE in
this area. During fiscal 2007, as our clinical studies declined from 2006,
including due to unanticipated cancellation of studies, we did not reduce our
laboratory staff. Our highly skilled laboratory technical people are difficult
to find, and once hired, we train our staff extensively on our proprietary
methods.

The other primary component of laboratory expense is the cost of supplies for
analysis of clinical trial samples. During the fiscal years ended June 30, 2007
and 2006, respectively, lab supplies were approximately 32% and 42%, and outside
services were approximately 9% and 6%. The 24% decrease in laboratory supplies
expense resulted directly from the decrease in number of studies during fiscal
2007compared to fiscal 2006, which reduced our costs for reagent chemicals.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE:

-------------------------------------------------------------------------------
                                      YEARS ENDED
                                        JUNE 30,
                                  ---------------------------------------------
DOLLARS IN THOUSANDS,                                     $          %
ROUNDED TO NEAREST THOUSAND         2007       2006     Change     Change
-------------------------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSE             3,892      3,696       196         5
-------------------------------------------------------------------------------
PERCENTAGE OF REVENUE               46%        34%
------------------------------------------------------

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, 2007 and 2006, respectively, selling,
general and administrative expense increased approximately 5% to approximately
$3,892,000 from $3,696,000. As a percentage of revenue, selling, general and
administrative expenses were approximately 46% and 34%, respectively, for the
comparable fiscal years ended June 30, 2007 and 2006. 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 $702,000. The majority of this increase
is attributable to approximately $555,000 of share-based compensation expense
for stock awards granted in the first quarter of fiscal 2007. We issued 125,000

                                      -27-
<PAGE>

stock options as share-based compensation in fiscal 2006; however, they were
issued before implementation of SFAS 123(R) and did not result in compensation
expense. We also added additional staff to laboratory management, science and
technology and accounting, increasing headcount to 17 FTE in fiscal 2007 from 14
FTE in fiscal 2006. Another factor impacting salaries and benefits, all senior
managers and executive officers took a voluntary 10% pay cut effective March 15,
2007, due to the reduced clinical study revenue experienced during fiscal 2007.

During fiscal 2007, we had increases in advertising, trade show and travel
expenses for business development activities. We reduced expenses for legal,
recruiting, consulting, other outside services, insurance and employee bonuses
during fiscal 2007. We suspended our investor relations program starting
December 1, 2006 to further reduce expenses.

RESEARCH AND PRODUCT DEVELOPMENT:

-------------------------------------------------------------------------------
                                        YEARS ENDED
                                          JUNE 30,
                                    -------------------------------------------
DOLLARS IN THOUSANDS,                                       $          %
ROUNDED TO NEAREST THOUSAND            2007      2006     Change     Change
-------------------------------------------------------------------------------
RESEARCH AND PRODUCT DEVELOPMENT        --        46       (46)       (100)
-------------------------------------------------------------------------------
PERCENTAGE OF REVENUE                   0%        0%
--------------------------------------------------------


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, Inc.

For the comparable fiscal years ended June 30, 2007 and 2006, research and
product development expenses decreased to zero from approximately $46,000. The
decrease was primarily the result of ending further expenditures in this area.
For the fiscal year ended June 30, 2006, the research and product development
expenses consisted of depreciation charges for laboratory instruments. For the
fiscal year ended June 30, 2007, we moved those laboratory instruments to
general use in the laboratory.

We anticipate that we will no longer incur research and development expenses
related to the technology held by PBI Technology. These technology assets held
by PBI Technology were written off as of June 30, 2004.

OTHER EXPENSE:

-------------------------------------------------------------------------------
                                       YEARS ENDED
                                         JUNE 30,
                                   --------------------------------------------
DOLLARS IN THOUSANDS,                                        $          %
ROUNDED TO NEAREST THOUSAND           2007       2006      Change     Change
-------------------------------------------------------------------------------
OTHER EXPENSE                         648       1,667      (1,019)     (61)
-------------------------------------------------------------------------------
PERCENTAGE OF REVENUE                  8%         16%
--------------------------------------------------------

Total other expense decreased 61% to approximately $648,000 from expense of
approximately $1,667,000 during the fiscal years ended June 30, 2007 and 2006,
respectively.

There were three major components of other expense in the year ended June 30,
2007 associated with the Laurus 2004 and 2005 Notes.

First, we recorded cash interest expense, approximately $322,000 and $339,000,
paid on the 2004 and 2005 Notes, and we recorded approximately $886,000 and
$771,000 of non-cash expense related to the accretion of the intrinsic value of
the conversion feature and warrants associated with both notes.

                                      -28-
<PAGE>

The second component is net fair value adjustments included in earnings related
to these instruments amounted to approximately $694,000 and $299,000 for the
fiscal year ending June 30, 2007 and 2006, respectively.

The third major component of other expense associated with Laurus related to the
approximately $293,500 in fees and expenses related to the 2004 Note, and
approximately $168,000 in fees and expenses in the fiscal year ended June 30,
2006, 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 $107,000 of expense recognized for the fiscal years ended June 30,
2007 and June 30, 2006. For fiscal 2007, we expect to continue to amortize these
expenses at the rate of approximately $9,000 per month, or $27,000 per quarter.

Another major component of other expense for fiscal 2006 was approximately
$978,000 of warrant expense associated with our private placement of common
stock and warrants in March and April 2006, for which we had no comparable
expense in fiscal 2007. This warrant expense was a one-time charge in the fiscal
year ended June 30, 2006, without any remaining amounts to be amortized in
future periods.

During the fiscal year ended June 30, 2007, we paid other expense - for
settlement charges totaling $50,000. This sum represents our pro rata share of a
promissory note in principal amount of $50,000 issued jointly by us and Saigene
Corporation in connection with our prior asset purchase agreement dated August
28, 2002. While we and Saigene Corporation were each obligated for $25,000 of
the $50,000 promissory note, Saigene was unable to satisfy its portion of the
note guarantee for $25,000, which we subsequently paid. See Note 13. Commitments
and Contingencies in the financial statement notes.

For fiscal 2006, our net "other expense" also included approximately $261,000 in
Washington state sales and business and occupation tax refunds (which accrued
from a review of past years tax remittances and application of new apportionment
rules where we incurred approximately $171,000 of expense for the audit). The
State of Washington has subsequently performed an audit of our documentation
supporting the refund during fiscal 2007. However, we have not had notification
of any changes to this amount to be refunded and continue to carry the balance
as "other receivable".

NET INCOME (LOSS):

-------------------------------------------------------------------------------
                                        YEARS ENDED
                                          JUNE 30,
                                   --------------------------------------------
DOLLARS IN THOUSANDS,                                        $          %
ROUNDED TO NEAREST THOUSAND            2007      2006      Change     Change
-------------------------------------------------------------------------------
NET INCOME (LOSS)                    (1,213)      179      (1,392)     (777)
-------------------------------------------------------------------------------
PERCENTAGE OF REVENUE                 (14)%        2%
---------------------------------------------------------


We had a loss of approximately $(1,213,000) in fiscal 2007 compared to net
income of approximately $179,000 in fiscal 2006. This change to a loss, from net
income, is principally due to a significant decrease in revenue during fiscal
2007 and a lesser extent our share-based compensation expense. We experienced a
major decrease in gross margin due to the decrease in revenue, increase in costs
due to increased staffing in the laboratory and an increase in referral business
that included subcontracted testing services. Our selling, general and
administrative expenses rose due to increased staffing in business development
and accounting. As a percentage of revenue, all expense categories increased.
Some offset to the decrease in revenue and increases to expense was provided by
and our net income position was favorably impacted by a large gain from
adjustment to fair value of the derivative instruments during fiscal 2007 and
higher interest income from our positive cash position.

LIQUIDITY AND CAPITAL RESOURCES:

We had a significant decrease in revenues and a net operating loss for the
fiscal year ended June 30, 2007, compared to record revenues and significant net
operating income for the fiscal year ended June 30, 2006. By comparison,
revenues for the fiscal year ended June 30, 2006 were significantly higher than
those in the comparable prior fiscal years and for the fiscal year ended June
30, 2007. While revenues have decreased from a record level for fiscal

                                      -29-
<PAGE>

2006, we experienced the second highest revenue in our history for fiscal 2007.
We have continued to experience significant volatility in our revenues over the
past several years. We may experience significant losses and our cash and
working capital position will be adversely impacted if our revenues continue to
decrease significantly in future periods. 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, 2007, our cash and cash equivalents were approximately $4,220,000,
compared to approximately $5,498,000 at June 30, 2006. The decrease in our cash
and equivalents is primarily attributable to principal payments on our secured
Laurus convertible debt, reduced profitability, and our repurchases of shares of
common stock. While cash flow from operations was down approximately $518,000
from fiscal 2006, we maintain a cash balance that we believe will fund our
current operating needs through fiscal 2008. The placement of common stock and
warrants in March and April 2006 which produced a net cash inflow of
approximately $3,963,000 is the main reason for our current cash position. The
net decrease in our cash and cash equivalents from the prior fiscal year is the
result of: (a) payments on our accounts payable, (b) payments on our accrued
liabilities, (c) increases in inventory. These items were more than offset as a
the result of: (i) collections on accounts receivable, (ii) increases in
advances from customers, (iii) decreases in prepaid expenses.

At June 30, 2007, we had approximately $1,659,000 in accounts receivable,
compared to approximately $1,978,000 as of June 30, 2006, reflecting the
decrease in revenue and timing of revenues billed and collected. We generally
have a high collectibility rate on our accounts receivable, however, we
experienced our first significant bad debt in the last three fiscal years where
we wrote off approximately $24,000. Our allowance for doubtful accounts is
$29,300 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.

Total liabilities recorded on our balance sheet as of June 30, 2007 were
approximately $5,859,000 compared to approximately $6,668,000 as of June 30,
2006. The significant decrease in liabilities was the result of decreases in our
other notes payable, accounts payable and capital lease obligations, and a large
decrease in our overall secured Laurus convertible debt. This was offset only by
increases in customer advances. Significant components of our liabilities
include the 2004 and 2005 Notes with Laurus, and, to a lesser degree, our prior
$350,000 in borrowings in fiscal 2006 under our 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 secured Laurus convertible notes by approximately $877,000,
related to the valuation of the conversion features and the warrants. Those
conversion features and warrants are bifurcated from the convertible notes and
reported as derivative liabilities. During the fiscal year ended June 30, 2007,
Laurus did not convert any portion of the principal amount due on the 2004 Note,
compared to $646,600 of the principal amount converted during the fiscal year
ended June 30, 2006. As of June 30, 2007 the remaining principal balance on the
2004 Note was $1,416,667. No amounts of the 2005 Note have been converted, and
as of June 30, 2007 the remaining principal balance on the 2005 Note was
$950,000. Accordingly, if the discount to face value is disregarded, our total
liabilities as of June 30, 2007 and June 30, 2006, respectively, would be
approximately $6,620,000 and $5,763,000.

At June 30, 2007, we had positive working capital of approximately $827,000,
compared to approximately $1,904,000 at June 30, 2006. The approximately
$1,077,000 decrease in working capital is attributable to several changes in the
components of working capital. Changes providing negative impact include
decreases in cash, accounts receivable, prepaid expenses and accounts payable.
Changes providing positive impact include increases in inventory, customer
advances, capital lease obligations, current balances and derivative liability
related to the 2004 and 2005 Notes, and other notes payable. The 2004 and 2005
Notes can be converted to common stock at any time if certain conditions are
met. The Notes are classified as short-term liabilities on this basis. This
classification creates a reduction in working capital. Should the Notes be
converted, the effect would increase working capital by the amount converted.
The transaction settlement in common stock would increase equity and decrease
short-term liabilities.

