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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-KSB

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2003


[  ]    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.

(Exact name of small business issuer as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 93-1211114                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

220 West Harrison Street
Seattle, Washington 98119
(Address of principal executive offices)

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

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Securities registered under Section 12(b) of the Exchange Act: |  | (none)                                 
|                                                               |  |                                        
|Securities registered under Section 12(g) of the Exchange Act: |  | Common Stock, $0.01 par value per share

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

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

Issuers revenues for its most recent fiscal year: $5,764,932

As of September 25, 2003, there were 9,145,125 shares of the Companys common
stock issued and outstanding, and the aggregate market value of such common
stock held by non-affiliates was approximately $7,350,745, based on the average
of the bid ($1.70) and asked ($2.10) prices of such stock on that date of
$1.90.

Documents Incorporated By Reference: The Companys definitive information
statement for the annual election of directors, which will be filed with the
Securities and Exchange Commission within 120 days after the close of the
fiscal year 2003, is incorporated by reference in Part III hereof.

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





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TABLE OF CONTENTS



|              |                                                                                                                         |  |  |  |  |  |  | 
|------------- | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. DESCRIPTION OF BUSINESS                                                                                        
|              | ITEM 2. DESCRIPTION OF PROPERTY                                                                                        
|              | ITEM 3. LEGAL PROCEEDINGS                                                                                              
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            
|PART II      
|              | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                       
|              | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                          
|              | Item 7. Financial Statements                                                                                           
|              | Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure                           
|PART III     
|              | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|              | ITEM 10. EXECUTIVE COMPENSATION                                                                                        
|              | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                
|              | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                
|              | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                                              
|              | ITEM 14 CONTROLS AND PROCEDURES                                                                                        
|SIGNATURES   
|EXHIBIT 1.1A 
|EXHIBIT 10.1 
|EXHIBIT 10.2 
|EXHIBIT 10.6A
|EXHIBIT 10.15
|EXHIBIT 10.16
|EXHIBIT 10.17
|EXHIBIT 10.18
|EXHIBIT 10.19
|EXHIBIT 23.1 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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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                                                                                         |  | 16  
|Item 3.    |  | Legal Proceedings                                                                                               |  | 16  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                             |  | 16  
|           |  | PART II                                                                                                         |  |     
|Item 5.    |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 17  
|Item 6.    |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                           |  | 20  
|Item 7.    |  | Financial Statements                                                                                            |  | 28  
|Item 8.    |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure                            |  | 28  
|           |  | PART III                                                                                                        |  |     
|Item 9.**  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act |  | 28  
|Item 10.** |  | Executive Compensation                                                                                          |  | 28  
|Item 11.** |  | Security Ownership of Certain Beneficial Owners and Management                                                  |  | 28  
|Item 12.** |  | Certain Relationships and Related Transactions                                                                  |  | 29  
|Item 13.   |  | Exhibits and Reports on Form 8-K                                                                                |  | 29  
|Item 14.   |  | Controls and Procedures                                                                                         |  | 30  
|SIGNATURES |  |                                                                                                                 |  | 31  



|** |  | Information required by Items 9 through 12 of Part III is incorporated by
reference from the Companys definitive information statement relating to
the annual election of directors, to be filed with the Securities and
Exchange Commission within 120 days after the close of the 2003 fiscal
year.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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EXPLANATORY NOTE

Unless otherwise indicated or the context otherwise requires, all references in
this Annual Report on Form 10-KSB to we, us, PBI and the Company are to
Pacific Biometrics, Inc., a Delaware corporation, and its wholly owed
subsidiaries Pacific Biometrics, Inc., a Washington corporation (PBI-WA), and
BioQuant, Inc., a Michigan corporation.

CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS

We desire to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. This Annual Report on Form 10-KSB
contains a number of forward-looking statements that 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 10. Readers are urged to
carefully review and consider the various disclosures made by us in this Report
and in our other reports previously filed with the Securities and Exchange
Commission, including our periodic reports on Forms 10-KSB and 10-QSB, and
those described from time to time in our press releases and other
communications, which attempt to advise interested parties of the risks and
factors that may affect our business, prospects and results of operations.

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PART I






|ITEM 1. |  | DESCRIPTION OF BUSINESS.
|------- |  | ------------------------

General

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and 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 and 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 services companies like PBI
typically derive substantially all of their revenue from the research,
development and marketing expenditures of the pharmaceutical and biotechnology
industries. Participants in the pharmaceutical and biotechnology 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 expertise that pharmaceutical companies or
central labs may lack internally. We believe the investment and amount of time
required to develop new drugs has been increasing, and that these trends create
opportunities for companies like PBI to provide its expertise and services to
help reduce the time in the drug development process and make the process of
drug development more efficient.

Our strategy is to meet the needs for outsourcing, by pharmaceutical and
biotechnology companies and other central laboratories, and to assist in
enhancing the drug development process by developing and delivering innovative
services that apply science and technology to provide 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. 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 revenues
increase 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.

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 our other existing specialty areas (including diabetes,
obesity, metabolic syndrome, and osteoarthritis), as well as to develop new
fields where we can provide our laboratory services (including rheumatoid
arthritis and immunogenicity testing for biologic drugs).

Further, to strengthen our specialty central lab services, in August 2002,
we acquired certain DNA-based proprietary technologies, processes and
equipment. See Technologies and Products  Saigene Technologies and Saigene
Investment Transaction below. 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). We intend to further develop and leverage these technologies to
enhance our specialty laboratory activities in the area of pharmacogenetic
testing and offer attractive prospects for licenses to companies interested in
in vitrodiagnostics, biothreat, food safety testing and other applications.

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Diversify Customer Base

Our goal is to diversify our customer base. During fiscal 2003 and fiscal
2002, one large pharmaceutical company represented approximately 76% and 63%,
respectively, of our total revenues. We currently expect revenues from this
customer to decrease in fiscal 2004, both on an absolute and a percentage
basis. We are actively pursuing and marketing to new customers, and we believe
that Company revenues in fiscal year 2004 will increase and that the increase
will result from new customers and additional or expanded projects from
existing customers.

Create Global Central Laboratory

We believe that in the central laboratory services business it is
important to provide a broad range of drug research and development services
globally. Through partnering with a major central laboratory, we believe that
we can compete with central laboratories that have offices, monitoring sites
and laboratories in many countries around the globe. We have commenced and
expect to continue discussions with several major central laboratory services
companies about potential partnering relationships.

Acquisitions

Our customers 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.
Additionally, we will evaluate, as appropriate, any potential business
combinations involving our company as a whole, or involving a portion of our
assets.

Information Technology

We intend to focus future capital expenditures and investments in
carefully selected hardware and software products, information technology
systems and networks. We believe capital improvements in these areas are
important to meet the changing demands of drug development by improving and
facilitating our data reporting and storage capabilities and our communications
with clients.

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



| |  |  | cardiovascular disease (dyslipidemia, atherosclerosis, and coronary heart disease),
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | diabetes (and obesity), and                                                        
|
| |  |  | bone and joint diseases (osteoporosis and arthritis).                              

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

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

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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 US the prevalence of metabolic syndrome is estimated
at 47 million individuals (Heart Disease and Stroke Statistics  2003 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 markers of inflammation, such as hsCRP, IL-6,
TNF-a,
sCD40L and Lp-PLA2.

As it relates to bone and joint diseases, we are active in promoting the
standardization of bone metabolism biomarkers, and are involved in technologies
for monitoring treatment response in diseases such as osteoporosis. We have
used our bone biomarker assays in osteoporosis to manage the first
proficiency-testing programs for bone-resorption markers. We developed our
expertise in osteoporosis laboratory assessments through our work with
diagnostic manufacturers of assays for bone markers such as Ostex
International, Inc. and Metra Biosystems, Inc., in addition to pharmaceutical
manufacturers of drugs that prevent bone loss such as Merck & Co., Inc. and The
Proctor & Gamble Company. In the areas of bone metabolism and womens health,
we also specialize in the measurement of hormones including pyridinolines,
various C- and N- terminal telopeptides, procollagens, osteocalcin and
bone-specific alkaline phosphatase.

Further, to strengthen our specialty central laboratory services, in
August 2002 we acquired certain DNA-based proprietary technologies, processes,
and equipment. See Technologies and Products  Saigene Technologies and
Saigene Investment Transaction below. 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. We intend to further develop and leverage these technologies to
enhance our specialty laboratory activities in the area of pharmacogenetic
testing and offer attractive prospects for licenses to companies interested in
in vitrodiagnostics, biothreat, food safety testing and other applications.

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



| |  |  | clinical testing services,                  
| | - |  | --------------------------------------------
|
| |  |  | development of laboratory reference methods,
|
| |  |  | development of clinical trial protocols, and
|
| |  |  | contract research and development.          

Our involvement with clients frequently begins at the protocol design stage.
Clinical trial support includes coordinating the receipt of specimens from
investigative sites, processing the samples 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 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 operations support clinical trials
by producing study-specific supplies, coordinating the receipt of specimens
from clinical sites, processing the samples, generating test databases, and
reporting data to sites and sponsors.

We generally provide 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 partnering with another major central laboratory, 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

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Phase II trials, as well as Phase III trials. We have commenced and
expect to continue discussions with several major central laboratory services
companies about potential partnering relationships. There are no assurances
that we will be able to successfully complete any such partnering relationship
or that such a relationship will successfully generate revenue.

Technologies and Products

Saigene Technologies

In August 2002, we acquired certain technology from Saigene Corporation,
including certain DNA-based proprietary technologies, processes and equipment.
(See Saigene Investment Transaction below and in Note 14 to the Notes to
Consolidated Financial Statements). This novel intellectual property
(patented and patent-pending) includes a proprietary isothermal DNA
amplification method (LIDA) and a genetic method for distinguishing live from
dead cells.

Since August 2002, we have been engaged in further research and
development efforts with regard to these acquired technologies, and we recently
were issued two patents on these technologies by the U.S. Patent and Trademark
Office. On January 28, 2003, we were issued U.S. Patent No. 6,511,804,
entitled A Selective Assay for Determining the Identity of Live Microorganisms
in a Mixed Culture. This patent encompasses a technology for discriminating
live cells from dead cells and may have potential application towards pathogen
detection and testing for drug-resistant microorganisms. We are currently
developing a test that can distinguish drug-susceptible from drug-resistant
Mycobacterium tuberculosis, the causative agent of tuberculosis infections in
humans. This new test would reduce the diagnostic time for a drug-resistant
tuberculosis infection from three weeks to only two days.

In addition, on March 21, 2003, the Company was issued U.S. Patent No.
6,531,300 entitled Target Amplification of Nucleic Acid with Mutant RNA
Polymerase. This patent encompasses a technology that provides a method to
amplify genetic material and may play a strategic role in the Companys
development of proprietary molecular technologies.

Management believes that the acquisition of these technology assets and
associated intellectual property from Saigene may provide potential future
value to our company and our business to the extent the technologies can be
successfully developed and exploited. As of June 30, 2003, these technology
assets currently still require additional development prior to
commercialization and their future value, as well as timing of their ongoing
development, is dependent upon additional capital being available to fund
continuing research and development. We expect to need additional capital to
fund continuing research and development efforts related to these technologies,
and there are no assurances that such funds will be available to us. In fact,
Saigene has informed us that in order to develop and commercialize these
technologies, we will likely require in the near term a capital infusion in
excess of $5 million. Moreover, management believes that a minimum additional
$15 million would be required to achieve regulatory approval and
commercialization of these technologies and the technologies that may be
acquired under the option agreement. We intend to seek suitable financing to
continue research and development efforts, commence the regulatory approval
process and commercialization of the technologies, but there can be no
assurance that we will be able to obtain such financing, on favorable terms or
at all.

As such, although we believe these technologies are valuable assets, there
are no assurances that we will be able to successfully develop these
technologies or that they will generate revenue. In addition, even if we are
ultimately successful in developing products from these technologies, those
products would likely be subject to regulatory approval, and could always be
the subject of litigation or other claims from competitors or others with
respect to such products or the patents and methodologies upon which they are
based.

Other Technologies

During the 1990s, we developed an intellectual property position in sweat
and saliva collection technologies. In 1998, due to lack of funding and our
failure to obtain FDA approval for resultant products, we suspended all further
development efforts relating to these technologies and products. We
subsequently wrote off the value of these assets on our balance sheet in 1999.
We believe there may be potential commercial application

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for some of these technologies, but we currently have no plans to resume
any active development efforts relating to these technologies or products.

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

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

Monitoring Markers of Bone Metabolism. This patented technology involves
a method to measure the presence or absence of markers, typically cross-linked
amino acids such as pyridinoline, from body fluids such as sweat. The presence
of these markers can be considered useful to ascertain possible bone disease
states or conditions.

Other Intellectual Property

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

Customers / Marketing

We provide specialty reference and central laboratory services to, among
others, the pharmaceutical and biotechnology industries. We also act as a
subcontractor for large central laboratories for our specialty reference
laboratory services. In fiscal year 2003, our customers included companies
ranging from the worlds largest pharmaceutical companies and biotechnology
companies to small and start-up organizations. In fiscal 2003, one customer
represented approximately 76% of our total gross revenues (although we
currently expect revenues from this customer to decrease in fiscal 2004, both
on an absolute and a percentage basis). In addition, for fiscal 2003, our top
five customers accounted for approximately 88% of our gross revenues.

Our scientific expertise is an integral and interrelated part of our marketing
and sales process. Our Chief Science Officer and our Chief Medical Officer are
directly involved in sales and marketing and, as part of the sales process,
often are involved with customers 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 test are commercially available. Additionally, our
affiliation with the Centers for Disease Control through our affiliate, Pacific
Biometrics Research Foundation, which allows us to participate in the
development of reference methods, creates further expertise that we can bring
to bear on our clients testing needs. By marketing and selling our expertise,
we believe we have a competitive advantage over our competitors.

Contractual Arrangements

Our contracts with customers 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 customer 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 customer, such as an increase in the number of patients
to be enrolled or the type or amount of data to be collected.

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Contracts may range from a few months to several years depending on the nature
of the work performed. For most contracts, a portion of the contract fee is
paid at the time the study or trial is started with the balance of the contract
fee payable in installments upon the progress of the work completed or
achievement of milestones over the study or trial duration. We recognize
revenue in the period that we perform the related services.

Most of our contracts may be terminated at any time by the customer either
immediately or upon notice. 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.

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

Competition

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

For specialty reference laboratory services in our areas of expertise, we
primarily compete against in-house departments of pharmaceutical companies,
other full-service and limited service specialty and central laboratory
services organizations and, to a lesser extent, universities. Many of these
organizations have significantly greater resources than we do. Our significant
competitors in specialty reference laboratory services include Esoterix Inc.,
ARUP Laboratories, Synarc, Inc., and the Mayo Clinic.

In the central laboratory services area, we primarily compete against in-house
departments of pharmaceutical companies, full-service and limited-service
specialty and central laboratory services organizations and, to a lesser
extent, universities. Many of these organizations have significantly greater
resources than we do and many have international operations. Our significant
competitors in central laboratory services include Covance Central Laboratory
Services, Inc., PPD, Inc., Quintiles Transnational Corp., Parexel International
Corporation, MDS Inc. and Quest Diagnostics Incorporated, among others.

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



| |  |  | reputation for on-time quality performance,                                               
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | expertise and experience in specific areas,                                               
|
| |  |  | scope of service offerings,                                                               
|
| |  |  | strengths in various geographic markets,                                                  
|
| |  |  | price,                                                                                    
|
| |  |  | technological expertise and efficient drug development processes,                         
|
| |  |  | ability to acquire, process, analyze and report data in a time-saving and accurate manner,
|
| |  |  | ability to manage large-scale clinical trials both domestically and internationally,      
|
| |  |  | expertise and experience in health economics and outcomes services, and                   
|
| |  |  | size.                                                                                     

While size and global reach are more important competitive factors in 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

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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 CAP-certified test
site. This certification provides external monitoring for CLIA compliance by
the College of American Pathologists (CAP) on a yearly basis.

The industry standards for conducting preclinical laboratory testing are
embodied in the Good Laboratory Practice (GLP) regulations as defined by the
FDA. It is managements experience that the pharmaceutical industry generally
does not require compliance with the GLP regulations, other than specific
provisions for discrete tests. 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 perceived 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 studies that are embodied in the
regulations for Good Clinical Practice (GCP). The FDA and other regulatory
authorities require 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 data collection during the clinical trial.

We are subject to licensing and regulation under federal, state and local laws
relating to hazard communication and employee right-to-know regulations, the
handling and disposal of medical specimens and hazardous waste and radioactive
materials, as well as the safety and health of laboratory employees. Our
laboratory is subject to applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens including 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. Our employees receive initial and periodic training focusing on
compliance with applicable hazardous materials regulations and health and
safety guidelines.

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

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

Saigene Investment Transaction

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

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

Further, in connection with the Saigene Asset Purchase Agreement, the following
additional actions were taken:



| |  |  | We entered into an amended and restated management agreement
with Saigene, under which Saigene continues to operate and manage
our laboratory in exchange for a monthly management fee of $90,000
(subsequently reduced to $70,000 effective July 1, 2003). This
management agreement may be terminated by us or Saigene upon 30 days
prior written notice;                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We agreed with Saigene to terminate a prior purchase
agreement, dated June 22, 2000, for the proposed purchase by Saigene
of our laboratory operations;                                                                                                                                                                                                                                                                                            
|
| |  |  | Holders of our Series A preferred stock consented to an
amendment of the Certificate of Designation with respect to the
rights and preferences of the Series A preferred stock, and agreed
to convert all accrued dividends (approximately $910,000) on the
Series A preferred stock into an aggregate of 150,000 shares of our
common stock;                                                                                                      
|
| |  |  | We entered into consulting arrangements with Paul Kanan and
Terry Giles, former founders and officers;                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Several of our current and former employees agreed to convert
$933,472 of deferred compensation and notes payable into warrants
and options to purchase an aggregate of 301,541 shares of our common
stock; and                                                                                                                                                                                                                                    
|
| |  |  | Each of Saigene, Paul Kanan, Terry Giles and certain other
holders of our common stock agreed not to sell any of our securities
until August 28, 2003, except at a price per share equal to or
greater than $3.00, in a private transaction, in a transaction
solely for estate planning, or, in the event we completed a private
financing, at a per share price equal to or greater than the per
share price set forth in such private financing.

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



| |  |  | executed in our favor a promissory note in the principal
amount of $200,000 payable on or before September 30, 2003. The
note is payable, at Saigenes election, either in cash or by the
tender of shares of our common stock held by Saigene at an
attributed value equal to the greater of $3.00 per share or the
average trading price of our common stock over a five day period;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | assumed a creditor obligation (that we had previously assumed
pursuant to the Saigene Asset Purchase Agreement) in the aggregate
amount of approximately $229,000;                                                                                                                                                                                                                    
|
| |  |  | assumed another creditor obligation in the aggregate amount of approximately $150,000; and                                                                                                                                                                                                                                                                                            
|
| |  |  | surrendered for cancellation 10,000 shares of our common stock held in Saigenes name.                                                                                                                                                                                                                                                                                                

Employees

At June 30, 2003, we had 33 full-time employees and 5 part-time employees for a
total of 38 employees, 25 of who were employed in laboratory operations,
laboratory administration and client services, 2 were employed in sales,
marketing and business development capacities, 3 were employed in research and
development and 8 were employed in administrative capacities. One of our
employees holds an M.D. degree, three others hold Ph.D.

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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.

In addition, pursuant to the management agreement with Saigene, Saigene
currently provides operational and management services for our laboratory, in
exchange for a monthly management fee of $90,000 (which was reduced to $70,000
effective July 1, 2003). The management agreement is terminable by us or
Saigene upon 30 days prior written notice. Under this management arrangement,
Saigene has made available to us the services of five contract employees.

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 the Business of the Company

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 above.



| |  | We have a working capital deficit and may need to raise additional
capital to fund operations during fiscal 2004, and we have received a
going concern opinion from our independent auditors.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At June 30, 2003, we had cash, cash equivalents, and accounts receivable
totaling $906,934 and a working capital deficit of $684,697. For the fiscal
year ended June 30, 2003, we experienced an operating loss of $1,087,164
(although we recorded net earnings of $1,457,344, primarily as a result of
$2,244,040 from reversal of a technology license payable). (See ITEM 6 
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources  Reversal of Technology License
Payable and Notes 3 and 13 to Notes to Consolidated Financial Statements.)
We believe that our current cash, cash equivalents, marketable securities,
available borrowings under our existing credit facilities and any net cash
provided by on-going operations will be sufficient to meet anticipated cash
needs for working capital and capital expenditures through fiscal 2004.
However, our revenue is unpredictable; a revenue shortfall could deplete our
limited financial resources and require us to reduce operations substantially
and/or to seek to raise additional funds through equity or debt financings.
Additionally, if we desire to invest in our laboratory technology or research
and development, we will require as much as $3-5 million in additional
financing.

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



| |  |  | the timing and number of clinical trials by customers, the
number of samples submitted to us for testing, and the amount of
revenues generated from these tests;               
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to enter into and build relationships with new
customers, and obtain additional projects from existing customers;                                                  
|
| |  |  | our ability to participate in and win bids from RFPs
(requests for proposals) for clinical tests;                                                                              
|
| |  |  | capital expenditure requirements, including for research and
development efforts, upgrading or replacing laboratory equipment and
making investments in information technology;

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| |  |  | delays or early terminations of clinical testing agreements with customers;                                                                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our plans to pursue additional business strategies;                                                                                                                                                      
|
| |  |  | 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
|
| |  |  | other business and economic factors that may occur from time
to time.                                                                                                                                    

None of these factors can be predicted with certainty.