Net cash provided in operating activities was approximately $164,000 for the
fiscal year ended June 30, 2007. For the fiscal year ended June 30, 2007, net
cash used in operations included the effect of approximately $886,000 of
accretion related to the 2004 and 2005 Notes, approximately $290,000 in
depreciation and amortization. Our investing activities used approximately
$329,000 for the fiscal year ended June 30, 2007 primarily for the repurchase of
shares of common stock and capital equipment related to our laboratory. On
August 25, 2006, our

                                      -30-
<PAGE>

board of directors authorized the repurchase of shares of common stock up to an
aggregate value of $500,000 for shares at a maximum price of $1.17 per share,
and under this repurchase program, we repurchased 187,200 shares for a total of
$201,544. See "ITEM 5 - Issuer Repurchases of Common Stock" above. Cash flows
used in financing activities included approximately $1,112,000 consisting
primarily of approximately $1,056,000 in payments on our 2004 and 2005 Notes
with Laurus, and payments of approximately $56,000 on capital lease obligations.

As described above, we experienced a significant decrease in revenue for the
year ended June 30, 2007, and we incurred a net loss. We have realized a decline
in our cash and working capital position from operations, and we expect these
trends will continue during fiscal 2008, at approximately the same rate due to
principal payments for the 2004 and 2005 Notes with Laurus, note payable with
Franklin Funding, and capital lease obligations. In fiscal 2008 we will continue
to actively pursue business development and marketing activities to broaden our
client and revenue base, and we anticipating make additional investments from
time to time 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 improve our operations and increase revenue may not be
successful.

We expect that our current cash, current assets and any cash flows from
operations will be sufficient to fund operations through fiscal 2008. (See "Note
8 to Consolidated Financial Statements" included in this Report). However, any
decreases in future revenue would adversely affect our financial condition, and
we may need to seek additional capital before fiscal 2009. 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.



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 PROCEDURES.

We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is (a) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and (b) accumulated and communicated to management,
including our Chief Executive Officer and Vice President of Finance, as
appropriate, to allow timely decisions regarding required disclosure. 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 Vice President of Finance, 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 Vice President of Finance
concluded that our disclosure controls and procedures are effective.

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

There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during the fourth quarter of fiscal 2007 that has materially affected, or

                                      -31-
<PAGE>

is reasonably likely to materially affect, our internal control 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. Management continually reviews, modifies and improves its systems of
accounting and controls in response to changes in business conditions and
operations and in response to recommendations in reports prepared by the
independent registered public accounting firm and outside consultants.


ITEM 8B. OTHER INFORMATION.

Not applicable

                                    PART III

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

The following list identifies the members of our Board of Directors and our
executive officers as of September 28, 2007, and sets forth certain biographical
information regarding each person.

                        DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers as of September 28, 2007 were as follows:

          NAME               AGE                     POSITION
--------------------------- ---- -----------------------------------------------

Ronald R. Helm               56  President, Chief Executive Officer and Director
Dr. Elizabeth Teng Leary     59              Chief Scientific Officer
Dr. Mario Ehlers             48               Chief Medical Officer
John P. Jensen               51      Vice President of Finance and Controller
Michael P. Murphy            52         Senior Vice-President, Operations
Terry M. Giles               59                      Director
Paul G. Kanan                61                      Director
Richard W. Palfreyman(1)(2)  65                      Director
Curtis J. Scheel (1)(2)      48                      Director

----------
(1)  Member of Audit Committee
(2)  Member of Compensation Committee

Our Board of Directors currently consists of five directors. Currently, two
directors are considered "independent" within the meaning of the listing
standards of The NASDAQ Stock Market.

Officers are appointed by the Board of Directors. Each executive officer named
above will serve until his or her successor is appointed or until his or her
earlier death, resignation or removal.

RONALD R. HELM has served as our Chairman, Chief Executive Officer and a
Director since August 28, 2002. From 1996 to August 28, 2002, Mr. Helm served as
the Chairman and CEO of Saigene Corporation, and served on the board of
directors of Saigene until January 2004. Mr. Helm was previously in a private
law practice with the California law firm of Helm, Purcell & Wakeman. Mr. Helm
was a Senior Vice-President and General Counsel for ComputerLand Corporation and
also served as the Managing Director of ComputerLand Europe. Prior to that, Mr.
Helm was the Associate Dean for Development and a Professor of Law at Pepperdine
University School of Law. He received his B.S.Ed from Abilene Christian
University and his J.D. from Pepperdine University School of Law.

ELIZABETH TENG LEARY, Ph.D, DABCC, has served as our Chief Scientific Officer
since 2000, prior to which Dr. Leary was our Vice President of Laboratory
Services from 1998. Dr. Leary co-founded Pacific Biometrics Inc., a Washington
corporation (PBI-WA), in 1989 and from 1989 to 1998, she was Vice President and
Director of the

                                      -32-
<PAGE>

Laboratory Division of PBI-WA. In l989, Dr. Leary also co-founded the Pacific
Biometrics Research Foundation (PBRF), a non-profit corporation affiliated with
us, and currently serves as the director of the CDC Cholesterol Reference
Network Laboratory at PBRF (one of eleven such reference laboratories in the
world). Prior to joining Pacific Biometrics, Dr. Leary served as a director of
clinical chemistry and industry consultant for 13 years. She is a diplomat of
the American Board of Clinical Chemistry. She is past chair of the Pacific
Northwest chapter of American Association for Clinical Chemistry (AACC) and the
Lipids and Vascular Disease Division of AACC, and past president of the North
America Chinese Clinical Chemist Association. She has published over 80 articles
in peer-reviewed journals and books and is a recipient of several grants and
awards. Dr. Leary received her B.A. from the University of California at
Berkeley and her Ph.D. in Biochemistry from Purdue University. She is a graduate
of the post-doctoral training program in clinical chemistry at the University of
Washington Department of Medicine.

MARIO R. EHLERS, M.D., PH.D., has served as our Chief Medical Officer since
September 2002. From June 1998 to September 2002, Dr. Ehlers was the Vice
President and Chief Medical Officer of Restoragen, Inc., a privately-held
biotechnology company. Subsequently, in December 2002, Restoragen, Inc. filed
for chapter 11 reorganization and bankruptcy protection. Prior to 1998, Dr.
Ehlers has 11 years of experience in academic research. He was formerly chairman
of an academic department at the University of Cape Town Medical School in South
Africa and an instructor in biochemistry at Harvard Medical School. He is author
to over 40 publications, two patents and two additional patent applications,
with an international reputation in research on ACE and related proteases and in
mycobacterial infectious diseases. Dr. Ehlers received both his MBChB (M.D.
equivalent) and Ph.D. from the University of Cape Town in South Africa.

JOHN P. JENSEN has served as our Vice President of Finance and Controller since
July 1, 2007 and as our Controller since May 2005. From May 2002 to March 2005,
Mr. Jensen was Vice President, Operations for Utility, Inc., a privately-held
manufacturing company. From June 2000 to March 2002, Mr. Jensen was Director of
Operations for Seattle Lab, Inc., a wholly-owned subsidiary of BVRP, Inc., a
French public company. Prior to 2000, Mr. Jensen has 22 years of experience in
financial management in the manufacturing, professional service and retail
medical supply sectors, holding senior management positions at Mountain Safety
Research, Inc., a wholly owned subsidiary of REI, Inc., and Karr, Tuttle,
Campbell, P.S. Mr. Jensen holds a B.B.A. with a Minor in Mathematics from
Eastern Washington University.

MICHAEL P. MURPHY, PH.D., has served as our Senior Vice-President, Operations
since May, 2005. From June 1999 to May 2005, Dr. Murphy served as Director,
Laboratory Operations, Regional CMBP Account Executive, and Technical Director
of Laboratory Corporation of America. He served as Director of Laboratory
Services from 1998 -1999 at Pacific Biometrics, Inc. before returning to the
commercial clinical diagnostic laboratory industry. From November 1993 through
November 1997, Dr. Murphy was Technical Director for Laboratory Corporation of
America. Prior to 1993 he served as Laboratory Director for Eastern Maine
Medical Center and Director, Professional Services at Compulab Corporation. His
experience includes various environments such as clinical diagnostic, commercial
reference, and clinical trial and research laboratories. His areas of expertise
include technical and administrative laboratory operations, method
standardization and quality assurance, laboratory consultation and support,
information systems and laboratory automation. Research and clinical areas of
interest include diabetes, infectious diseases, cardiovascular and oncology
testing. Dr. Murphy received his B.S. from Xavier University and Ph.D. from The
Ohio State University. He is a Diplomat of the American Board of Clinical
Chemistry.

TERRY M. GILES was elected to the Board of Directors in September 2003. Mr.
Giles previously served on our Board of Directors from 1995 to 2001. Mr. Giles
currently is in private law practice in California, and is also an adjunct
professor with the Pepperdine University School of Law. Mr. Giles currently also
serves as Chairman of Giles Enterprises, a private holding company for various
business enterprises, as Chairman of the Board of Landmark Education
Corporation, a private company providing seminars on personal growth and
responsibility, as Chairman of Mission Control Productivity, Inc., a private
company, and as the owner of GWE, LLC, a private company specializing in lender
financing. Mr. Giles serves on the Pepperdine University Board of Regents and is
a member of the Board of Visitors for the Pepperdine University School of Law.
Mr. Giles also serves on the board of directors of The Terry M. Giles
Foundation, a charitable foundation. Mr. Giles received his B.A. from California
State University at Fullerton and his J.D. from Pepperdine University School of
Law.

                                      -33-
<PAGE>

PAUL G. KANAN has served as a Director since July 1996, and previously served as
President and Chief Executive Officer from October 1996 through August 2002. Mr.
Kanan served as President and Chief Executive Officer of our wholly owned
subsidiary, Pacific Biometrics, Inc., a Washington corporation, from October
1996 through August 2002, and as President and a director of BioQuant from
October 1993 through August 2002. Since May 2001, Mr. Kanan has served as Vice
President of Operations and Chief Financial Officer of Agensys, Inc., a
biotechnology firm in California. Mr. Kanan is also an officer and director of
CEO Advisors, a health care consulting firm that he co-founded in 1992. Mr.
Kanan received his B.S.E. from the University of Michigan and an M.B.A. from
Harvard University Graduate School of Business.

RICHARD W. PALFREYMAN became a Director on August 28, 2002, and currently serves
on our Audit Committee and Compensation Committee. Mr. Palfreyman is currently
the President, CEO and Director of the Relax the Back Corporation, serving since
November 2001. Mr. Palfreyman's prior business positions include serving as
President and Chief Executive Officer of BackSaver Acquisitions Corporation from
November 2001 to October 2002, as Chief Operating Officer and Chief Financial
Officer of Spafinder, Inc. from October 2000 to August 2001, as Chief Operating
Officer of Spectra Entertainment Corporation from October 1996 to June 2000. He
has also served as President and Chief Executive Officer of the Photo & Sound
Corporation and as the Chief Financial Officer of ComputerLand Corporation. Mr.
Palfreyman holds a B.S. in Economics and an M.B.A. from the University of Utah.

CURTIS J. SCHEEL became a Director on January 1, 2006, and currently serves on
our Audit Committee and Compensation Committee. Mr. Scheel currently serves as
the Chief Operating Officer of Ritz Camera Centers, serving since January 2003.
Mr. Scheel's prior business positions include President and Chief Financial
Officer of Cameraworld.com from December 1999 to May 2002 and Director of
National Marketing, Technology Division, Deutsche Financial Services Corp. from
July 1996 to December 1999. He has also served as Vice President and Chief
Financial Officer at Artisoft, Inc. from September 1995 to June 1996 and Vice
President and Treasurer at Microage, Inc. from September 1989 to 1995. Mr.
Scheel holds a B.B.A. and an M.B.A. from the University of Wisconsin-Madison.

None of the persons specified above share any familial relationship. Other that
the persons specified above, there are currently no significant employees
expected to make a significant contribution to the business.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1933, as amended, requires our
executive officers and directors, and persons who own more than 10% of our
outstanding Common Stock, to file reports of ownership and change in ownership
with the Securities and Exchange Commission. Officers, directors and greater
than 10% stockholders are required by SEC regulations to furnish us with copies
of all such ownership reports they file.

Based solely on our review of the copies of such reports we received, or written
representations from certain reporting persons, we believe that, during the 2007
fiscal year, all such filing requirements applicable to our executive officers,
directors and greater than 10% beneficial owners were complied with, except that
the following filings were not made on a timely basis: Terry Giles, one of our
directors, filed a Form 4 reporting 5 late transactions.

CODE OF ETHICS

We have adopted a Code of Ethics applicable to our principal executive officer,
principal financial officer, and other employees performing similar functions.
We filed a copy of the Code of Ethics as an exhibit to our annual report on Form
10-KSB for the 2004 fiscal year, which may be accessed through the SEC's website
at www.sec.gov.

AUDIT COMMITTEE

The Audit Committee assists the Board in fulfilling its responsibilities to
provide oversight with respect to our financial statements and reports, our
independent auditors, the system of internal controls and the audit process. Its
primary duties include reviewing the results and scope of the audit and other
services provided by our independent auditors, and reviewing and evaluating our
internal control functions. The Audit Committee also has authority for

                                      -34-
<PAGE>

selecting and engaging our independent auditors and approving their fees. During
the 2007 fiscal year, the Audit Committee met 4 times.

The Audit Committee currently consists of two directors, Richard Palfreyman
(Chairman) and Curtis J. Scheel. Mr. Palfreyman is financially literate, and the
Board has determined that Mr. Palfreyman is qualified as an "audit committee
financial expert" within the meaning of SEC regulations based on his accounting
and related financial management expertise. In addition, Mr. Palfreyman and Mr.
Scheel is each considered an "independent director" within the meaning of the
listing standards of The NASDAQ Stock Market.

POLICY ON STOCKHOLDER NOMINATION OF DIRECTORS

There have been no material changes to the procedures by which stockholders may
recommend nominees for election to our Board of Directors.

ITEM 10. EXECUTIVE COMPENSATION.

COMPENSATION OF EXECUTIVE OFFICERS

The following table shows for each of the two fiscal years ended June 30, 2007
and 2006 , respectively, compensation awarded or paid to, or earned by, the
following persons (collectively, the "NAMED EXECUTIVE OFFICERS"):

     o    Ronald R. Helm, our Chief Executive Officer and Chairman;
     o    Elizabeth T. Leary, Ph.D., our Chief Scientific Officer; and
     o    Mario R. Ehlers, Ph.D., our Chief Medical Officer.


                           SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
                                                                       STOCK       ALL OTHER
                                              SALARY       BONUS       AWARDS        COMP.        TOTAL
NAME AND PRINCIPAL POSITION       YEAR         ($)          ($)         ($)           ($)           ($)
-------------------------------------------------------------------------------------------------------------
<S>                              <C>       <C>           <C>         <C>           <C>           <C>
Ronald R. Helm (1)                2007      $233,000      $34,500     $396,000      $6,341(1)     $669,841
CHIEF EXECUTIVE OFFICER           2006       225,000       90,000          --        7,339         322,339
AND CHAIRMAN

Elizabeth T. Leary (2)            2007       184,458        4,750       17,820       6,736(2)      213,764
CHIEF SCIENTIFIC OFFICER          2006       190,000       53,468          --        4,874         248,342

Mario R. Ehlers (3)               2007       194,166        5,000       18,810       5,869(3)      223,845
CHIEF MEDICAL OFFICER             2006       192,667       38,585          --        8,557         240,068
</TABLE>

(1)  Mr. Helm became a Director, Chairman and Chief Executive Officer on August
     28, 2002. The amounts listed under "All Other Compensation" in fiscal
     2007 include $1,959 in life insurance premiums paid by us for Mr. Helm's
     benefit and $4,640 in company-contributions for Mr. Helm's account in the
     401(k) plan.
(2)  Dr. Leary became Chief Scientific Officer in 2000. The amounts in the Bonus
     column in fiscal year 2007 consist of payouts under the employee bonus
     program. The amounts in the Bonus column in fiscal year 2006 consist of
     payouts under the senior manager and employee bonus programs $38,000 and
     sales commissions paid of $15,468. The amounts listed under "All Other
     Compensation" in fiscal 2007 include $1,959 of life insurance premiums paid
     by us for Dr. Leary's benefit and $5,035 in company-contributions for Dr.
     Leary's account in the 401(k) plan.

                                      -35-
<PAGE>

(3)  Dr. Ehlers became Chief Medical Officer on September 30, 2002. The amounts
     listed under "All Other Compensation" in fiscal 2006 include $1,959 in life
     insurance premiums paid by us for Dr. Ehlers' benefit and $4,000 in
     company-contributions for Dr. Ehlers' account in the 401(k) plan.

NARRATIVE DISCUSSION OF SUMMARY COMPENSATION TABLE INFORMATION

The following provides a narrative discussion of the material factors which we
believe are necessary to understand the information disclosed in the foregoing
Summary Compensation Table. The following narrative disclosure is separated into
sections, with a separate section for each of our Named Executive Officers.

RONALD R. HELM, CHIEF EXECUTIVE OFFICER AND CHAIRMAN

     CASH COMPENSATION. Mr. Helm was awarded total cash compensation for his
     services to us for fiscal 2007 in the amount of $267,500. Of this sum,
     $233,000 represents his base salary and $34,500 for cash bonuses. As of the
     2007 fiscal year end, Mr. Helm's employment agreement was in process of
     renegotiation with the Compensation Committee of the Board of Directors.
     The base salary represents an adjustment to $240,000 from $225,000 in
     fiscal year 2006; due to the reduced revenue experienced in fiscal 2007,
     all senior managers including executive officers took a 10 percent pay cut
     effective March 15, 2007. The Compensation Committee plans to reevaluate
     Mr. Helm's base salary and long-term incentive awards on an annual basis.

     In determining Mr. Helm's base salary for the 2007 fiscal year, the
     Compensation Committee considered Mr. Helm's managerial and executive
     experience and the level of compensation paid to the highest paid
     executives at comparable public companies. The Committee also considered
     competitive trends, our overall financial performance and resources, our
     operational performance, general economic conditions as well as a number of
     factors relating to Mr. Helm, including the performance of Mr. Helm, and
     level of his experience, ability and knowledge of the job.

     LONG-TERM INCENTIVE AWARDS. On August 25, 2006, the Board awarded Mr. Helm
     400,000 shares of restricted stock, at a market price of $.99 per share,
     fully vested on the date of the grant. In connection with the restricted
     stock award, Mr. Helm surrendered 160,000 stock options previously granted
     to him in fiscal 2005 (these options were not valued as compensation as the
     grant was made in fiscal 2005 under SFAS 123) to obtain 200,000, or half,
     of the restricted stock award.

     The amount included under the column "Stock Awards" in the Summary
     Compensation Table for Mr. Helm represents the dollar amount recognized as
     compensation expense with respect to the restricted stock award to Mr. Helm
     of $396,000, as reflected in our audited financial statements for the 2007
     fiscal year in accordance with Statement of Financial Accounting Standards
     Statement No. 123(R), SHARE-BASED PAYMENT (SFAS No. 123(R)), disregarding,
     however, the estimate of forfeitures related to service-based vesting
     conditions included in such financial statements and required by SFAS No.
     123(R).

     FRINGE BENEFITS AND PERQUISITES. During fiscal 2007, we provided fringe
     benefits to Mr. Helm in an amount of $6,341, related to short-term,
     long-term disability and life insurance and company match on our 401(k)
     plan.

     EMPLOYMENT AGREEMENT. On June 1, 2005, as amended August 30, 2006, we
     entered into an employment agreement with Ronald R. Helm. The employment
     agreement provides for a base salary of $240,000 per year, with potential
     bonuses of 20% in year one and 30% in year two based on criteria determined
     by our board of directors. For the 2006 fiscal year, we paid to Mr. Helm
     bonuses for achievement of certain performance milestones: (a) 2.5% bonus
     paid quarterly upon achievement of revenue targets of $2,500,000 for each
     fiscal quarter; (b) 10% bonus paid upon achievement of a positive operating
     income and backlog targets; (c) 10% bonus paid upon closing of the PIPE
     financing in April 2006; and (d) 10% bonus paid upon achievement of overall
     company performance targets of $10,000,000 in revenue and backlog targets.

     Pursuant to the amendment in August 2006, Mr. Helm agreed to surrender all
     of his stock options specified in the original employment agreement in
     exchange for an award of 200,000 shares of restricted common

                                      -36-
<PAGE>

     stock. In addition, Mr. Helm received 200,000 additional shares of
     restricted stock for meeting fiscal 2006 performance milestones of
     $10,000,000 in revenue and backlog targets.

     The term of the employment agreement continues through June 30, 2008,
     renewable upon mutual agreement of us and Mr. Helm. If we terminate the
     employment agreement without cause, Mr. Helm will be entitled to receive
     the unpaid salary and vacation for the remaining term of the agreement,
     plus any bonus earned as of the date of termination. In the event our
     company is sold, is the non-surviving party in a merger or completes a sale
     of substantially all its assets, Mr. Helm will be entitled to receive an
     amount equal to two times his base annual salary, less any money that he
     receives from the buyer or surviving entity. Mr. Helm may terminate the
     agreement upon 30 days' notice.

ELIZABETH T. LEARY, CHIEF SCIENTIFIC OFFICER

     CASH COMPENSATION. Dr. Leary was awarded total cash compensation for her
     services to us for fiscal 2007 in the amount of $189,208. Of this sum,
     $184,458 represents her base salary and $4,750 for cash bonuses. The base
     salary represents an adjustment to $184,458 from $190,000; due to the
     reduced revenue experienced in fiscal 2007, all senior managers including
     executive officers took a 10 percent pay cut effective March 15, 2007. The
     Compensation Committee plans to reevaluate Dr. Leary's base salary and
     long-term incentive awards on an annual basis.

     In determining Dr. Leary's base salary for the fiscal year 2007, the
     Compensation Committee considered Dr. Leary's managerial and executive
     experience and the level of compensation paid to the highest paid
     executives at comparable public companies. The Committee also considered
     competitive trends, our overall financial performance and resources, our
     operational performance, general economic conditions as well as a number of
     factors relating to Dr. Leary, including the performance of Dr. Leary, and
     level of her experience, ability and knowledge of the job.

     LONG-TERM INCENTIVE AWARDS. On August 25, 2006, the Board awarded Dr. Leary
     18,000 shares of restricted stock, at a market price of $.99 per share,
     fully vested on the date of the grant.

     The amount included under the column "Stock Awards" in the Summary
     Compensation Table for Dr. Leary represents the dollar amount recognized as
     compensation expense with respect to the restricted stock award to Dr.
     Leary of $17,820, as reflected in our audited financial statements for the
     2007 fiscal year in accordance with Statement of Financial Accounting
     Standards Statement No. 123(R), SHARE-BASED PAYMENT (SFAS No. 123(R)),
     disregarding, however, the estimate of forfeitures related to service-based
     vesting conditions included in such financial statements and required by
     SFAS No. 123(R).

     FRINGE BENEFITS AND PERQUISITES. During fiscal 2007, we provided fringe
     benefits to Dr. Leary in an amount of $6,736, related to short-term,
     long-term disability and life insurance and company match on our 401(k)
     plan.