We anticipate that we may need substantial additional debt or equity
financing in the future for which we have no current commitments or
arrangements. We cannot assure you that any additional financing, if required,
will be available in amounts or at times when needed, or, even if it is
available that it will be on terms acceptable to us. If we raise additional
funds by selling equity or equity-based securities, the ownership of our
existing stockholders will be diluted. Our plans which may or may not occur
for financing may include, but are not limited to, any one or more of the
following:



| |  |  | engaging a financial advisor to explore strategic
alternatives, which may include a merger, asset sale, joint venture
or other similar transaction;                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | raising additional capital to fund continuing operations by
private placements of equity or debt securities or through the
establishment of other funding facilities, which may be on terms
unfavorable to us;
|
| |  |  | forming a joint venture with one or more strategic partners
to provide additional capital resources to fund operations; and                                                                                   
|
| |  |  | loans from management or employees, salary deferrals or other
cost cutting mechanisms.                                                                                                                        

Our inability to secure additional financing could have a material adverse
effect on whether we would be able to successfully implement our proposed
business plan and our ability to continue as a going concern. Our independent
accountants have issued a going concern emphasis paragraph in their report on
our financial statements for the fiscal year ended June 30, 2003, stating that
we have suffered recurring losses and have a net working capital deficit.
Accordingly, those conditions raise substantial doubt about our ability to
continue as a going concern. If additional financing is not available and if
we cannot generate sufficient revenue from operations, we may need to change
our business plan, significantly reduce or suspend our operations (which may
include reducing our operating expenses and downsizing our staff), sell or
merge our business, or file a petition in bankruptcy.



| |  | During the past several fiscal years, we have depended on one customer
for a significant portion of our revenue.
| |  | ----------------------------------------------------------------------------------------------------------------

During fiscal 2003 and fiscal 2002, sales to our largest customer
represented approximately 76% and 63% of total sales, respectively. Because
our revenue has been concentrated with one large customer, the impact of any
contract termination, delay or non-renewal is heightened. Any cancellations,
delays or reductions in scope by such a major customer could have a material
adverse effect on our revenues. Currently we do not have a significant backlog
with this customer and for fiscal 2004 we expect aggregate revenues from this
customer to decrease on both an absolute and percentage basis. Although we are
actively pursuing and marketing to new customers, if we are unable to obtain
new projects from existing or new customers, our revenues and financial
performance will be adversely impacted.



| |  | If we do not generate new customers 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 customers for our
services. In addition, any project we undertake may generally be terminated at
any time by the customer on short notice. As a result, it is difficult for us
to forecast future sales, and our future revenues depend on our ability to
generate new customers and new projects. Our business development efforts are
substantially dependent on our ability to effectively manage our time,

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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 customer. 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 customer. We also understand that some companies in the pharmaceutical
industry have preferred vendor lists, such that a vendor cannot participate
in RFPs (requests for proposal) or contract with the company unless the vendor
is pre-approved on the list. We are attempting to expand our efforts in this
area. If a client or prospective client has negative perceptions about our
capabilities, our laboratory capacity or our financial health, this may affect
our ability to develop new clients or projects. If our business development
efforts are not successful, our revenues and cash flow may decrease and our
operating results may suffer.



| |  | The loss of our key personnel, including our Chief Science 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 Science 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.



| |  | 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. Contract
termination, delay or reduction in scope may occur for a variety of reasons,
most of which are beyond our control, including:



| |  |  | the failure of the customers products to satisfy safety requirements;                             
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | unexpected or undesired results of the customers products;                                        
|
| |  |  | insufficient patient enrollment by the customer;                                                   
|
| |  |  | insufficient investigator recruitment by the customer;                                             
|
| |  |  | the customers decision to terminate the development of a product or to
end a particular study; and
|
| |  |  | our failure to perform properly our duties under the contract.                                     

Because we primarily receive revenue solely 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 under price 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.

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| |  | Failure to keep pace with changes in the marketplace may cause us to lose
market share and our revenues 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 customers. If we implement
features, standards and performance criteria that are different from those
required by our customers 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 revenues 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, there are
no assurances that it will be successful in keeping up with customer needs or
expectations in this area. In addition, if a client or prospective client has
negative perceptions about our abilities in this area based on our balance
sheet and financial strength, this may affect our ability to develop new
clients or projects. Many of our competitors have greater resources than we do
in this area. We are also exploring potential financing to be used to continue
to update our laboratory service capability; if we are unsuccessful in raising
funds as and when needed, we may, or it may be perceived, that we are less
efficient and less economical than our competitors and we may lose business to
our competitors. If this occurs, it would have a material adverse effect on
our revenues and financial performance.



| |  | We may not be able to successfully develop and market new services.
| |  | -------------------------------------------------------------------

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



| |  | We operate in a highly competitive industry.
| |  | --------------------------------------------

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. We compete on a variety of factors,
including



| |  |  | reputation for on-time quality performance,                                               
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | expertise and experience in specific areas,                                               
|
| |  |  | scope of service offerings,                                                               
|
| |  |  | price,                                                                                    
|
| |  |  | technological expertise and efficient drug development processes,                         
|
| |  |  | ability to acquire, process, analyze and report data in a time-saving and accurate manner,
|
| |  |  | ability to manage large-scale clinical trials both domestically and internationally,      
|
| |  |  | expertise and experience in health economics and outcomes services, and                   
|
| |  |  | size.                                                                                     

Many of our competitors have greater resources that 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.



| |  | 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. 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

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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 customers 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.
| |  | -----------------------------------------------------------------------------------------------------

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 customer, but at
substantial cost to us.



| |  | Our quarterly operating results may vary.
| |  | -----------------------------------------

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



| |  |  | the commencement, completion or cancellation of large contracts,                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the progress of ongoing contracts,                                                                                                                                   
|
| |  |  | seasonality (particularly in the summer months as patient
enrollment and participation in clinical testing typically decreases
coinciding with summer vacations), and
|
| |  |  | changes in the mix of our services.                                                                                                                                  

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



| |  | We depend on the pharmaceutical and biotechnology industries.
| |  | -------------------------------------------------------------

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



| |  | We must maintain certifications from our customers in order to be
eligible to bid on projects.
| |  | ----------------------------------------------------------------------------------------------

Many of our customers 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 customer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 customers, 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

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| |  |  | difficulties and expenses in connection with integrating the
acquired companies and achieving the expected benefits,                                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | diversion of managements attention from current operations,                                                                                                                                                                                
|
| |  |  | the possibility that we may be adversely affected by risk
factors facing the acquired companies, and                                                                                                                                        
|
| |  |  | 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.



| |  | 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



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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. There can be no assurance that we will be able to maintain such
insurance coverage at levels or on terms acceptable to us.



| |  | We may be subject to further sanctions from the SEC if we fail to comply
with the May 10, 2001 Final Judgment.
| |  | --------------------------------------------------------------------------------------------------------------

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



| |  | We rely on air transportation and overnight delivery services.
| |  | --------------------------------------------------------------

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

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| |  | The market and liquidity for our shares is limited.
| |  | ---------------------------------------------------

Our common stock is currently quoted for trading on the OTC Bulletin
Board, and as a result, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, our securities than if the
securities were traded on the Nasdaq Stock Market or another national exchange.

Our common stock is also subject to certain rules and regulations relating
to penny stock (generally defined as any equity security that is not quoted
on the Nasdaq Stock Market and that has a price less than $5.00 per share,
subject to certain exemptions). Broker-dealers who sell penny stocks are
subject to certain sales practice requirements for sales in certain nonexempt
transactions (i.e., sales to persons other than established customers and
institutional accredited investors), including requiring delivery of a risk
disclosure document relating to the penny stock market and monthly statements
disclosing recent price information for the penny stock held in the account,
and certain other restrictions. For as long as our securities are subject to
the rules on penny stocks, the market liquidity for such securities could be
significantly limited. This lack of liquidity may also make it more difficult
for us to raise capital in the future.



| |  | Our stock price is volatile.
| |  | ----------------------------

The trading price of our common stock has fluctuated significantly in the
past. The future trading price of our common stock may continue experiencing
wide price fluctuations in response to such factors as



| |  |  | actual or anticipated fluctuations in revenues or operating results,                                   
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | failure to meet expectations of performance,                                                           
|
| |  |  | developments in or disputes regarding copyrights, trademarks,
patents and other proprietary rights, and
|
| |  |  | general economic conditions.                                                                           



| |  | We do not intend to pay dividends.
| |  | ----------------------------------

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.






|ITEM 2. |  | DESCRIPTION OF PROPERTY.
|------- |  | ------------------------

We lease approximately 15,000 square feet of office and laboratory space in
Seattle, Washington for our executive offices and laboratory. This lease has a
term of ten years, expiring on October 31, 2007, and carries an average annual
rental of approximately $238,000. In addition, under the terms of the lease,
we are required to place a $100,000 security deposit in an interest bearing
account in our name, with interest earned accruing to us. This amount has been
classified as restricted cash on the accompanying consolidated balance sheet
and has a current balance of approximately $71,000 as modified by mutual
agreement with the landlord.

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

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






|ITEM 3. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------

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






|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 fiscal 2003.

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PART II






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

Common Stock

On January 10, 2003, our board of directors approved a 1:3 (one for three)
reverse stock split on our common stock. The reverse split was subsequently
approved by our stockholders and became effective on March 14, 2003. All
shares and per share calculations set forth in this Annual Report on Form
10-KSB reflect the 1:3 reverse stock split.

Our common stock is currently quoted for trading on the OTC Bulletin Board
under the symbol PBME. Initially, our common stock began trading in October
1996 (subsequent to the initial public offering) on The Nasdaq Stock Market
under the symbol PBMI. In March 1999, our securities were delisted from The
Nasdaq Stock Market as it failed to meet the maintenance requirements for
tangible net assets and minimum stock price. The stock subsequently traded and
continues to trade on the OTC Bulletin Board. In March 2003, the ticker symbol
for the common stock was changed to PBME from PBMI in connection with the
one-for-three reverse stock split.

The following table shows, for each quarter of fiscal 2003 and 2002 , the high
and low closing sales prices (as adjusted for the 1:3 reverse stock split
effective March 2003) 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 2003:                            |  |                    |      |  |     |   |       | 
|Fourth quarter, ended June 30, 2003     |  | $                  | 1.70 |  |     | $ | 0.52  | 
|Third quarter, ended March 31, 2003     |  | $                  | 1.10 |  |     | $ | 0.36  | 
|Second quarter, ended December 31, 2002 |  | $                  | 0.69 |  |     | $ | 0.33  | 
|First quarter, ended September 30, 2002 |  | $                  | 0.75 |  |     | $ | 0.075 | 
|Fiscal 2002:                            |  |                    |      |  |     |   |       | 
|Fourth quarter, ended June 30, 2002     |  | $                  | 0.12 |  |     | $ | 0.03  | 
|Third quarter, ended March 31, 2002     |  | $                  | 0.06 |  |     | $ | 0.03  | 
|Second quarter, ended December 31, 2001 |  | $                  | 0.06 |  |     | $ | 0.003 | 
|First quarter, ended September 30, 2001 |  | $                  | 0.09 |  |     | $ | 0.03  | 

Holders

As of September 25, 2003, there were 9,145,125 shares of common stock issued
and outstanding, held by approximately 187 holders of record.