     EMPLOYMENT AGREEMENT. As of the 2007 fiscal year end the employment
     agreement from 2004 with Dr. Leary remained in force. It specifies a base
     salary of $190,000 per year, with potential bonuses of 2.5% paid quarterly
     and 10% annual bonus based on criteria determined by our board of
     directors. For the 2006 fiscal year, we paid to Dr. Leary bonuses for
     achievement of certain performance milestones: (a) 2.5% bonus paid
     quarterly upon achievement of revenue targets of $2,500,000 for each fiscal
     quarter; (b) 10% bonus paid upon achievement of revenue and backlog
     targets.

MARIO R. EHLERS, CHIEF MEDICAL OFFICER

     CASH COMPENSATION. Dr. Ehlers was awarded total cash compensation for his
     services to us for fiscal 2007 in the amount of $199,166. Of this sum,
     $194,166 represents his base salary and $5,000 for cash bonuses. The base
     salary represents an adjustment to $194,199 from $200,000; due to the
     reduced revenue experienced in fiscal 2007, all senior managers including
     executive officers took a 10 percent pay cut effective March 15, 2007. The
     Compensation Committee plans to reevaluate Dr. Ehlers's base salary and
     long-term incentive awards on an annual basis.

                                      -37-
<PAGE>

     In determining Dr. Ehlers's base salary for the 2007 fiscal year, the
     Compensation Committee considered Dr. Ehlers's managerial and executive
     experience and the level of compensation paid to the highest paid
     executives at comparable public companies. The Committee also considered
     competitive trends, our overall financial performance and resources, our
     operational performance, general economic conditions as well as a number of
     factors relating to Dr. Ehlers, including the performance of Dr. Ehlers,
     and level of his experience, ability and knowledge of the job.

     LONG-TERM INCENTIVE AWARDS. On August 25, 2006, the Board awarded Dr.
     Ehlers 19,000 shares of restricted stock, at a market price of $.99 per
     share, fully vested on the date of the grant.

     The amount included under the column "Stock Awards" in the Summary
     Compensation Table for Dr. Ehlers represents the dollar amount recognized
     as compensation expense with respect to the restricted stock award to Dr.
     Ehlers of $18,810, as reflected in our audited financial statements for the
     2007 fiscal year in accordance with Statement of Financial Accounting
     Standards Statement No. 123(R), SHARE-BASED PAYMENT (SFAS No. 123(R)),
     disregarding, however, the estimate of forfeitures related to service-based
     vesting conditions included in such financial statements and required by
     SFAS No. 123(R).

     FRINGE BENEFITS AND PERQUISITES. During fiscal 2007, we provided fringe
     benefits to Dr. Ehlers in an amount of $5,869, related to short-term,
     long-term disability and life insurance and company match on our 401(k)
     plan.

     EMPLOYMENT AGREEMENT. As of the 2007 fiscal year end, we did not have a
     written employment agreement with Dr. Ehlers.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table presents information about unexercised stock options held by
each of the Named Executive Officers as of June 30, 2007. As of the end of the
2007 fiscal year, none of the Named Executive Officers held any stock awards
that had not vested.
<TABLE><CAPTION>
                                               OPTION AWARDS
                   -----------------------------------------------------------------------
                                                      EQUITY
                                                    INCENTIVE
                                                    PLAN AWARDS:
                    NUMBER OF        NUMBER OF      NUMBER OF
                    SECURITIES       SECURITIES     SECURITIES
                    UNDERLYING      UNDERLYING      UNDERLYING
                    UNEXERCISED      UNEXERCISED    UNEXERCISED     OPTION       OPTION
                      OPTIONS         OPTIONS        UNEARNED      EXERCISE    EXPIRATION
NAME                EXERCISABLE    UNEXERCISABLE      OPTIONS       PRICE         DATE
------------------------------------------------------------------------------------------
                       (#)              (#)             (#)          ($)
<S>                  <C>                <C>             <C>        <C>        <C>
Ronald R. Helm        340,000            --              --         $0.81      01/30/2014
                        4,049            --              --          0.81      01/30/2014
Elizabeth T. Leary     21,922            --              --          0.51      08/27/2012
                      157,887            --              --          0.81      01/30/2014
Mario R. Ehlers       117,391            --              --          0.81      01/30/2014
                        3,787            --              --          0.81      01/30/2014
</TABLE>

POTENTIAL PAYMENTS UPON RESIGNATION, RETIREMENT, OR CHANGE OF CONTROL

Other than an employment agreement with Mr. Helm (as described above), we do not
have any plans or agreements that are specific and unique to executive officers
regarding termination of employment or a change of control of the company.
However, our 2005 Stock Incentive Plan provides for accelerated vesting of all
unvested stock options and unvested stock awards upon a change of control (as
defined in the plan), irrespective of the scheduled vesting date for these
awards.

                                      -38-
<PAGE>

COMPENSATION OF DIRECTORS

We use a combination of cash and stock-based incentive compensation to attract
and retain qualified candidates to serve on the Board. The following table
presents information about compensation paid to our non-employees directors
during fiscal 2007.

                           DIRECTOR COMPENSATION TABLE

                     FEES EARNED OR
    NAME              PAID IN CASH     STOCK AWARDS    OPTION AWARDS    TOTAL
--------------------------------------------------------------------------------
                          ($)              ($)              ($)          ($)
--------------------------------------------------------------------------------

Terry M. Giles         $ 25,000         $12,375(1)         -(1)        $37,375

Paul G. Kanan            25,000          12,375(2)         -(2)         37,375

Richard W. Palfreyman    32,625          12,375(3)         -(3)         45,000

Curtis J. Scheel         32,625          12,375(4)         -(4)         45,000

--------------
(1)  Mr. Giles held an aggregate of 12,500 stock awards and 25,000 stock options
     at the end of fiscal 2007.
(2)  Mr. Kanan held an aggregate of 12,500 stock awards and 178,245 stock
     options at the end of fiscal 2007.
(3)  Mr. Palfreyman held an aggregate of 12,500 stock awards and 76,761 stock
     options at the end of fiscal 2007.
(4)  Mr. Scheel held an aggregate of 12,500 stock awards and 25,000 stock
     options at the end of fiscal 2007.

NARRATIVE TO DIRECTOR COMPENSATION TABLE

The Board grants directors an honorarium of $3,750 per meeting attended. In
addition, Committee members receive $625 and Committee Chair receives $1,250 per
meeting attended. The Chairman as an employee does not receive cash compensation
for his board services. Each non-employee director received a discretionary
bonus of $10,000 during fiscal 2007 based on the company's performance in fiscal
2006.


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

PRINCIPAL STOCKHOLDERS

The following table sets forth as of September 28, 2007, certain information
regarding the beneficial ownership of our common stock by the following persons
or groups:

     o    each person who, to our knowledge, beneficially owns more than 5% of
          our common stock;
     o    each Named Executive Officer identified in the Executive Compensation
          table above;
     o    each of our current directors, and
     o    all of our directors and executive officers as a group.

As of September 28, 2007, there were issued and outstanding 18,720,147 shares of
common stock.

                                      -39-
<PAGE>

                                         BENEFICIAL OWNERSHIP OF COMMON STOCK(2)
                                         ---------------------------------------
          NAME AND ADDRESS(1)              NO. OF SHARES             PERCENT
--------------------------------------------------------------------------------
 OFFICERS AND DIRECTORS:
 Mario Ehlers, M.D., Ph.D..............        140,178       (3)        **
 Terry M. Giles........................         37,500       (4)        **
 Ronald R. Helm........................        947,049       (5)       4.9%
 Paul G. Kanan.........................        279,269       (6)        1.5
 Elizabeth T. Leary, Ph.D..............        241,207       (7)        1.3
 Richard W. Palfreyman ................         84,261       (8)        **
 Curtis J. Scheel .....................         37,500       (9)        **
 All current directors and executive
 officers as a group (9 persons).......      1,766,964       (10)       9.0

 5% OWNERS:
 Saigene Corporation ..................      2,537,057       (11)      13.6
 2201 34th Avenue NW, Suite C
 Gig Harbor, WA  98335
 EFG Bank S.A..........................      1,491,907                  8.0
 24 Quai du Seujet
 1211 Geneva 2, Switzerland
 Anthony Silverman.....................      1,126,600       (12)       6.0
 2747 Paradise Road, #903
 Las Vegas, NV 89109

------------------
**Less than one percent

(1)  Except as otherwise noted, the address of each of these stockholders is c/o
     Pacific Biometrics, Inc., 220 West Harrison Street, Seattle, WA 98119.
(2)  This table is based upon information supplied by executive officers,
     directors and principal stockholders. Unless otherwise indicated in the
     footnotes to this table and subject to community property laws where
     applicable, to our knowledge, each of the stockholders named in this table
     has sole voting and investment power with respect to the common stock shown
     as beneficially owned.
(3)  Includes 121,178 shares of common stock subject to outstanding stock
     options held by Dr. Ehlers that are exercisable within 60 days of September
     28, 2007 ("Vested Options").
(4)  Includes 25,000 shares of common stock subject to Vested Options held by
     Mr. Giles.
(5)  Includes 344,049 shares of common stock subject to Vested Options held by
     Mr. Helm.
(6)  Includes 88,524 shares of common stock held by the Kanan Living Trust dated
     May 15, 1990, of which Mr. Kanan is a co-trustee with his wife. Also
     includes 177,424 shares of common stock subject to Vested Options held by
     Mr. Kanan.
(7)  Includes 179,809 shares of common stock subject to Vested Options held by
     Dr. Leary.
(8)  Consists of 71,761 shares of common stock subject to Vested Options held by
     Mr. Palfreyman.
(9)  Consists of 25,000 shares of common stock subject to Vested Options held by
     Mr. Scheel.
(10) Consists of Ronald R. Helm, Paul G. Kanan, Terry M. Giles, Richard W.
     Palfreyman, Curtis J. Scheel, Dr. Elizabeth T. Leary, Dr. Mario Ehlers,
     John P. Jensen and Michael Murphy. Includes an aggregate 945,042 shares of
     common stock subject to Vested Options held by such persons.
(11) Includes an aggregate of 1,036,693 shares of common stock held of record by
     third parties, but over which Saigene has voting power pursuant to
     irrevocable proxies granted by such third parties. Also includes 1,350,000
     shares of common stock pledged to certain third parties to secure debt
     obligations of Saigene, but over which Saigene currently retains voting
     power.
(12) Includes 170,000 shares of common stock held by Katsinam Partners, LP, of
     which Mr. Silverman is the general partner.

EQUITY COMPENSATION PLAN INFORMATION

     The following table gives information as of June 30, 2007, 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" to our Consolidated Financial Statements for
the fiscal year ended June 30, 2007 included in this report.

                                      -40-
<PAGE>
<TABLE><CAPTION>
                                                 (A)
                                             No. of Shares                  (B)                       (C)
                                             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)                            1,353,907                   $0.79                    446,093
Equity Compensation Plans Approved               673,479                   $0.99                  2,326,521
by Stockholders (2)

Equity Compensation Plans Not
Approved by Stockholders                       4,390,372                   $1.23                          -
   TOTAL                                       6,417,759                   $1.11                  2,772,614
</TABLE>
--------------
(1)  Consists solely of the Pacific Biometrics, Inc. 1996 Stock Incentive Plan.
(2)  Consists solely of the Pacific Biometrics, Inc. 2005 Stock Incentive Plan.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE.

Certain information called for by Part III, Item 12, will be included in our
proxy statement relating to our 2007 annual meeting of stockholders, and is
incorporated here 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
  10.2A      (16)   2005 Stock Incentive Plan
  10.2B      (20)   Form of stock option agreement under 2005 Stock Incentive
                    Plan
  10.2C      (20)   Form of restricted stock award agreement under 2005 Stock
                    Incentive Plan
  10.3A      (15)   Executive Employment Agreement, dated June 1, 2006, between
                    Pacific Biometrics, Inc. and Ronald R. Helm
  10.3B      (17)   First Amendment to Executive Employment Agreement, between
                    Pacific Biometrics, Inc. and Ronald R. Helm
  10.4++     (12)   Employment Agreement, dated October 1, 2004, by and between
                    the Company and Dr. Elizabeth Leary
  10.5A      (4)    Office Lease, dated April 23, 1997, between Tom Kane and
                    Elsa Kane and the Company
  10.5B      **     First Amendment to Office Lease, dated January 20, 1998
  10.5C      **     Second Amendment to Office Lease, dated April 20, 2007
  10.6       (5)    Asset Purchase Agreement, dated as of June 27, 2002, among
                    the Company, PBI-WA and Saigene Corporation

                                      -41-
<PAGE>

  10.7       (6)    Amendment Number One to Asset Purchase Agreement, dated as
                    of August 28, 2002, among the Company, Saigene Corporation,
                    and PBI-WA
  10.8       (3)    Option Agreement, dated August 28, 2002, between the Company
                    and Saigene Corporation
  10.9       (10)   Common Stock Purchase Warrant issued by the Company in favor
                    of Source Capital Group, Inc.
  10.10      (7)    Amended and Restated Financing 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
  10.11      (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
  10.12      (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
  10.13      (7)    Investment Agreement, dated as of December 19, 2002, between
                    Saigene Corporation and the Company
  10.14      (8)    Securities Purchase Agreement, dated May 28, 2004 between
                    the Company and Laurus Master Fund, Ltd.
  10.15      (8)    $2.5 Million Secured Convertible Term Note, dated May 28,
                    2004, made by the Company in favor of Laurus Master Fund,
                    Ltd.
  10.16      (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.
  10.17      (8)    Registration Rights Agreement, dated May 28, 2004, between
                    the Company and Laurus Master Fund, Ltd.
  10.18      (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.
  10.19      (8)    Subsidiary Guaranty dated May 28, 2004, among Pacific
                    Biometrics, Inc., a Washington corporation, BioQuant, Inc.,
                    and PBI Technology, Inc.
  10.20      (8)    Stock Pledge Agreement dated May 28, 2004, between the
                    Company and Laurus Master Fund, Ltd.
  10.21      (13)   Amendment No. 1 and Waiver, dated January 31, 2005, between
                    the Company and Laurus Master Fund, Ltd.
  10.22      (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.
  10.23      (13)   Securities Purchase Agreement, dated January 31, 2005
                    between the Company and Laurus Master Fund, Ltd.
  10.24      (13)   $1.5 Million Secured Convertible Term Note, dated January
                    31, 2005, made by the Company in favor of Laurus Master
                    Fund, Ltd.
  10.25      (13)   Registration Rights Agreement, dated January 31, 2005,
                    between the Company and Laurus Master Fund, Ltd.
  10.26      (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.
  10.27      (14)   Amendment No. 1, dated May 6, 2005, between Pacific
                    Biometrics, Inc. and Laurus Master Fund, Ltd.
  10.28      (14)   Amendment No. 2, dated May 6, 2005, between Pacific
                    Biometrics, Inc. and Laurus Master Fund, Ltd.
  10.29      (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.
  10.30      (18)   Loan and Security Agreement, dated November 3, 2005, between
                    Pacific Biometrics, Inc. and Franklin Funding, Inc.
  10.31      (19)   Form of Unit Subscription Agreement for March 2006 private
                    placement
  10.32      (19)   Form of Common Stock Purchase Warrant for March 2006 private
                    placement
  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.

                                      -42-
<PAGE>

  23.2       **     Consent of PMB Helin Donovan, LLP
  31.1       **     Certification by Ronald R. Helm, Chief Executive Officer
  31.2       **     Certification by John P. Jensen, Vice President of Finance
                    and Controller
  32.1       **     Certification by Ronald R. Helm, Chief Executive Officer and
                    John P. Jensen, Vice President of Finance and Controller, of
                    Pacific Biometrics, Inc., pursuant to 18 U.S.C. 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 Pre-Effective
     Amendment No. 1 to Registration Statement on Form SB-2, Registration No.
     333-11551, filed on October 11, 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, 2006.
(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.
(16) Incorporated by reference to Appendix A of Registrant's Definitive Proxy
     Statement on Schedule 14A filed on October 25, 2005.
(17) Incorporated by reference to Exhibit of Registrant's Current Report on Form
     8-K filed on September 5, 2006.
(18) Incorporated by reference to Exhibit of Registrant's Current Report on Form
     8-K filed on November 7, 2005.
(19) Incorporated by reference to Exhibit of Registrant's Current Report on Form
     8-K filed on March 13, 2006.
(20) Incorporated by reference to Exhibits of Registrant's Annual Report on Form
     10-KSB for the fiscal year ended June 30, 2006, filed on October 3, 2006.


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 2007 annual meeting of stockholders, and is
incorporated herein by reference.

                                      -43-
<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 October 5, 2007.

                                       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 Officer,          October 5, 2007
--------------------------     President, and Director
Ronald R. Helm                 (PRINCIPAL EXECUTIVE OFFICER)


/s/ John P. Jensen             Vice President of Finance         October 5, 2007
--------------------------     and Controller (PRINCIPAL
John P. Jensen                 FINANCIAL OFFICER AND
                               PRINCIPAL ACCOUNTING OFFICER)


/s/ Terry M. Giles             Director                          October 5, 2007
--------------------------
Terry M. Giles


/s/ Paul G. Kanan              Director                          October 5, 2007
--------------------------
Paul G. Kanan


/s/ Richard W. Palfreyman      Director                          October 5, 2007
--------------------------
Richard W. Palfreyman


/s/ Curtis J. Scheel           Director                          October 5, 2007
--------------------------
Curtis J. Scheel

                                      -44-
<PAGE>



                            PACIFIC BIOMETRICS, INC.

                            Form 10-KSB Annual Report




                   Index to Consolidated Financial Statements



                                                                            Page
                                                                            ----


Report of Independent Registered Public Accounting Firm                      F-2

Report of Independent Registered Public Accounting Firm                      F-3

Consolidated Financial Statements:

     Consolidated Balance Sheets as of June 30, 2007 and 2006                F-4

     Consolidated Statements of Operations for the years ended
     June 30, 2007 and 2006                                                  F-5

     Consolidated Statements of Cash Flows for the years ended
     June 30, 2007 and 2006                                                  F-6

     Consolidated Statement of Stockholders' Equity for the
     years ended June 30, 2007 and 2006                                      F-7

     Notes to Consolidated Financial Statements                              F-8












                                       F-1
<PAGE>
                             PMP Helin Donovan, LLP
               Certified Public Accountants & Business Consultants
--------------------------------------------------------------------------------

Pacific Biometrics, Inc.
Seattle, WA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying balance sheets of Pacific Biometrics, Inc. as
of June 30, 2007 and the related statements of operations, stockholders' 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Biometrics, Inc. as of
June 30, 2007 and the results of its operations, stockholders' equity and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.



/s/ PMB Helin Donovan LLP

PMB Helin Donovan LLP
Certified Public Accountants
San Francisco, California
September 20, 2007



                              50 Francisco Street,
                        Suite 120 San Francisco, CA 94133
             Phone (415) 399-1330- Fax (415) 399-9212- www.pmbhd.com





                                       F-2
<PAGE>
                            Williams & Webster, P.S.
               Certified Public Accountants & Business Consultants
--------------------------------------------------------------------------------

Pacific Biometrics, Inc.
Seattle, WA

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying balance sheet of Pacific Biometrics, Inc. as
of 2006, and the related statement of operations, stockholders' 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Biometrics, Inc. as of
June 30, 2006 and the results of its operations, stockholders' equity and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.



/s/ Williams & Webster, P.S.

Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
September 30, 2006




      Members of Private Companies Practice Section, SEC Practice Section,
                                 AICPA and WSCPA
               Bank of America Financial Center - 601 W Riverside,
                         Suite 1940 - Spokane, WA 99201
      Phone (509) 838-5111 - Fax (509) 838-5114 - www.williams-webster.com


                                       F-3
<PAGE>
                            PACIFIC BIOMETRICS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 AS OF JUNE 30,


<TABLE><CAPTION>
                                     ASSETS                                       2007            2006
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Current assets:
    Cash and cash equivalents                                                 $  4,219,926    $  5,497,737
    Accounts receivable, net                                                     1,659,483       1,977,589
    Other receivables                                                              261,753         258,263
    Inventory                                                                      163,965              --
    Prepaid expenses and other assets                                              104,825         363,966
    Deferred financing cost on secured convertible note - current portion          107,170         107,170
                                                                              ------------    ------------
          Total current assets                                                   6,517,122       8,204,725

Property and equipment, net                                                        835,934         693,231

Other assets:
    Deferred financing cost on secured convertible note - long-term portion         18,447         125,617
                                                                              ------------    ------------
          Total assets                                                        $  7,371,503    $  9,023,573
                                                                              ============    ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                          $    482,058    $    549,517
    Accrued liabilities                                                            478,794         499,858
    Advances from customers                                                      1,093,776         966,573
    Capital lease obligation - current portion                                      58,841          51,994
    Secured convertible note - current portion, net of unaccreted fair
      value assigned to conversion feature and warrants of $761,907 and
      $1,684,210 respectively                                                    1,604,761       1,641,590
    Embedded derivative liability - current  portion                             1,047,492       1,391,463
    Freestanding derivative liability relating to secured convertible
      note - current portion                                                       811,536       1,161,770
    Other notes payable - current portion                                          113,339          38,148
                                                                              ------------    ------------
          Total current liabilities                                              5,690,597       6,300,913

Capital lease obligations - long - term portion                                     65,619          56,500
Other notes payable - long - term portion                                          102,467         310,938
                                                                              ------------    ------------
          Total liabilities                                                      5,858,683       6,668,351
                                                                              ------------    ------------

Stockholders' equity:
    Preferred stock, Series A convertible $0.01 par value, 5,000,000 shares
      authorized, 0 shares issued and outstanding for  2007and 2006                     --              --
    Common stock, $0.01 par value, 30,000,000 shares authorized, 18,720,147
      and 18,336,884 shares issued and outstanding, respectively                   360,803         355,098
    Additional paid-in capital                                                  28,288,347      27,921,488
    Accumulated deficit                                                        (27,133,035)    (25,919,941)
    Treasury stock                                                                  (3,295)         (1,423)
                                                                              ------------    ------------
          Total stockholders' equity                                             1,512,820       2,355,222
                                                                              ------------    ------------

          Total liabilities and stockholders' equity                          $  7,371,503    $  9,023,573
                                                                              ============    ============
</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>
                                                                                    2007            2006
                                                                                ------------    ------------
<S>                                                                             <C>             <C>
Revenues                                                                        $  8,480,330    $ 10,750,023
                                                                                ------------    ------------

Laboratory expenses and cost of sales                                              5,153,039       5,161,011
                                                                                ------------    ------------
          Gross Profit                                                             3,327,291       5,589,012
                                                                                ------------    ------------

Operating expenses:
    Research and product development                                                      --          46,283
    Selling, general and administrative                                            3,892,054       3,696,284
                                                                                ------------    ------------

Operating income (loss)                                                             (564,763)      1,846,445
                                                                                ------------    ------------

Other income (expense):
    Interest expense                                                                (376,927)       (402,072)
    Interest expense from accretion of conversion feature and warrants -
      secured convertible debt                                                      (886,304)       (771,429)
    Gain on adjustment of embedded and freestanding derivatives to fair value        694,205         298,616
    Amortization of deferred financing costs - secured convertible debt             (107,170)       (107,170)
    Interest income                                                                   88,343          18,275
    Other income                                                                       1,346         321,378
    Warrant expense for equipment lease and financing                                (11,820)     (1,024,940)
    Other expense                                                                    (50,000)             --
                                                                                ------------    ------------
                          Total other income (expense)                              (648,327)     (1,667,342)