Dividends

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

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

Our Series B preferred stock accrues dividends at a rate of 8% per annum,
compounded quarterly. As of June 30, 2003, we had accrued dividends on the
Series B preferred stock of approximately $2,000.

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Other than for payment on the accruing dividends on the Series B preferred
stock, 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.

Recent Sales of Unregistered Securities

On August 28, 2002, pursuant to the terms of the asset purchase agreement with
Saigene Corporation (see Saigene Investment Transaction above), we issued to
Saigene 6,541,430 shares of our common stock, and an additional 458,570 shares
of common stock to certain of Saigenes designees, as consideration for the
purchased assets. The asset purchase agreement, entered into on June 27, 2002,
and as amended August 28, 2002, provided for our purchase of certain assets of
Saigene, including technology, intellectual property and equipment assets in
connection with certain DNA amplification and cell viability and related
technologies and processes. We issued the shares of common stock in reliance
on the statutory exemption from registration provided by Section 4(2) of the
Securities Act.

In connection with the consummation of the transactions contemplated by the
asset purchase agreement with Saigene, the holders of our Series A preferred
stock consented to an amendment to the Certificate of Designation with respect
to the rights and preferences of the Series A preferred stock, and agreed to
convert all accrued dividends (approximately $910,000) on the Series A
preferred stock into an aggregate of 150,000 shares of our common stock. We
issued the shares of common stock in reliance on the statutory exemption from
registration provided by Section 4(2) of the Securities Act.

Further, in connection with the consummation of the transactions contemplated
by the asset purchase agreement with Saigene, effective August 28, 2002, we
entered into agreements with nine current and former executives and employees
pursuant to which such persons agreed to convert the full amount of their
deferred compensation and notes payable owed by us into shares of our common
stock. Pursuant to these agreements, we granted warrants to purchase 117,624
shares of our common stock in consideration for conversion of an aggregate of
$352,874 owing in deferred compensation and notes payable, and granted stock
options pursuant to our 1996 Stock Incentive Plan to purchase 183,917 shares of
common stock upon conversion of $580,598 in deferred compensation. The
warrants and options are exercisable at a price of $0.51 per share, and expire
on August 27, 2012. The warrants to purchase common stock were granted in
reliance on the statutory exemption from registration provided by Section 4(2)
of the Securities Act. The stock options were granted pursuant to our 1996
Stock Incentive Plan, pursuant to our Registration Statement on Form S-8 filed
on March 18, 1997.

In December 2002, we and Transamerica Business Credit Corporation restructured
our debt obligations to Transamerica in the amount of approximately $470,000.
In settlement of our prior obligations, we issued to Transamerica 50,000 shares
of our common stock, and entered into a new promissory note payable to
Transamerica in the principal amount of $245,000. Saigene is a co-maker on the
promissory note with us. The promissory note carries an interest rate of
approximately 10% and is payable over a 36-month period with final payment due
on October 1, 2005. See Note 7 to Notes to Consolidated Financial
Statements. The shares of common stock were issued to Transamerica in
reliance on the statutory exemption from registration provided by Section 4(2)
of the Securities Act.

From March 2003 through July 31, 2003, we conducted a private placement for the
sale and issuance of up to 1,666,667 shares of our Series B preferred stock at
a purchase price of $3.00 per share. The Series B preferred stock is
convertible, at the election of the holder on a one-for-one basis into our
common stock. In addition, beginning March 11, 2004, we may force the
conversion of the Series B preferred stock into common stock, on a one-for-one
basis, provided that trading price of the common stock is at least $5.00 per
share for ten consecutive trading days. In connection with the private
offering, we engaged Joseph Carl Securities, Inc. as placement agent to offer
the Series B preferred stock on a best efforts basis. As compensation for the
placement agents services, we paid the placement agent a cash commission of 8%
and a non-accountable expense allowance of 2% of the amount of Series B
preferred stock sold. In addition, we agreed to issue to the placement agent
one common stock purchase warrant at an exercise price of $3.00 per share,
expiring January 31, 2005, for each 10 shares of Series B preferred stock sold
in the offering. As of June 30, 2003, we had sold 33,666.66 shares of Series B
preferred stock for total net proceeds

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of $72,920. The private placement expired according to its terms in July 2003,
and the placement agent was entitled to receive 3,366 warrants pursuant to the
terms of the offering. The shares and warrants were sold and issued solely to
accredited investors in reliance on the exemption from registration provided by
Rule 506 of Regulation D under the Securities Act.

Effective May 31, 2003, we entered into a settlement agreement with our prior
landlord in California relating to certain defaults on two prior promissory
notes in the aggregate principal amount of approximately $365,000. See Note
13 to Notes to Consolidated Financial Statements. As settlement for the prior
obligations, we entered into a new promissory note with the landlord in the
principal amount of $320,315 and issued to the landlord 16,667 shares of our
common stock. The promissory note carries an interest rate of 10% per annum,
and is payable over a 26-month period with final payment due not later than
July 31, 2005. In addition, as partial security for repayment of the note, we
issued a total of 666,666 shares of our common stock into an escrow account, to
be released back to us upon payment in full of the promissory note. In
addition, for each calendar quarter in which we make aggregate payments on the
note of at least $50,000, 83,333 shares will be released to our transfer agent
for cancellation. The shares were issued in reliance on the statutory
exemption from registration provided by Section 4(2) of the Securities Act.

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|ITEM 6. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------

You should read the following discussion and analysis in conjunction with our
consolidated audited financial statements and related notes for the year ended
June 30, 2003, included elsewhere in this Report. Except for historical
information, the following discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
See Cautionary Notice Regarding Forward Looking Statements and Risk
Factors.

Overview

We provide specialty central laboratory services to support pharmaceutical and
diagnostic manufacturers in the conduct of human clinical research, for use in
their drug discovery and 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 and 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. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including,
among others, those affecting revenues, the allowance for doubtful accounts,
the salability of inventory and the useful lives of tangible and intangible
assets. The discussion below is intended as a brief discussion of some of the
judgments and uncertainties that can impact the application of these policies
and the specific dollar amounts reported on our financial statements. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions, or if
management made different judgments or utilized different estimates. Many of
our estimates or judgments are based on anticipated future events or
performance, and as such are forward-looking in nature, and are subject to many
risks and uncertainties, including those discussed below and elsewhere in this
Report. We do not undertake any obligation to update or revise this discussion
to reflect any future events or circumstances.

We have identified below some of our accounting policies that we consider
critical to our business operations and the understanding of our results of
operations. This is not a complete list of all of our accounting policies, and
there may be other accounting policies that are significant to our company.
For a detailed discussion on the application of these and our other accounting
policies, see Note 2 to the Consolidated Financial Statements included in this
Report.

Revenue Recognition

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

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for losses expected on contracts. Costs are not deferred in anticipation of
contracts being awarded, but instead are expensed as incurred. All
out-of-pocket costs are included in total revenues and expenses.

Bad Debt Allowance

We endeavor to assess and monitor the creditworthiness of our customers to
which we grant credit terms in the ordinary course of business. We maintain a
provision for doubtful accounts to provide for the possibility that amounts due
to us may not be collected. As of June 30, 2003, the allowance for bad debt
was approximately 5% of our total accounts receivable. This bad debt provision
is monitored on a monthly basis and adjusted as circumstances warrant. As the
recorded bad debt provision is based upon managements judgment, actual bad
debt write-offs may be greater or less than the amount recorded. Historically
bad debt write-offs have not been material.

Operating Expenses

We segregate 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 consists of appropriate 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 includes shipping and handling fees and reimbursable out-of-pocket costs.
Laboratory expenses and cost of goods sold, as a percentage of net revenues,
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, Saigene management fees, 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.

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

Impairment of Assets

Our long-lived assets consist of LIDA and cell viability technologies. We
review our long-lived assets for impairment on a yearly basis or when events or
changes in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is based
upon our judgment of our ability to recover the asset from the expected future
undiscounted cash flows of the related operations. Actual future cash flows
may be greater or less than estimated. If the sum of expected future cash
flows is less than the carrying amount of the asset, a loss is recognized.
During the year ended June 30, 2003, we did not recognize a loss on any of our
long-lived assets.

There have been no material changes to our critical accounting policies and
estimates since June 30, 2002. For detailed information on our critical
accounting policies and estimates, see our financial statements and notes
thereto for the year ended June 30, 2003, included in this Form 10-KSB.

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Results of Operations for the Years Ended June 30, 2003 and 2002



| |  | Revenues
| |  | --------

|                            |  |          |       |      |  |        |       |        |  |   |       |  |  |  |    |  
|--------------------------- |  | -------- | ----- | ---- |  | ------ | ----- | ------ |  | - | ----- |  |  |  | -- | -
|Years Ended                
|                            |  | June 30, |       |      |  |       
|Dollars in
thousands,       |  |          |       | $    |  | %     
|rounded to nearest thousand |  | 2003     |       | 2002 |  | Change |       | Change
|                            |  |          |       |      |  |        |       |       
|Revenues                    |  | $        | 5,765 |      |  | $      | 4,405 |        |  | $ | 1,360 |  |  |  | 31 | %

Our revenues consist of revenues generated from clinical trials testing
services and revenues generated from the provision of diagnostic services. The
approximately 31% increase in fiscal 2003 revenues over fiscal 2002 was
primarily attributable to an increase in the size and number of clinical trials
testing services we performed.

During fiscal 2003, revenue generated from clinical trials testing services
accounted for approximately 89% of our total revenues. Revenue generated from
the provision of diagnostic and other services accounted for approximately 11%
of our total revenues during the same period. Historically, over 90% of our
total revenues have been generated from clinical trials. We expect that
clinical trials will continue to account for a significant portion of our
revenues in the future.

In February 2002, we entered into a master services agreement with a large
pharmaceutical company to provide laboratory research services from time to
time based on specifications to be included in one or more work orders
submitted by the pharmaceutical company. There is no guaranteed minimum number
of work orders or revenues to us under this agreement. Each work order is
separately negotiated with the pharmaceutical company and is usually limited to
a specific project with limited duration. For the 2003 fiscal year, we
provided services through work orders under this agreement aggregating
approximately $4,397,000. Services provided to this customer accounted for
approximately 20% of our outstanding accounts receivable balance of
approximately $467,000 as of June 30, 2003. This customer accounted for
approximately 76% and 63% of the revenues for the fiscal years ended June 30,
2003 and 2002, respectively. Currently we do not have a significant backlog
with this customer and for fiscal 2004 we expect aggregate revenues from this
customer to decrease on both an absolute and percentage basis.

We generally do not have any long-term contracts or agreements with our
customers. Each contract is negotiated separately with the pharmaceutical
manufacturer or research organization and is usually limited to a specific
project with limited duration. The cancellation of any contracts with existing
customers or the failure to replace such contracts upon expiration or
termination could have a material adverse effect on our laboratory operations.