Net earnings (loss) before tax expense                                            (1,213,090)        179,103
                                                                                ------------    ------------

Tax expense                                                                               --              --

Net earnings (loss)                                                             $ (1,213,090)   $    179,103
                                                                                ============    ============

Net earnings (loss) per share:
    Basic earnings (loss) per share                                             $      (0.06)   $       0.01
                                                                                ============    ============
    Diluted earnings (loss) per share                                           $      (0.06)   $       0.01
                                                                                ============    ============

Weighted average common shares outstanding:
    Basic                                                                         18,720,147      13,295,169
                                                                                ============    ============
    Diluted                                                                       18,720,147      16,245,998
                                                                                ============    ============
</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>
                                                                                                           2007            2006
                                                                                                       ------------    ------------
<S>                                                                                                    <C>             <C>
Cash flows from operating activities:
    Net earnings (loss)                                                                                $ (1,213,090)   $    179,103

    Reconciliation of net earnings (loss) to net cash provided by (used in)
    operating activities:
      Depreciation and amortization                                                                         290,222         256,889
      Accretion of fair value assigned to conversion feature and warrants                                   886,303         771,429
      Amortization of deferred financing costs on  secured convertible note                                 107,170         107,170
      Bad Debt Expense                                                                                       23,909              --
      Gain from embedded and freestanding derivative liabilities relating to secured convertible note      (694,205)       (298,616)
      Warrant expense for equipment lease and financing                                                      11,820       1,024,940
      Compensation expense (income) from restricted shares and options                                      560,415             944
      Changes in assets and liabilities:
      ----------------------------------
          Accounts receivable                                                                               294,197      (1,369,722)
          Other receivable                                                                                   (3,490)       (256,243)
          Inventory                                                                                        (163,965)             --
          Prepaid expenses and other assets                                                                  25,664         231,645
          Advances from customers                                                                           127,203         269,012
          Accounts payable                                                                                  (67,459)        111,175
          Accrued liabilities                                                                               (21,064)       (346,409)
                                                                                                       ------------    ------------
          Net cash  provided by operating activities                                                        163,629         681,317
                                                                                                       ------------    ------------

Cash flows from investing activities:
    Purchases of capital equipment                                                                         (127,458)       (512,684)
    Acquisition of Company common stock                                                                    (201,544)             --
                                                                                                       ------------    ------------
          Net cash used in investing activities                                                            (329,002)       (512,684)
                                                                                                       ------------    ------------

Cash flows from financing activities:
    Payments on notes payable                                                                            (1,056,414)       (370,492)
    Net proceeds from loan and security agreement                                                                --         350,000
    Payments on capital lease obligations                                                                   (56,024)        (51,993)
    Net proceeds from private placement of common stock                                                          --       3,963,045
                                                                                                       ------------    ------------
          Net cash provided by (used in) financing activities                                            (1,112,438)      3,890,560
                                                                                                       ------------    ------------

Net increase (decrease) in cash and cash equivalents                                                     (1,277,811)      4,059,193
Cash and cash equivalents, beginning of period                                                            5,497,737       1,438,543
                                                                                                       ------------    ------------

Cash and cash equivalents, end of period                                                               $  4,219,926    $  5,497,737
                                                                                                       ============    ============

Supplemental Information:
Cash paid during the period for interest                                                               $    362,797    $    408,311
Cash paid during the period for income taxes                                                           $         --    $         --

Non-cash investing and financing activities:
    Cashless exercise of stock options and warrants                                                    $        272    $      1,022
    Warrants issued in consideration of issuance costs for private placement                           $         --    $    300,154
    Warrants issued to private placement investors                                                     $         --    $    599,149
    Warrants issued in conjuction with equipment financing                                             $         --    $     34,723
    Common stock issued upon conversion of principal on Laurus convertible note                        $         --    $    646,600
</TABLE>

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

                                       F-6
<PAGE>
                            PACIFIC BIOMETRICS, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE><CAPTION>
                         Series A Preferred
                               Stock                 Common Stock                     Additional                        Total
                       ----------------------   ---------------------   Treasury        Paid-in       Accumulated    Stockholders'
                         Shares       Amount      Shares      Amount      Stock         Capital         Deficit         Equity
                       ----------   ---------   ----------   --------   ---------    ------------    ------------    ------------
<S>                    <C>          <C>         <C>          <C>        <C>          <C>             <C>             <C>
Balance June 30, 2005   1,550,000   $  15,500   13,325,705   $304,985   $  (1,423)   $ 22,326,406    $(26,099,044)   $ (3,453,577)

Warrants issued in
  conjunction with
  private placement
  of common stock              --          --           --         --          --         978,137              --         978,137
Fair value of
  warrants issued to
  lender in
  conjunction  with
  non-revolving line
  of credit                    --          --           --         --          --           7,142              --           7,142
Fair value adjustment
  to stock options             --          --           --         --          --             (79)             --             (79)
Common stock issued
  to Laurus Master
  Funds for note
  payment                      --          --      610,000      6,100                     640,500              --         646,600
Fair value of
  warrants issued to
  placement agent -
  Laurus Master Funds
  note payment                 --          --           --         --          --          39,661              --          39,661
Common stock issued
  to investors -
  private placement
  of common stock
  and warrants                 --          --    3,185,231     31,853          --       3,931,192              --       3,963,045
Cancellation of
  common stock
  released from
  escrow, previously
  held in trust as
  security for note
  payable
                               --          --     (583,333)    (5,833)         --              --              --          (5,833)
Common stock issued
  for conversion of
  preferred Series A
  shares                       --          --    1,791,907     17,919          --         (17,919)             --              --
Preferred Series A
  shares converted
  into common stock    (1,550,000)    (15,500)          --         --          --          15,500              --              --
Stock options
  exercised -
  cashless exercise            --          --        7,374         74          --             948              --           1,022
Net income for year
  ended June 30, 2006          --          --           --         --          --              --         179,103         179,103
                       ----------   ---------   ----------   --------   ---------    ------------    ------------    ------------
Balance June 30, 2006          --          --   18,336,884    355,098      (1,423)     27,921,488     (25,919,941)      2,355,221
Cashless exercise of
  stock options and
  warrants                     --          --       27,229        272          --            (272)             --              --
Warrants issued for
  equipment leasing            --          --           --         --          --          11,820              --          11,820
Restricted shares
  issued                       --          --      543,234      5,433          --         532,369              --         537,802
Stock options issued
  - compensation
  expense                      --          --           --         --          --          22,615              --          22,615
Common stock
  purchased                    --          --     (187,200)        --      (1,872)       (199,672)             --        (201,544)
Net loss for year
  ended June 30, 2007          --          --           --         --          --              --      (1,213,090)     (1,213,090)
                       ----------   ---------   ----------   --------   ---------    ------------    ------------    ------------
Balance June 30, 2007          --   $      --   18,720,147   $360,803   $  (3,295)   $ 28,288,347    ($27,133,035)   $  1,512,820
                       ==========   =========   ==========   ========   =========    ============    ============    ============
</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 had suspended such
activities. Laboratory services 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 statements 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 billed to and due from 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 year ended June 30, 2007 we had one account balance
written off for $23,909. For the year ended June 30, 2006, the Company deemed no
accounts receivable uncollectible. The balance of the bad debt allowance was
approximately $29,000 and $32,000 for the fiscal year ended June 30, 2007 and
June 30, 2006, respectively.

INVENTORY

Inventory is stated the lower of cost or market. Cost is determined on a first
in, first out (FIFO) basis. Our inventory consists of reagent chemicals, which
the Company began buying in bulk in 2007, which are used in our laboratory
testing.

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 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.

                                       F-8
<PAGE>
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. The Company did not allocate resources to
business development activities for the technologies held by PBI Technology,
Inc. during the fiscal year ended June 30, 2007.

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. The
Company follows SFAS 109, as amended, to prepare income tax reporting.

FINANCIAL INSTRUMENTS

The carrying amounts of cash, cash equivalents, and accounts receivable
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 unaccreted fair value assigned to conversion feature and warrants,
representing its estimated fair value. (See Note 8 Notes Payable) The carrying
value of the Company's other debt approximates their estimated fair values due
to the rates of interest on the debt approximate current interest rates for
similar obligations with like maturities.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as the embedded conversion features of debt instruments that
are indexed to the Company's common stock, are classified as liabilities when
either (a) the holder possesses rights to net-cash settlement or (b) physical or
net share settlement is not within the control of the Company. In such
instances, net-cash settlement is assumed for financial accounting and
reporting, even when the terms of the underlying contracts do not provide for
net-cash settlement. Such financial instruments are initially recorded at fair
value and subsequently adjusted to fair value at the close of each reporting
period. Fair value for option based derivative financial instruments is
determined using the Black-Scholes pricing model.

FINANCIAL DERIVATIVES - EMBEDDED FEATURES AND WARRANTS

Embedded conversion and other features that meet the definition of derivative
financial instruments have, where applicable, been bifurcated from host
instruments (secured convertible notes - see Note 8. Notes Payable) and, in all
instances derivative financial instruments have been recorded as assets or
liabilities and are carried at fair value, using the Black-Scholes pricing
model. The Company records the value allocated to warrants issued with the
convertible instruments, measured at fair value, using the Black-Scholes pricing
model and recognized by allocating a portion of the proceeds to derivative
liabilities with an offset to discount on the convertible instrument. The
recorded discount is accreted as interest expense using the effective interest
method over the life of the debt.

                                       F-9
<PAGE>
STOCK-BASED COMPENSATION

The Company has traditionally applied APB Opinion 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," and related interpretations in accounting for its
stock-based employee compensation plan. On January 1, 2006, the Company adopted
the provisions of SFAS No. 123(R), "SHARE-BASED PAYMENT", using the modified
prospective transition method. Under the transition method, compensation cost
recognized in the year ended June 30, 2006, includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123(R), and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Results for prior periods have not been restated, in accordance with the
modified prospective transition method.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company's net
loss for the year ended June 30, 2006 is unchanged compared to if it had
continued to account for share-based compensation under APB 25. The Company did
not grant any share-based compensation after January 1, 2006 and before year end
at June 30, 2006.

SFAS No. 123(R) requires companies to estimate the fair value of equity-based
payment awards on the date of grant using an option-priced model. The value of
the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated income
statements. Prior to adoption of SFAS No. 123(R), the Company accounted for
equity-based awards to employees and directors using the intrinsic value method
in accordance with APB No. 25 as allowed under Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" SFAS NO. 123(R) and
recognized compensation expenses, over the requisite service period of each of
the awards.

For the fiscal year ended June 30, 2007, the Company granted 130,245
incentive-based stock options and 543,234 incentive-based restricted shares.
This was the first grant under the provisions of SFAS No. 123(R). For the fiscal
year ended June 30, 2006, the Company granted 253,000 incentive-based stock
options which were granted prior to March 31, 2006 and the adoption of the
provisions of SFAS No. 123(R). Both grants of incentive-based stock options and
restricted shares were under incentive compensation plans. For prior reporting
period, had compensation cost been determined based on the fair value of stock
options granted in a manner consistent with the method promulgated by SFAS No.
123, the Company's net loss and loss per share would have been changed to the
pro forma amounts in the table below for the fiscal year ended June 30, 2006.


                                                                     2006
                                                                 ------------
Net income (loss) as reported                                    $    179,103
Adjust:
    Total stock-based employee compensation expense
    determined under fair value based method for all
    awards, net of related tax effects                                 62,135
                                                                 ------------
Pro forma net income (loss)                                      $    116,968
                                                                 ============
Net loss per share:
          Basic - as reported                                    $       0.01
                                                                 ============
          Diluted - as reported                                  $       0.01
                                                                 ============
          Basic - pro forma                                      $       0.01
                                                                 ============
          Diluted - pro forma                                    $       0.01
                                                                 ============

                                      F-10
<PAGE>
To estimate compensation expense, the Company uses the Black-Scholes pricing
model and assumptions deemed reasonable by management. All options are valued as
of the date of the grant period. The following assumptions were used to compute
the fair value of option grants for the year ended June 30:

                                                   2007              2006
                                                ----------        ----------
    Expected volatility                            105%               83%
    Expected dividend yield                          0%                0%
    Risk-free interest rate                       5.03%             5.05%
    Expected life                                10 years          10 years

The total equity-based compensation expense related to all of the Company's
equity-based awards, recognized for the fiscal year ended June 30, 2007, was
comprised as follows:

Laboratory Expenses and Cost of Sales           $   13,582
Selling, general and administrative             $  546,833
                                                ----------
Total equity-based compensation expense         $  560,415

Effect of equity-based compensation expenses,
on basic and diluted loss per Ordinary share    $    (0.03)

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. We
anticipate that we will no longer incur research and development expenses
related to the technology held by PBI Technology, Inc.

EARNINGS (LOSS) PER SHARE

Basic net income (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. As of June 30, 2007, vested, in-the-money options to
purchase 183,917 shares of common stock and in-the-money warrants to purchase
457,607 shares of common stock were outstanding and were not included in the
computation of diluted loss per share because the effect would be antidilutive
for fiscal 2007.

As of June 30, 2006, vested, in-the-money options to purchase 1,175,101 shares
of common stock and in-the-money warrants to purchase 1,775,727 shares of common
stock were outstanding and were included in the computation of diluted earnings
per share for fiscal 2006. In addition, 1,550,000 shares of Series A preferred
convertible stock were not included in the computation of diluted loss per share
because the shares of Series A preferred stock were converted into common stock
during April of the fiscal year ended June 30, 2006.

                                      F-11
<PAGE>
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 February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities--Including an amendment of FASB Statement No.
115". This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. This statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. Early adoption is permitted. Management has not determined the effect
that adoption of this statement would have on the Company's financial condition
or results of operations.

In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements
No. 87, 88, 106, and 132(R)". This statement requires an employer to recognize
the overfunded or underfunded positions of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
statement also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position, with limited
exceptions. Management believes the adoption of this statement will have no
immediate material effect on the Company's financial condition or results of
operations.

In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, "FAIR VALUE MEASUREMENTS". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. Where applicable, SFAS No. 157 simplifies and
codifies related guidance within GAAP and does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged. Management has not determined
the effect that adoption of this statement would have on the Company's financial
condition or results of operations.

In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109," which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of FIN 48 to have a material impact on its financial
reporting.

3.  CONCENTRATION OF CREDIT RISK

The Company's largest client in fiscal 2007 individually accounted for
approximately 17% of the Company's total revenues in fiscal 2007, while the
Company's largest client in fiscal 2006 accounted for approximately 36% of the
Company's total revenues in fiscal 2006. As of June 30, 2007 and 2006,
respectively, approximately 54% and 27% of the Company's accounts receivable
balance was from the two largest clients at that time.

                                      F-12
<PAGE>
Clients of the Company represent many Fortune 500 pharmaceutical companies. The
revenues from several pharmaceutical company divisions are aggregated as a
single client for the Company's revenue calculations. Sixteen percent of the
Company's revenue is derived from Fortune 500 clients for the year ended June
30, 2007. The percentage of revenue increases to 40% using the Fortune Global
500 list. The Company's exposure to concentration of credit risk is reduced
considering the financial strength of the Company's clients.

The Company maintains its cash in three insured commercial accounts and one
uninsured investment account at major financial institutions. Although the
financial institutions are considered creditworthy and have not experienced any
losses on their deposits, the Company's cash balance exceeded Federal Deposit
Insurance Corporation (FDIC) limits by $3,919,926 at June 30, 2007 and by
$5,397,737 at June 30, 2006.

4.  PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses consisted of the following at June 30:

                                                         2007           2006
                                                      ----------     ----------
    Laboratory Information System Software .......... $       --     $  233,477
    Investor Relations Consulting ...................         --         14,464
    Insurance .......................................     30,120         39,801
    Property Taxes ..................................     13,795         12,402
    Service Contracts ...............................     37,543         44,689
    Trade Show and Conference Fees ....... ..........     12,813          6,750
    Other ...........................................     10,554         12,383
                                                      ----------     ----------
                                                      $  104,825     $  363,966
                                                      ==========     ==========

5.  PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at June 30:

                                                         2007           2006
                                                      ----------     ----------
    Laboratory equipment ............................ $1,099,878     $1,010,112
    Computer equipment ..............................    368,258        357,345
    Internal use software ...........................    233,417             --
    Office furniture and equipment ..................    209,232        180,158
    Leasehold improvements ..........................    238,262        168,507
                                                      ----------     ----------
    Total property and equipment ....................  2,149,047      1,716,122
    Less: accumulated depreciation and amortization..  1,313,113      1,022,891
                                                      ----------     ----------
    Net property and equipment ...................... $  835,934     $  693,231
                                                      ==========     ==========

At June 30, 2007 and 2006, respectively, these amounts included assets under
capital leases of $434,056 and $358,856, and related accumulated amortization of
$337,265 and $282,806. Depreciation expense for the fiscal years ended June 30,
2007 and 2006, respectively, was $290,222 and $256,889.

6.  ACCRUED LIABILITIES

Accrued liabilities consisted of the following at June 30:

                                                         2007           2006
                                                      ----------     ----------
    Accrued Laurus note costs due to third party..... $  131,592     $  131,592
    Accrued payroll and related payroll taxes .......    135,304        136,060
    Accrued vacation ................................     64,649         82,556
    Accrued audit fees ..............................     46,677         28,566
    Accrued interest expense ........................     18,500         27,840
    Accrued 401(k) ..................................      2,550         19,449
    Accrued board of directors fees .................     18,750         20,135
    Accrued fees due to PBRF ........................      7,835          7,835
    Other ...........................................     52,937         45,825
                                                      ----------     ----------
                                                      $  478,794     $  499,858
                                                      ==========     ==========

                                      F-13
<PAGE>
7.  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 6.5% to 17.64% and mature at various dates through 2009.
Annual future minimum lease payments for years subsequent to June 30, 2007 are
as follows:

    2008                                              $   69,660
    2009                                                  24,743
    2010                                                  17,652
    2011                                                  17,652
    2012                                                  13,239
    Total minimum payments                               142,947
    Less: amount representing interest                   (18,487)
                                                      ----------
    Obligations under capital leases                  $  124,460
                                                      ==========

    Total minimum payments                            $  124,460
    Less: current portion                                 58,841
                                                      ----------
    Long-term portion                                 $   65,619
                                                      ==========

8.  NOTES PAYABLE

LAURUS DEBT

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%), subject to
reduction on a month-to-month basis if certain specified conditions are met. The
note interest rate was equal to 10.25% and 10.25% for the fiscal years ended
June 30, 2007 and 2006, respectively.

Under the original terms of the note, the Company was obligated to make monthly
payments of accrued interest beginning July 1, 2004 and, commencing December 1,
2004, begin to make monthly payments of $85,000 to reduce the principal amount
by $83,333.

For any cash payments made on the note, the Company is required to pay an amount
equal to 102% of the principal amount due as noted above. 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, 2007, Laurus had converted
$710,200 in principal into 696,800 shares of the Company's common stock. On June
30, 2007, the principal balance on this first note owing to Laurus was
$1,416,667, net of principal payments.

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.

                                      F-14
<PAGE>
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 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, 2007, the unamortized balance of the deferred financing
costs was $232,787. 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 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 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, with the balance allocated to the
January 2005 Note.

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 under the same terms as the May 2004 Note as detailed above. The note
interest rate was equal to 10.25% and 10.25% for the fiscal years ended June 30,
2007 and 2006, respectively.

Under the original terms of the note, the Company was 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 the January 2005 the terms of cash payments and prepayments are the same as
for the May 2004 Note as detailed above.

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.

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.

                                      F-15
<PAGE>
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, 2006, 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 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 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.

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 (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 became 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 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.

                                      F-16
<PAGE>
Through June 30, 2007, Laurus has converted a total of $710,200 in principal on
the 2004 Note, leaving a remaining principal balance on the 2004 Note of
$1,416,667, net of conversions and principal payments. There have been no
conversions of principal on the 2005 Note, leaving a remaining principal balance
of $950,000 net of principal payments. With these principal conversions,
repayments of principal on the 2004 Note were scheduled to begin in February
2007 at a rate of approximately $40,000 for the first month and approximately
$85,000 for each month thereafter, per the 102% payment of principal requirement
that applies to both notes. These payments will reduce the outstanding principal
of the 2004 Note by $83,333 per month. Payments on the 2005 Note of $51,000 per
month were scheduled to begin in August 2006. These payments will reduce the
outstanding principal of the 2005 Note by $50,000 per month. Any future
additional conversions of principal by Laurus on either Note will further reduce
our repayment obligations.

In fiscal years 2004 and 2005, the Company estimated the valuation of the
conversion feature and the warrants for the May 2004 and January 2005 Notes in
accordance with EITF 00-27 and EITF 98-5, using the Black-Scholes pricing model
and other assumptions deemed reasonable by management. At June 30, 2006 the
Company corrected its accounting for derivative financial instruments, for the
May 2004 and January 2005 Notes, to conform to the requirements of Statements of
Accounting Standards No. 133, as amended, and Financial Accounting Standards
Board Emerging Issues Task Force (EITF) No. 00-19. Embedded conversion features
that meet the definition of derivative financial instruments have, where
applicable, been bifurcated from host instruments, the May 2004 and January 2005
Notes, and, in all instances derivative financial instruments have been recorded
as assets or liabilities and are carried at fair value. The Company restated
prior fiscal years results to conform to the requirements of the Statement of
Financial Accounting Standards No. 154, Accounting Changes and Error
Corrections. Net fair value adjustments included in earnings (loss) related to
these instruments amounted to $298,616 and ($265,928) for the fiscal year ending
June 30, 2006 and 2005, respectively. Accordingly, the balances for fiscal years
2004 and 2005 have been restated and balances for fiscal 2006 and fiscal 2007
correctly accounted for.

LOAN AND SECURITY AGREEMENT WITH FRANKLIN FUNDING

On November 3, 2005, the Company entered into a loan and security agreement with
Franklin Funding, Inc., providing for a non-revolving line of credit of up to
$500,000 for equipment financing collateralized by the equipment. In connection
with the loan and security agreement, the Company agreed to grant to Franklin
Funding stock purchase warrants to purchase up to 50,000 shares of the Company's
common stock, in increments of 5,000 shares, for each $50,000 borrowed, each
with an exercise price determined as of the respective date of borrowing and
expiration date of 10 years. Through June 30, 2006, the Company has borrowed a
total of $350,000 under this equipment line of credit and issued to Franklin
Funding warrants to purchase 35,000 shares, at an exercise price of $1.17 per
share. The loan and security agreement provided that a maximum of $500,000 was
available for borrowing until May 3, 2006, consequently no further borrowings
may be made under the loan and security agreement. The Company recognized
expenses related to the grant of the warrants in the fiscal years ended June 30,
2007 and June 30, 2006 of approximately $11,820 and $7,142, respectively.