Laboratory Expenses and Cost of Goods Sold:

|
|
|
|
|
|
|
|
|
|

Laboratory expenses and cost of goods sold in actual dollar amounts increased
approximately 36% over fiscal 2002. The increase was primarily attributable to
increased expenses incurred in meeting the increased demand in the size and
number of clinical trials testing services we performed during the period. As
a percentage of revenue, laboratory expenses and cost of goods sold remained
relatively stable at approximately 49% in fiscal 2003 compared to approximately
47% in fiscal 2002.

Laboratory expenses and cost of goods sold consisted 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 payment of business and
occupation taxes. During the years ended June 30, 2003 and 2002, respectively,
salaries and related benefits accounted for approximately 37.7% and 27.3% of
total cost of sales, lab supplies were approximately 26.0% and 30.1%, and
outside services were

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approximately 16.8% and 16.9%. The increase in salaries and benefits between
the comparable periods was primarily attributable to an increase in the number
of employees in this area.

Research and Product Development:

|                                 |  |          |     |      |  |        |    |        |  |   |     |  |  |  |     |  
|-------------------------------- |  | -------- | --- | ---- |  | ------ | -- | ------ |  | - | --- |  |  |  | --- | -
|Years Ended                     
|                                 |  | June 30, |     |      |  |       
|Dollars in
thousands,            |  |          |     | $    |  | %     
|rounded to nearest thousand      |  | 2003     |     | 2002 |  | Change |    | Change
|                                 |  |          |     |      |  |        |    |       
|Research and Product Development |  | $        | 214 |      |  | $      | 26 |        |  | $ | 188 |  |  |  | 723 | %
|Percentage of Revenues           |  |          | 4   | %    |  |        | 1  | %      |  |   |     |  |  |  |     |  

Research and product development expenses in actual dollar amounts increased to
approximately $214,000 in fiscal 2003 from approximately $26,000 in fiscal
2002, reflecting an increase of approximately $188,000, or 723%, year over
year. The increase is primarily attributable to an increase in compensation
expense due to hiring of three new employees, and to a lesser extent, increases
in depreciation on equipment acquired from Saigene and legal fees associated
with patents on technology acquired from Saigene.

Research and development expenses for fiscal 2003 consisted mainly of
expenditures we made in developing technology acquired from Saigene in August
2002. Compensation expense accounted for approximately 65% of the total
research and development expenses in fiscal 2003. We had minimum research and
development expenses for fiscal 2002. We anticipate that we will continue to
incur research and development expenses related to the technology acquired from
Saigene. However, if we are unable to increase revenues or raise additional
funding to continue to fund our existing research and development efforts, we
will seek to reduce our research and development efforts and expenses.

Selling, General and Administrative Expense:

|                                            |  |             |       |      |  |        |       |        |  |   |       |  |  |  |     |  
|------------------------------------------- |  | ----------- | ----- | ---- |  | ------ | ----- | ------ |  | - | ----- |  |  |  | --- | -
|                                            |  | Years Ended |       |      |  |        |       |        |  |  
|                                            |  | June 30,    |       |      |  |       
|Dollars in
thousands,                       |  |             |       | $    |  | %     
|rounded to nearest thousand                 |  | 2003        |       | 2002 |  | Change |       | Change
|                                            |  |             |       |      |  |        |       |       
|Selling, General and
Administrative Expense |  | $           | 3,837 |      |  | $      | 1,497 |        |  | $ | 2,340 |  |  |  | 156 | %
|Percentage of Revenues                      |  |             | 67    | %    |  |        | 34    | %      |  |   |       |  |  |  |     |  

Selling, general and administrative expense (SG&A) in actual dollar amounts
increased by approximately 156% between 2003 and 2002. Selling, general and
administrative expenses represented approximately 67% percent of revenue in
fiscal 2003, compared to approximately 34% in fiscal 2002. The overall
increase is primarily attributable to the payment of approximately $1,250,000
in management fees under the terms of a management agreement with Saigene.
These expenses also increased due to increased compensation expense associated
with the hiring of our Chief Executive Officer, our Chief Medical Officer and a
Business Development Representative during fiscal 2003, and to a lesser extent,
increased accounting and legal fees incurred in connection with the Saigene
asset purchase acquisition, consulting expenses beginning August 2002 from our
consulting agreements with Terry Giles (a former director of the Company) and
Paul Kanan (a director and former officer of the Company) of $10,000 and $3,000
per month, respectively, our public reporting obligations, increased sales
commissions and our negotiation of settlements with certain of our creditors.
SG&A salary, benefits and commissions were approximately $1,300,000 for fiscal
2003, compared to approximately $668,000 for fiscal 2002. Of the approximate
$632,000 increase in salary, approximately two-thirds (2/3) is attributable to
the addition of our Chief Executive Officer, our Chief Medical Officer, and an
additional Business Development Representative during fiscal 2003. The
remaining approximately one-third (1/3) is generally the result of, increased
consulting expense and an increase in compensation expense related to variable
pricing rules for stock options. (See Note 11 to Notes to Consolidated
Financial Statements in this Report).

On May 3, 2002, the Board of Directors voted to reprice all outstanding options
to purchase common stock to the then current market price, which was $0.06 on
that day. As of June 30, 2003, 97,194 of these options remained

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outstanding. For fiscal 2003, we recognized approximately $182,000 in
compensation expense to adjust these options to fair market value, compared to
approximately $2,000 in fiscal 2002. In the future, the amount of compensation
expense we recognize will fluctuate based on the value of our common stock and
the number of options that are outstanding as of each valuation date. (See Note
11 to Notes to Consolidated Financial Statements in this Report).

We anticipate selling, general and administrative expenses to remain relatively
steady quarter to quarter in the near term during fiscal 2004. However,
compared with fiscal 2003, we expect SG&A expenses for fiscal 2004 to decrease,
given the non-recurring expenses related to the Saigene transaction incurred in
fiscal 2003. Notably also, effective on July 1, 2003, we entered into an
amendment to the management agreement with Saigene to reduce the monthly fees
payable to Saigene from $90,000 to $70,000 per month. This expense decrease
will be partially offset by further increases in compensation expense due to
our hiring of a new Chief Financial Officer in June 2003. If we are unable to
increase revenues or obtain financing in amounts sufficient to fund operations,
we intend to institute measures to reduce selling, general and administrative
expenses.

Other Income:

|                            |  |             |       |      |  |        |     |        |  |   |       |  |  |  |       |  
|--------------------------- |  | ----------- | ----- | ---- |  | ------ | --- | ------ |  | - | ----- |  |  |  | ----- | -
|                            |  | Years Ended |       |      |  |        |     |        |  |  
|                            |  | June 30,    |       |      |  |       
|Dollars in
thousands,       |  |             |       | $    |  | %     
|rounded to nearest thousand |  | 2003        |       | 2002 |  | Change |     | Change
|                            |  |             |       |      |  |        |     |       
|Other Income                |  | $           | 2,545 |      |  | $      | 123 |        |  | $ | 2,422 |  |  |  | 1,969 | %
|Percentage of Revenues      |  |             | 44    | %    |  |        | 3   | %      |  |   |       |  |  |  |       |  

Total other income in actual dollar amounts increased approximately $2,422,000
in fiscal 2003 over fiscal 2002. The increase was primarily attributable to
our reversing the reserve and removing the $2,244,040 contingent liability
relating to 3M from the balance sheet. (See  Liquidity and Capital Resources
 Reversal of Technology License Payable below and Note 13 to Notes to
Consolidated Financial Statements.) Other items impacting the increase in
other income in fiscal 2003 include one-time gains on the restructuring of
certain outstanding debt of approximately $169,000, approximately $(118,000) in
net interest expense, and approximately $21,000 of rent and fees paid to us by
Saigene. In addition, primarily during the third quarter of fiscal 2003, we
reassessed all of our existing liabilities and wrote off some of our old
accounts payable and an old lease obligation, resulting in a one-time gain
associated with the write-off in the amount of approximately $228,000.

In fiscal 2002, other income (expense) included net interest expense of
approximately $(159,000), offset by fees paid to us by Saigene in consideration
of extending the deadline for purchase of the laboratory of approximately
$190,000, sublet rental income from Saigene of approximately $71,000, and other
income aggregating approximately $20,000.

Net Earnings:

|                            |  |          |       |      |  |        |     |        |  |   |     |  |  |  |    |  
|--------------------------- |  | -------- | ----- | ---- |  | ------ | --- | ------ |  | - | --- |  |  |  | -- | -
|Years Ended                
|                            |  | June 30, |       |      |  |       
|Dollars in
thousands,       |  |          |       | $    |  | %     
|rounded to nearest thousand |  | 2003     |       | 2002 |  | Change |     | Change
|                            |  |          |       |      |  |        |     |       
|Net Earnings                |  | $        | 1,457 |      |  | $      | 950 |        |  | $ | 507 |  |  |  | 53 | %

Net earnings in actual dollar amounts was approximately $1,457,000 in fiscal
2003 compared to approximately $950,000 in fiscal 2002, representing an
increase of approximately $507,000 or 53% between the comparable periods. The
change in net earnings is primarily attributable to our reversing the prior
reserve and removing the $2,244,040 contingent liability relating to 3M from
the balance sheet. (See
 Liquidity and Capital Resources  Reversal of
Technology License Payable below and Note 13 to Notes to Consolidated
Financial Statements.)

Excluding the reversal of the contingent liability of $2,440,040, we had a net
loss of approximately $(983,000), reflecting the increase in selling, general
and administrative expense (discussed above), which included the management
fees paid to Saigene and the increased compensation expense associated with the
hiring of our new Chief Executive Officer, our Chief Medical Officer and a
Business Development Representative during fiscal 2003,

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and to a lesser extent, increased accounting and legal fees incurred in
connection with the Saigene asset purchase acquisition, our public reporting
obligations and negotiation of settlements with certain creditors.

The change in net earnings is also affected by our increase in revenue for the
comparable periods, more than offset by the increase in selling, general and
administrative expense in fiscal 2003 over fiscal 2002. Other items having a
lesser impact on the change in net earnings include increased research and
product development expenses in fiscal 2003 over fiscal 2002, and other income
(expense) items.

Liquidity and Capital Resources:

Our operations historically have primarily been funded through revenues
generated from operations and from the sale and issuance of our common stock
and preferred stock from time to time.

As of June 30, 2003, our cash and cash equivalents were approximately $440,000
and we had approximately $467,000 in accounts receivable, compared to cash and
cash equivalents of approximately $271,000 and approximately $990,000 in
accounts receivable as of June 30, 2002. Total liabilities as of June 30, 2003
were approximately $2,714,000 compared to approximately $6,064,000 as of June
30, 2002. The improvement in our cash and cash equivalents is primarily
attributable to collections on our accounts receivable and increases in
accounts payable and accrued expenses, offset by losses from operations,
purchases of equipment and laboratory supplies, and payments on notes payable.

As of June 30, 2003, we also had restricted cash of approximately $71,000. The
restricted cash represents a security deposit that we were required to set
aside in connection with the office lease we signed in 1997 for office space in
Seattle, Washington. Our Seattle office lease expires in July 2007, and we are
obligated to maintain the restricted cash security deposit through the term of
the lease.

As of June 30, 2003, we had negative working capital of approximately $685,000,
compared to negative working capital of approximately $4,714,000 at June 30,
2002. The improvement in working capital is attributable to a reversal of a
contingent liability reserve in the amount of $2,244,040 and decreases in our
notes payable due in part to negotiation of settlements with certain creditors
and payments on notes payable, partially offset by increases in accounts
payable and accrued liabilities and decreases in accounts receivable. For
fiscal 2002 and each of the first three quarters of fiscal 2003, we had
included on our balance sheet as a current liability a reserve for a potential
obligation to 3M in the amount of $2,244,040 under a prior license agreement.
(See Reversal of Technology License Payable and Note 13 to Notes to
Consolidated Financial Statements.) We believe based on advice of legal
counsel that the applicable statute of limitations with respect to this license
agreement has expired and that the likelihood of liability to 3M is remote.
Accordingly, at June 30, 2003, we reversed the reserve.

Net cash provided from operating activities was approximately $437,000 for the
year ended June 30, 2003. Our investing activities used approximately
$(72,000) for the year ended June 30, 2003 primarily for the purchase of
capital equipment. Cash flow used by financing activities was approximately
$(196,000) for the year ended June 30, 2003, consisting primarily of
approximately $73,000 net raised in our Series B Preferred Stock offering,
approximately $(272,000) used to make payments on notes payable and lease
obligations, and approximately $4,000 in proceeds from exercise of stock
options.

During 2003, we also incurred approximately $254,000 in capital leases to
acquire equipment for use in our laboratory, issued 183,917 stock options and
117,624 warrants as consideration for cancellation of approximately $933,000 in
deferred compensation, issued 150,000 shares of common stock in exchange for
approximately $910,000 of accrued dividends on Series A Preferred Stock,
entered into approximately $75,000 of notes payable in exchange for outstanding
accounts payable, received donated equipment valued at approximately $71,000,
and issued 7,000,000 shares of common stock and provided other consideration in
exchange for technology, intellectual property and equipment assets from
Saigene. (See Saigene Investment Transaction and Note 14 to the Notes to
Consolidated Financial Statements.)

Saigene has informed us that in order to develop and commercialize the
technology that we acquired from Saigene in August 2002, we will likely require
in the near term a capital infusion in excess of $5 million. Moreover,
management believes that an additional $15 million over the next two years
would be required to achieve regulatory

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approval and commercialization of the technologies acquired from the Saigene in
August 2002, as well as the additional technologies that may be acquired under
the option agreement with Saigene. We intend to seek suitable financing to
continue research and development efforts, commence the regulatory approval
process and commercialization of the technologies, but there can be no
assurance that we will be able to obtain such financing, on favorable terms or
at all.

From March 2003 through July 31, 2003, we sought to raise up to $5 million in a
private offering of up to 1,666,667 shares of our Series B, 8% convertible,
cumulative redeemable, preferred stock (the Series B Preferred Stock) at a
purchase price of $3.00 per share to accredited investors. Dividends accrue on
the Series B Preferred Stock at the rate of 8% per annum, compounded quarterly.
Each share of Series B Preferred Stock is convertible at any time in the
holders discretion into one share of our common stock, and is convertible by
us at any time after the one year anniversary of the date of the offering when
the closing price of our common stock is at least $5.00 per share for a period
of at least ten consecutive trading days. Holders of shares of Series B
Preferred Stock are entitled to receive a liquidation preference of $3.00 per
share on such shares after the holders of Series A preferred stock have
received their full liquidation preferences. We engaged a placement agent to
offer the Series B Preferred Stock on a best efforts basis, and as partial
consideration for its services, we agreed to grant to the placement agent
warrants to purchase shares of common stock, at an exercise price of $3.00 per
share, equal to 10 percent of the number of shares of Series B Preferred Stock
sold in the offering. As of June 30, 2003, we sold and issued
33,666.66 shares
of Series B Preferred Stock for total net proceeds of $72,920, entitling the
placement agent to warrants to purchase 3,366 shares of common stock. As of
June 30, 2003, we accrued approximately $2,000 in dividends on the issued and
outstanding shares of Series B Preferred Stock. We intend to use the funds
received from the offering for working capital. The private placement expired
according to its terms on July 31, 2003 with no additional shares of Series B
Preferred Stock sold.

We also have 1,550,000 shares of Series A preferred stock issued and
outstanding. In August 2002, the holders of Series A preferred stock approved
an amendment to the Certificate of Designation to modify certain mandatory
conversion rights, eliminate dividend rights and eliminate the right of the
holders of the Series A preferred stock to designate a director to our board of
directors. As such, in August 2002, all accrued and unpaid dividends on the
Series A preferred stock at that time (approximately $910,000) were converted
into 150,000 shares of our common stock, and the Series A preferred stock no
longer accrues mandatory dividends. Each share of Series A preferred stock is
entitled to a liquidation preference of $2.00 per share. Each share of Series
A preferred stock is convertible at the option of the holder at any time, into
one-third share of common stock, and is convertible at our option into
one-third share of common stock when the closing price of our common stock is
at least $6.00 or more for thirty consecutive trading days. For the year ended
June 30, 2003, we did not declare dividends payable on the Series A preferred
stock and we do not intend to declare dividends for the 2004 fiscal year.

In December 2002, we entered into a settlement agreement with Transamerica
Business Credit Corporation relating to rental payments owed on a capital
leasing facility. In connection with the settlement agreement, among other
things we issued a secured promissory note in the amount of $245,000 in favor
of Transamerica. Saigene is a co-maker on the promissory note with us. The
promissory note carries an interest rate of approximately 10% and is payable
monthly over a 36-month period with final payment due on October 1, 2005. For
the fiscal year ended June 30, 2003, we made required payments of $20,000 and
the principal balance as of June 30, 2003 was approximately $241,000. See
Note 8 to Notes to Consolidated Financial Statements.

In May 2003, we and Saigene entered into a settlement agreement with our prior
landlord relating to certain defaults on two outstanding promissory notes.
(See Note 13 to Notes to Consolidated Financial Statements.) Under the terms
of the settlement, we issued to the landlord a new promissory note in the
principal amount of approximately $320,000 and cancelled the prior notes. The
new promissory note bears interest at a rate of 10% per annum, and is payable
over a 26-month period with final payment due not later than July 31, 2005. As
part of the settlement, we also issued to the landlord 16,667 shares of our
common stock, and we placed 666,666 shares of our common stock in escrow to
secure payment of the new promissory note. The shares held in escrow will be
released to our transfer agent for cancellation at the rate of 83,333 shares
for each calendar quarter that we make payment of at least $50,000 under the
terms of the promissory note. Upon payment of the promissory note in full, all
remaining shares in escrow will be returned to our transfer agent for
cancellation.

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Subsequent to the 2003 fiscal-year end, we entered into a loan and security
agreement with Franklin Funding, Inc., providing for a non-revolving line of
credit of up to $250,000. This line of credit is secured by certain of our
equipment and does not impose any financial covenants. All borrowings under
the line of credit must be made by November 15, 2003. Borrowings under the
line of credit bear interest at a rate of 17.64% per annum and are repayable
monthly based on a 36-month amortization schedule, with final payment due on
August 5, 2006. As additional consideration for the credit facility, we agreed
to grant to the lender stock purchase warrants to purchase up to an aggregate
of 25,000 shares of common stock, on the basis of warrants for 5,000 shares for
each $50,000 in principal amount borrowed. The exercise price for the warrants
is the fair market value of our common stock as of the respective date of
grant, and the warrants have a term of ten years from the respective date of
grant. As of September 25, 2003, we had borrowed $150,000 in aggregate
principal amount, entitling the lender to warrants to purchase 15,000 shares of
common stock.

Our auditors added an explanatory paragraph to their opinion on our fiscal 2003
financial statements stating that there was substantial doubt about our ability
to continue as a going concern. There can be no assurance that our efforts to
monitor expenses and generate revenue will be successful. We are currently
seeking to raise financing to fund operations. However, in the current market
condition, raising capital has been, and will continue to be difficult. As
noted above, we did not raise sufficient financing from our Series B Preferred
Stock private placement. (See also Note 3 to the Notes to the Consolidated
Financial Statements.) There can be no assurance that we will raise
sufficient financing from any equity or debt financing to help fund operations
during the near term. Accordingly, management will need to contemplate other
alternatives to enable us to fund continuing operations, including, but not
limited to, exploring strategic alternatives, which may include a merger, asset
sale, joint venture or another comparable transaction, loans from management or
employees, salary deferrals or other cost cutting mechanisms, or raising
additional capital by private placements of equity or debt securities or
through the establishment of other funding facilities. None of these potential
alternatives may be available to us, or may only be available on unfavorable
terms. If we are unable to obtain sufficient cash to continue to fund
operations, we may be forced to seek protection from creditors under the
bankruptcy laws and/or cease operations. Any inability to obtain additional
cash as needed could have a material adverse effect on our financial position,
results of operations and our ability to continue in existence. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Reversal of Technology License Payable

In December 1997, we entered into an exclusive license agreement and supply
agreement with Sudormed, Inc. The technology licensed from Sudormed was the
basis for our development of our sweat and saliva products. Due to a lack of
funding and the failure to obtain FDA approval for the products, all
development efforts relating to the products were suspended in August 1998.
The license agreement required us to make a $1.6 million license payment in
December 1998, which was subsequently extended to March 1999. In May 1999,
Sudormed terminated the license agreement and the supply agreement due to our
failure to make the $1.6 million license payment.

The Minnesota Mining and Manufacturing Company (3M) manufactured certain of
the products that Sudormed supplied to us pursuant to the supply agreement. As
described above, Sudormed terminated both the license agreement and the supply
agreement in May 1999 due to our failure to make required payments. 3M
subsequently foreclosed upon certain assets of Sudormed and became a party in
possession of secured property of Sudormed. In May 2000, 3M notified us that,
in its capacity as a secured party in possession of the Sudormed assets, it
demanded payment in full of the $1.6 million plus accrued interest and fees due
under the Sudormed license agreement. We dispute 3Ms demand, and will
vigorously defend any action that 3M may bring. We have not had any
correspondence or communication with 3M since 2000, and to our knowledge no
action has been filed.

During fiscal 2003, we reassessed our potential liability to 3M. We believe
based on advice from legal counsel that any claims by 3M under the license
agreement are now barred by the applicable statute of limitations (having
expired in the third and fourth quarters of fiscal 2003), and accordingly that
the likelihood of liability to 3M is remote. We previously reserved on our
balance sheet a contingent liability in the amount of $2,240,040, representing
the full potential amount owing under the technology license plus accrued
interest and fees. At June 30, 2003, we reversed the reserve and removed the
contingent liability from the balance sheet.