                                      F-17
<PAGE>
SUMMARY OF LAURUS AND FRANKLIN FUNDING NOTES PAYABLE
<TABLE><CAPTION>
The Company had the following other notes payable as of June 30:
                                                                                2007            2006
                                                                            ------------    ------------
<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                       (710,200)       (710,200)
       Less: Principal payments                                                 (373,133)             --
       Less: Fair value of conversion feature and warrants                      (514,641)       (896,701)
                                                                            ------------    ------------
                                                                                 902,026         893,099

       Less: Current Portion                                                    (902,026)       (893,099)
                                                                            ------------    ------------
       Long-Term Portion                                                    $         --    $         --
                                                                            ============    ============


    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    $  1,500,000

       Less: Principal payments                                                 (550,000)             --
       Less: Fair value of conversion feature and warrants                      (247,265)       (751,509)
                                                                            ------------    ------------
                                                                                 702,735         748,491

       Less: Current Portion                                                    (702,735)       (748,491)
                                                                            ------------    ------------
       Long-Term Portion                                                    $         --    $         --
                                                                            ============    ============


    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                                                      $         --    $     38,148


    Loan and security agreement, secured by specific equipment, 17.64%
    interest, monthly payments of $11,878, balloon payment of $60,000 due
    November 2008, principal balance only                                        210,953         310,938
                                                                            ============    ============

    Principal balance plus interest                                              244,765         349,086

       Less: Current Portion                                                    (141,533)        (38,148)
                                                                            ------------    ------------
       Long-Term Portion                                                    $    102,232    $    310,938
                                                                            ============    ============
</TABLE>

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

                                                      2008           $1,706,986
                                                      2009              870,634
                                                                     ----------
                                                                     $2,577,620
                                                                     ==========

                                      F-18
<PAGE>
9.  PREFERRED AND COMMON STOCK

The Company's common stock currently is quoted on the OTC Bulletin Board under
the symbol "PBME".

SERIES A PREFERRED STOCK

Effective March 31, 2006, the holders of the outstanding shares of Series A
preferred stock entered into an agreement with the Company agreeing to
voluntarily exchange their shares of Series A preferred stock into common stock.
The exchange rate for the Series A preferred stock was based on a price of $1.73
per share, which represents the highest ten-trading day average during the first
30 days after the quarterly results for the second quarter of fiscal 2006
(provided that at least 12,000 shares must have traded during the day in order
for any day to qualify in the average), beginning February 16, 2006. The number
of shares of common stock issuable on exchange equal the total cash
consideration originally paid by the Series A preferred holders, aggregate
amount of $3,100,000, (1,550,000 shares issued, liquidation preference $2.00 per
share) divided by the exchange rate. Accordingly, at a rate of $1.73, upon
delivery to the Company of the Series A preferred stock certificates for
cancellation, the Company issued 1,791,907 shares of common stock and the
outstanding 1,550,000 Series A preferred stock shares were cancelled. After
giving effect to the exchange, the Company no longer has any preferred stock
shares outstanding.

COMMON STOCK

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 2006 and fiscal 2005,
Laurus converted at a price of $1.06 a total of $646,600 and $63,600 of the
principal amount, respectively, due under the May 2004 Note into 634,400 and
62,400 shares, respectively, of the Company's common stock. No conversions were
executed for the fiscal year ended June 30, 2007. Laurus has converted a total
of $710,200 in principal on the 2004 Note, leaving a remaining principal balance
on the 2004 Note of $1,416,667, net of principal payments.

As of June 30, 2007, the Company held treasury common stock in the amount of
269,272 ($3,295 par value). For the fiscal year ended June 30, 2007, we added
187,200 shares ($1,872 par value) to treasury common stock that we purchased
during the fiscal year. For the fiscal year ended June 30, 2006, there were no
shares of common stock added to the treasury common stock in the amount of
82,072 ($1,423 par value).



                                      F-19
<PAGE>
10. INCOME TAXES

The Company follows SFAS 109, as amended to prepare its 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:

                                                          2007          2006
                                                       ----------    ----------
    Tax benefit computed at federal statutory rate     $ (372,000)   $   61,000
    Permanent differences                                  74,000       550,000
    Valuation allowance (tax benefit of recognizing
      prior year net operating loss carryforward)      $  298,000    $ (611,000)
                                                       ----------    ----------
                                                       $       --    $       --
                                                       ==========    ==========

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:

                                                          2007          2006
                                                       ----------    ----------
    Net deferred tax asset:
        Net operating loss carryforward                $5,154,000    $4,902,000
        Research and experimentation credit               326,000       326,000
        Effect of stock option variable pricing           239,000        50,000
        Accrued liabilities                                14,000        22,000
        Allowance for bad debts                            10,000        11,000
        Depreciation and amortization                      61,000        50,000
                                                       ----------    ----------
                                                        5,804,000     5,361,000
    Less valuation allowance                           (5,804,000)   (5,361,000)
                                                       ----------    ----------
                                                       $       --    $       --
                                                       ==========    ==========

At June 30, 2007, operating loss carryforwards of approximately $15 million
expiring through 2027 are available to offset future taxable income. For
financial reporting purposes, a valuation allowance of approximately $5,804,000
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 year ended June 30, 2007, the valuation
allowance was increased by approximately $298,000, year. For the fiscal year
ended June 30, 2006, the valuation allowance was decreased by approximately
$611,000, respectively.

11. STOCK OPTION PLAN

1996 STOCK INCENTIVE PLAN

The Company's 1996 Stock Incentive Plan (the "1996 Plan") provided for the
issuance of up to 1,800,000 shares of common stock under this Plan. Options
granted under the 1996 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, 2007, The Company's 1996
Stock Incentive Plan had expired.

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 fiscal years ended June 30, 2007
and 2006, in accordance with

                                      F-20
<PAGE>
accounting for options under variable pricing rules, the Company recognized
approximately $22,614 and $943, respectively, in compensation income
representing the decrease in the market price of the Company's common shares to
$1.23 and $0.94 per share, as well as the reduction of 7,374 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.

2005 STOCK INCENTIVE PLAN

The Company has a Stock Incentive Plan (the "2005 Plan") with 3,000,000 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 market value of the underlying common stock on
the grant date, and will expire no later than ten years following the date of
grant. With respect to nonqualified options, the exercise price and term shall
be determined at the discretion of the Board. However, the exercise price shall
not be less than the fair market value of the underlying common stock on the
grant date, and the term will not exceed a period of ten years. The options
generally vest over a range of immediately to three years. As of June 30, 2007,
2,326,521 shares of common stock remained available for future grant under the
2005 Plan.

The following is a summary of the activity in the 1996 and 2005 Plans for the
years ended June 30, 2007 and 2006:
<TABLE><CAPTION>
                                                       Shares Under Option
                                        -----------------------------------------------

                                            Number          Weighted         Weighted
                                                            Average          Average
                                            Of              Exercise         Fair Value
                                                            Price per        of
                                            Shares          share            Options
                                                                             Granted
                                        -----------------------------------------------
<S>                                     <C>               <C>               <C>
1996 Plan
------------------------------------
Options outstanding at June 30, 2005      1,376,109       $      0.81       $        --
    Granted                                 125,000              0.86              0.86
    Exercised                                (7,902)             0.60
    Terminated                                 0.00              0.00
                                        -----------       -----------
Options outstanding at June 30, 2006      1,493,207       $      0.82
                                        ===========       ===========

1996 and 2005 Plans
------------------------------------
    Granted              (1996 Plan)         25,000              1.15              1.15
    Granted              (2005 Plan)        130,245              0.99               .99
    Exercised                                    (0)             0.00
    Terminated           (1996 Plan)       (164,300)             1.03
                                        -----------       -----------

Options outstanding at June 30, 2007      1,484,152       $      0.81
                                        ===========       ===========



2005 Plan                            Restricted Shares
---------------------------------------------------------------------------------------
    Granted                                 543,234              0.99              0.99

Options and Restricted Shares             2,027,386       $      0.86
outstanding at June 30, 2007            ===========       ===========
</TABLE>

The weighted average contractual life remaining of options outstanding at June
30, 2007 is approximately 6.9 years.

As of June 30, 2007, outstanding options had exercise periods which expired over
the following time periods:

                                      F-21
<PAGE>
                             Weighted Average
    Exercise     Number       Remaining Life       Number
    Price     Outstanding       (in years)       Exercisable
    -----     -----------       ----------       -----------
    $0.51       183,917              5.2             183,917
    $0.70         3,000              7.2               3,000
    $0.81       911,990              6.6             750,256
    $0.86       125,000              8.2              65,694
    $0.90         6,000              6.7               6,000
    $0.96        90,000              7.5              90,000
    $0.99       130,245              9.2              42,981
    $1.01         3,000              7.0               3,000
    $1.15        25,000              8.5              14,375
    $1.75         6,000              6.4               6,000
              ---------          -------           ---------
              1,484,152              8.5           1,165,223
              =========          =======           =========


As of June 30, 2007, the fair value of options to be vested is $149,944.

The 1996 Plan expired by its terms on July 9, 2006, but outstanding options and
awards previously granted under the 1996 Plan continue in accordance with their
terms.

12. STOCK PURCHASE WARRANTS

The following is a summary of outstanding warrants as of June 30, 2007 and 2006:

                                                 Weighted Average
                              Exercise Price     Exercise Price
                              per Share          per Share           Number
                              ---------          ---------           ------
    Warrants outstanding
    at June 30, 2006          $0.1875 - $1.48    $1.08               3,085,713
                              ---------------    -----               ---------

    Warrants outstanding
    at June 30, 2007          $0.1875 - $1.60    $1.23               4,390,372
                              ---------------    -----               ---------

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 $1.25 per share, exercisable at any time prior to
May 28, 2011. In addition, the Company 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. 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, the Company 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 and April 2006, in connection with a private placement of common stock,
the Company granted warrants to investors covering 955,600 shares of
unregistered common stock at $1.60 per share and the placement agents covering
225,200 shares of unregistered common stock at $1.60 per share.

                                      F-22
<PAGE>
Through June 30, 2006, the Company has borrowed a total of $350,000 under this
equipment line of credit and issued to Franklin Funding warrants to purchase
35,000 shares, at an exercise price of $1.17 per share.

13. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into a non-cancelable operating lease for office
facilities. Under the current lease which expires October 31, 2007, the Company
is responsible for its proportionate share of real estate taxes, insurance and
common area maintenance costs. Rent expense was $231,192 and $225,264 for the
years ended June 30, 2007 and 2006, respectively. The office lease has been
renewed per agreement with the lessor on April 1, 2007, effective November 1,
2007.

Future minimum lease payments are as follows:

                  Year Ended June 30,
                  -------------------
                  2008 through October 31, 2007              $   78,052
                  2008 new lease through June 30, 2008          157,778
                  2009                                          241,779
                  2010                                          249,447
                  2011                                          257,115
                  2012                                          264,783
                  2013                                           89,113
                                                             ----------
                                                             $1,338,067
                                                             ==========

SECURITY INTEREST

In connection with its secured convertible note agreements, the Company and each
of its subsidiaries have granted to Laurus Master Fund, Ltd. a secured interest
in all of their assets.

GUARANTOR OBLIGATION

In connection with its purchase of certain assets from Saigene Corporation
(Saigene), in December 2002, the Company guaranteed a note payable held by
Saigene. In October 2006, the note holder contacted both Saigene and the Company
for payment of principal. The Company initially paid $25,000, half as its share
of the debt. Subsequent to that payment, the Company was informed that Saigene
was unable to pay its half to satisfy the debt holder. The Company paid the
second half of $25,000 to the debt holder to pay the note payable in full and
discharge any rights to either company.

14. RETIREMENT PLAN

The Company has a 401(k) Plan that was reopened to employees in May 2005. The
401(k) Plan covers all employees over the age of 21 with 1,000 hours of service
in a 12-month eligibility computation. The Company makes a contribution equal to
one-half of the employee's contribution up to the maximum of 6%. The Company can
make discretionary contributions as determined by its board of directors, not to
exceed the amount permissible under the Internal Revenue Code. The Company has
not made any discretionary contributions since the plan was reopened. For the
fiscal year ended June 30, 2007, the Company's matching expense was $62,175 and
401(k) payable balance was $2,550.


                                      F-23