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|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




PART III






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

Information called for by Part III, Item 9, is included in our Information
Statement to be filed within 120 days of June 30, 2003 (our fiscal year end),
and is incorporated herein by reference.






|ITEM 10. |  | EXECUTIVE COMPENSATION
|-------- |  | ----------------------

Information called for by Part III, Item 10, is included in our Information
Statement to be filed within 120 days of June 30, 2003 (our fiscal year end),
and is incorporated herein by reference.






|ITEM 11. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
|-------- |  | ---------------------------------------------------------------

Information called for by Part III, Item 11, is included in our Information
Statement to be filed within 120 days of June 30, 2003 (our fiscal year end),
and is incorporated herein by reference.



| |  | Equity Compensation Plan Information
| |  | ------------------------------------

The following table gives information as of June 30, 2003, regarding Company
common stock that may be issued upon the exercise of options, warrants and
other rights under our equity compensation plans. See also Notes 11 and 12 to
Consolidated Financial Statements included in this Report.

|                                                       |       |                     |                      |                     |                      |                         |                         |      |  |  |         |         | 
|------------------------------------------------------ | ----- | ------------------- | -------------------- | ------------------- | -------------------- | ----------------------- | ----------------------- | ---- |  |  | ------- | ------- | 
|                                                       |       |                     | (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)
|                                                       |       |                     |                      |                     |                      |                        
|Equity Compensation
Plans Approved by
Stockholders (1) |       |                     | 281,111              |                     |                      | $                       | 0.35                    |      |  |  | 289,988 |        
|Equity Compensation
Plans Not Approved
by Stockholders |       |                     | 339,472              |                     |                      |                         | 0.34                    |      |  |  |        |        
|                                                       | TOTAL |                     |                      | 620,583             |                      |                         | $                       | 0.34 |  |  |         | 289,988 | 



---

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

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|         |  |                                                
|-------- |  | -----------------------------------------------
|ITEM 12. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information called for by Part III, Item 12, is included in our Information
Statement to be filed within 120 days of June 30, 2003 (our fiscal year end),
and is incorporated herein by reference.




|         |  |                                  
|-------- |  | ---------------------------------
|ITEM 13. |  | EXHIBITS AND REPORTS ON FORM 8-K.



|(a) |  | Exhibits.
|--- |  | ---------

| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1.1   |  |  | Placement Agent Agreement, dated February 3, 2003, between Joseph
Carl Securities and the Company (1)                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 1.1A  |  |  | Amendment to Placement Agent Agreement, dated June 14, 2003, between
Joseph Carl Securities and the Company                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 3.1   |  |  | 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 (1)
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 3.2   |  |  | Amended and Restated By-Laws of the Company (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 4.1   |  |  | Specimen Stock Certificate (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.1  |  |  | 1996 Stock Incentive Plan, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.2  |  |  | Part Time Employment Agreement, dated April 1, 2001, by and between
the Company and Elizabeth Teng Leary, Ph.D.                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.3  |  |  | Office Lease, dated April 23, 1997, by and between Tom Kane and Elsa
Kane and Pacific Biometrics, Inc. (3)                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.4  |  |  | Asset Purchase Agreement, dated as of June 27, 2002, by and among
the Company, PBI-WA and Saigene Corporation. (4)                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.5  |  |  | Amendment Number One to Asset Purchase Agreement, dated as of August
28, 2002, by and among the Company, Saigene, and PBI-WA. (5)                                                                                                                                                                                                                                                                                                                                                                             
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.6  |  |  | Amended and Restated Management Agreement, dated as of August 28,
2002, by and among the Company, Saigene, and PBI-WA. (5)                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.6A |  |  | Amendment No. 1 to Amended and Restated Management Agreement, dated
as of June 18, 2003, by and among the Company, Saigene, and PBI-WA                                                                                                                                                                                                                                                                                                                                                                        
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.7  |  |  | Consulting Agreement, dated as of August 28, 2002, between Terry M.
Giles and the Company (5)                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.8  |  |  | Consulting Agreement, dated as of August 28, 2002, between Paul G.
Kanan and the Company (5)                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.9  |  |  | Promissory Note, dated as of August 28, 2002, in the principal
amount of $219,109, by PBI-WA in favor of Saigene. (5)                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.10 |  |  | Amended and Restated Financing Agreement, dated as of October 1,
2002, by and among the Company, Transamerica Technology Finance
Corporation, successor in interest to Transamerica Business Credit
Corporation, and Saigene Corporation. (6)                                                                                                                                                                                                                                                                 
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.11 |  |  | Restructure Agreement, dated as of October 1, 2002, by and among the
Company, Transamerica Technology Finance Corporation, successor in
interest to Transamerica Business Credit Corporation, and Saigene
Corporation. (6)                                                                                                                                                                                                                                                                                    
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.12 |  |  | Amendment to Warrant Agreements, dated as of October 1, 2002, by and
among the Company, Transamerica Technology Finance Corporation,
successor in interest to Transamerica Business Credit Corporation,
and Saigene Corporation. (6)                                                                                                                                                                                                                                                                          
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.13 |  |  | Promissory Note, dated as of October 1, 2002, in the principal
amount of $245,000 in favor of Transamerica Technology Finance
Corporation. (6)                                                                                                                                                                                                                                                                                                                                                                
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.14 |  |  | Investment Agreement, dated as of December 19, 2002, by and between
Saigene Corporation and the Company (6)                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | 10.15 |  |  | Settlement Agreement, dated May 31, 2003, by and between Makena
Commercentre II, LLC, Makena Partners, the Company, PBI-WA, and
Saigene Corporation                                                                                                                                                                                                                                                                                                                                                           

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| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.16 |  |  | Promissory Note, dated May 31, 2003, in favor of Makena Commercentre
II, LLC, by and between the Company, PBI-WA, and Saigene Corporation                            
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 10.17 |  |  | Escrow Agreement, dated May 2003, by and between U.S. Bank Trust
National Association, the Company, Makena Commercentre II, LLC, and
Makena Partners                 
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 10.18 |  |  | Loan and Security Agreement, dated August 5, 2003, by and between
the Company and Franklin Funding, Inc.                                                             
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 10.19 |  |  | Option Agreement, dated August 28, 2002, by and between the Company
and Saigene Corporation                                                                          
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 21.1  |  |  | Subsidiaries of Pacific Biometrics, Inc. (2)                                                                                                                         
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 23.1  |  |  | Consent of Grant Thornton LLP                                                                                                                                        
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 31.1  |  |  | Certification by Ronald R. Helm, Chief Executive Officer                                                                                                             
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 31.2  |  |  | Certification by Michael Carrosino, Chief Financial Officer                                                                                                          
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 32.1  |  |  | Certification by Ronald R. Helm, Chief Executive Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002   
| |  |  |       |  |  |                                                                                                                                                                      
| |  |  | 32.2  |  |  | Certification by Michael Carrosino, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002



---

| | (1) |  | Incorporated by reference to Exhibits of Registrants
Quarterly Report on Form 10QSB for the quarter ended March 31, 2003,
filed on May 15, 2003.        
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Incorporated by reference to Exhibits of Registrants
Registration Statement on Form SB-2, Registration No. 333-11551                                    
|
| | (3) |  | Incorporated by reference to Exhibits of Registrants Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1997                               
|
| | (4) |  | Incorporated by reference to Exhibits of Registrants Current
Report on Form 8-K filed on July 3, 2002.                                                  
|
| | (5) |  | Incorporated by reference to Exhibits of Registrants Current
Report on Form 8-K filed on September 6, 2002.                                             
|
| | (6) |  | Incorporated by reference to Exhibits of Registrants
Quarterly Report on Form 10QSB for the quarter ended December 31,
2002, filed on February 14, 2003.



|(b) |  | Reports on Form 8-K
|--- |  | -------------------

We filed a Current Report on Form 8-K on May 8, 2003 reporting our press
release on May 6, 2003 in which we announced our financial results for our
third fiscal quarter ended March 31, 2003.




|        |  |                        
|------- |  | -----------------------
|ITEM 14 |  | CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms.

There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out this evaluation.

-30-



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##### Table of Contents






SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on September 26, 2003.

| |  |                          |  |                        
| |  | ------------------------ |  | -----------------------
| |  | PACIFIC BIOMETRICS, INC.
| |  |                          |  |                        
| |  | By:                      |  | /s/ Ronald R. Helm     
| |  |                          |  |                        
| |  |                          |  | Ronald R. Helm         
| |  |                          |  | 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, President, and Director |  | September 26, 2003
|                          |  | (Principal Executive Officer)                    |  |                   
|Ronald R. Helm            |  |                                                  |  |                   
|                          |  |                                                  |  |                   
|/s/ Michael Carrosino     |  | Chief Financial Officer and Treasurer            |  | September 26, 2003
|                          |  | (Principal Financial Officer and                 |  |                   
|Michael Carrosino         |  | Principal Accounting Officer)                    |  |                   
|                          |  |                                                  |  |                   
|/s/ Michael L. Hartzmark  |  | Director                                         |  | September 26, 2003
|                          |  |                                                  |  |                   
|Michael L. Hartzmark      |  |                                                  |  |                   
|                          |  |                                                  |  |                   
|/s/ Paul G. Kanan         |  | Director                                         |  | September 26, 2003
|                          |  |                                                  |  |                   
|Paul G. Kanan             |  |                                                  |  |                   
|                          |  |                                                  |  |                   
|/s/ Richard W. Palfreyman |  | Director                                         |  | September 26, 2003
|                          |  |                                                  |  |                   
|Richard W. Palfreyman     |  |                                                  |  |                   
|                          |  |                                                  |  |                   
|/s/ Timothy A. Wudi       |  | Director                                         |  | September 26, 2003
|                          |  |                                                  |  |                   
|Timothy A. Wudi           |  |                                                  |  |                   

-31-



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##### Table of Contents



PACIFIC BIOMETRICS, INC.

Form 10-KSB Annual Report

Index to Financial Statements

|                                                   |                                                                                                     |  |      |     | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                   |                                                                                                     |  | Page
|                                                   |                                                                                                     |  |     
|Report of Independent Certified Public Accountants |                                                                                                     |  | F-2  |    
|Consolidated Financial Statements:                 |                                                                                                     |  |      |    
|                                                   | Consolidated Balance Sheets as of June 30, 2003 and 2002                                            |  |      | F-3 | 
|                                                   | Consolidated Statements of Operations for the years ended June 30, 2003 and 2002                    |  |      | F-4 | 
|                                                   | Consolidated Statements of Cash Flows for the years ended June 30, 2003 and 2002                    |  |      | F-5 | 
|                                                   | Consolidated Statement of Stockholders Equity (Deficit) for the years ended
June 30, 2003 and 2002 |  |      | F-6 | 
|                                                   | Notes to Consolidated Financial Statements                                                          |  |      | F-7 | 

F-1



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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Pacific Biometrics, Inc.
Seattle, Washington

We have audited the accompanying consolidated balance sheets of Pacific
Biometrics, Inc. as of June 30, 2003 and 2002 and the related consolidated
statements of operations, cash flows and stockholders equity (deficit) for the
years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pacific Biometrics, Inc. as of June 30, 2003 and 2002, and the consolidated
results of its operations and its consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the
United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the financial statements, the Company has experienced significant losses from
operations in prior years and has experienced cash flow shortages.
Additionally, the Company has reported deficiencies in working capital and
stockholders equity. The Company also has significant amounts of debt that
are past due as of June 30, 2003. These matters raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Grant Thornton LLP

Seattle, Washington
August 26, 2003

F-2



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##### Table of Contents



PACIFIC BIOMETRICS, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30,

|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |            |   |  | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ----------- | --------- | ---- | ------ | ----------- | ---------- | - |  | 
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           | 2003 |        | 2002       
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |            
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       | ASSETS      |           |      |        |             |            |   |  | 
|Current assets:                                      |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |            
|                                                     | Cash and cash equivalents                                                                                                                                                                                                                                |                                             | $                                     | 440,326     |           |      | $      | 270,951     |           
|                                                     | Accounts receivable, net of allowance for doubtful
accounts of $23,965 and $25,543, respectively                                                                                                                                                         |                                             |                                       | 466,608     |           |      |        | 990,311     |           
|                                                     | Note receivable from related party                                                                                                                                                                                                                       |                                             |                                       | 200,000     |           |      |        |            |           
|                                                     | Inventories                                                                                                                                                                                                                                              |                                             |                                       | 158,104     |           |      |        |            |           
|                                                     | Prepaid expenses and other assets                                                                                                                                                                                                                        |                                             |                                       | 73,176      |           |      |        | 75,314      |           
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total current assets                        |                                       |             | 1,338,214 |      |        |             | 1,336,576  |  
|Property and equipment, net                          |                                                                                                                                                                                                                                                          |                                             | 433,060                               |             |           |      | 98,543 |            
|Other assets:                                        |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |            
|                                                     | Restricted cash                                                                                                                                                                                                                                          |                                             |                                       | 71,074      |           |      |        | 70,346      |           
|                                                     | Technology assets                                                                                                                                                                                                                                        |                                             |                                       | 476,874     |           |      |        |            |           
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total assets                                |                                       | $           | 2,319,222 |      |        | $           | 1,505,465  |  
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          |                                             | LIABILITIES AND STOCKHOLDERS DEFICIT |             |           |      |        |             |            |   | 
|Current liabilities:                                 |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |            
|                                                     | Accounts payable                                                                                                                                                                                                                                         |                                             | $                                     | 792,420     |           |      | $      | 508,968     |           
|                                                     | Accrued liabilities                                                                                                                                                                                                                                      |                                             |                                       | 563,778     |           |      |        | 371,445     |           
|                                                     | Dividends payable                                                                                                                                                                                                                                        |                                             |                                       | 1,558       |           |      |        | 909,828     |           
|                                                     | Deferred compensation                                                                                                                                                                                                                                    |                                             |                                       |            |           |      |        | 295,368     |           
|                                                     | Advances from customers                                                                                                                                                                                                                                  |                                             |                                       | 310,948     |           |      |        | 203,418     |           
|                                                     | Technology licenses payable                                                                                                                                                                                                                              |                                             |                                       |            |           |      |        | 2,244,040   |           
|                                                     | Capital lease obligations - current portion                                                                                                                                                                                                              |                                             |                                       | 58,239      |           |      |        | 467,507     |           
|                                                     | Notes payable to related parties - current portion                                                                                                                                                                                                       |                                             |                                       | 123,576     |           |      |        | 552,171     |           
|                                                     | Other notes payable - current portion                                                                                                                                                                                                                    |                                             |                                       | 172,392     |           |      |        | 498,183     |           
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total current liabilities                   |                                       |             | 2,022,911 |      |        |             | 6,050,928  |  
|Capital lease obligations - long term portion        |                                                                                                                                                                                                                                                          |                                             | 208,717                               |             |           |      | 13,456 |            
|Notes payable to related parties - long term portion |                                                                                                                                                                                                                                                          |                                             | 11,775                                |             |           |      |       |            
|Other notes payable - long term portion              |                                                                                                                                                                                                                                                          |                                             | 470,696                               |             |           |      |       |            
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total liabilities                           |                                       |             | 2,714,099 |      |        |             | 6,064,384  |  
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|Stockholders deficit:                               |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |            
|                                                     | Preferred stock, Series A $0.01 par value, 5,000,000 shares
authorized, 1,550,000 shares issued and outstanding, liquidation
preference of $2.00 per share, aggregating $3,100,000                                                                       |                                             |                                       | 15,500      |           |      |        | 15,500      |           
|                                                     | Preferred stock, Series B $0.01 par value, 5,000,000 shares
authorized, 33,666.66 shares issued and outstanding at June 30, 2003
and none outstanding at June 30, 2002, liquidation preference of $3.00
per share, aggregating $101,000 at June 30, 2003 |                                             |                                       | 337         |           |      |        |            |           
|                                                     | Common stock, $0.01 par value, 30,000,000 shares
authorized, 9,218,458 shares issued and outstanding at June 30, 2003
and 3,810,171 issued and outstanding at June 30, 2002                                                                              |                                             |                                       | 263,189     |           |      |        | 38,102      |           
|                                                     | Additional paid-in capital                                                                                                                                                                                                                               |                                             |                                       | 20,421,642  |           |      |        | 17,939,666  |           
|                                                     | Accumulated deficit                                                                                                                                                                                                                                      |                                             |                                       | (21,094,843 | )         |      |        | (22,552,187 | )         
|                                                     | Treasury stock                                                                                                                                                                                                                                           |                                             |                                       | (702        | )         |      |        |            |           
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total stockholders deficit                 |                                       |             | (394,877  | )    |        |             | (4,558,919 | )
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           
|                                                     |                                                                                                                                                                                                                                                          | Total liabilities and stockholders deficit |                                       | $           | 2,319,222 |      |        | $           | 1,505,465  |  
|                                                     |                                                                                                                                                                                                                                                          |                                             |                                       |             |           |      |        |             |           

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

F-3



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##### Table of Contents



PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30,

|                                               |                                        |              |            |           |           |   |           |           |           |  | 
|---------------------------------------------- | -------------------------------------- | ------------ | ---------- | --------- | --------- | - | --------- | --------- | --------- |  | 
|                                               |                                        |              |            |           | 2003      |   | 2002     
|                                               |                                        |              |            |           |           |   |          
|Revenues                                       |                                        | $            | 5,764,932  |           |           | $ | 4,405,131 |          
|                                               |                                        |              |            |           |           |   |           |          
|Laboratory expense and cost of goods sold      |                                        |              | 2,801,188  |           |           |   | 2,055,375 |          
|                                               |                                        |              |            |           |           |   |           |          
|                                               |                                        | Gross Margin |            |           | 2,963,744 |   |           |           | 2,349,756 | 
|                                               |                                        |              |            |           |           |   |           |          
|Operating expenses:                            |                                        |              |            |           |           |   |           |          
|                                               | Research and product development       |              |            | 213,635   |           |   |           | 25,589    |          
|                                               | Selling, general and administrative    |              |            | 3,837,273 |           |   |           | 1,496,787 |          
|                                               |                                        |              |            |           |           |   |           |          
|Operating (loss) income                        |                                        |              | (1,087,164 | )         |           |   | 827,380   |          
|                                               |                                        |              |            |           |           |   |           |          
|Other income (expense):                        |                                        |              |            |           |           |   |           |          
|                                               | Interest expense                       |              |            | (118,399  | )         |   |           | (159,906  | )        
|                                               | Interest income                        |              |            | 760       |           |   |           | 1,240     |          
|                                               | Other income                           |              |            | 248,723   |           |   |           | 281,455   |          
|                                               | Gain
on troubled debt restructuring    |              |            | 169,384   |           |   |           |          |          
|                                               | Reversal of technology license payable |              |            | 2,244,040 |           |   |           |          |          
|                                               |                                        |              |            |           |           |   |           |          
|                                               |                                        |              | 2,544,508  |           |           |   | 122,789   |          
|                                               |                                        |              |            |           |           |   |           |          
|Net earnings before tax expense                |                                        |              | 1,457,344  |           |           |   | 950,169   |          
|                                               |                                        |              |            |           |           |   |           |          
|Tax expense                                    |                                        |              |           |           |           |   |          |          
|                                               |                                        |              |            |           |           |   |           |          
|Net earnings                                   |                                        | $            | 1,457,344  |           |           | $ | 950,169   |          
|                                               |                                        |              |            |           |           |   |           |          
|Preferred stock dividend accrued               |                                        |              | (1,558     | )         |           |   | (248,000  | )        
|                                               |                                        |              |            |           |           |   |           |          
|Net earnings applicable to common stockholders |                                        | $            | 1,455,786  |           |           | $ | 702,169   |          
|                                               |                                        |              |            |           |           |   |           |          
|Net earnings per share:                        |                                        |              |            |           |           |   |           |          
|                                               | Basic earnings per share               |              | $          | 0.20      |           |   | $         | 0.55      |          
|                                               |                                        |              |            |           |           |   |           |          
|                                               | Diluted earnings per share             |              | $          | 0.17      |           |   | $         | 0.53      |          
|                                               |                                        |              |            |           |           |   |           |          
|Weighted average common shares outstanding:    |                                        |              |            |           |           |   |           |          
|                                               | Basic                                  |              |            | 7,315,103 |           |   |           | 1,270,057 |          
|                                               |                                        |              |            |           |           |   |           |          
|                                               | Diluted                                |              |            | 8,333,313 |           |   |           | 1,796,416 |          
|                                               |                                        |              |            |           |           |   |           |          

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

F-4



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##### Table of Contents



PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,

|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |        |          |         |  
|-------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | -------- | -------- | ------- | ------ | -------- | ------- | -
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            | 2003     |          | 2002   
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |        
|Cash flows from operating activities:        |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |        
|                                             | Net earnings                                                                       |                                                            | $                                                                                      | 1,457,344                                 |            |          | $        | 950,169 |       
|                                             | Adjustment to reconcile net earnings to net cash provided by operating activities: |                                                            |                                                                                        |                                           |            |          |          |         |       
|                                             |                                                                                    | Depreciation and amortization                              |                                                                                        |                                           | 89,640     |          |          |         | 67,886 |         
|                                             |                                                                                    | Loss on disposal of property and equipment                 |                                                                                        |                                           |           |          |          |         | 1,110  |         
|                                             |                                                                                    | Gain recognized on troubled debt restructuring             |                                                                                        |                                           | (169,384   | )        |          |         |       |         
|                                             |                                                                                    | Reversal of technology license payable                     |                                                                                        |                                           | (2,244,040 | )        |          |         |       |         
|                                             |                                                                                    | Gain
on restructuring of capital leases                    |                                                                                        |                                           | (22,018    | )        |          |         |       |         
|                                             |                                                                                    | Compensation expense from fair value adjustment to options |                                                                                        |                                           | 181,169    |          |          |         | 2,076  |         
|                                             |                                                                                    | Changes in assets and liabilities:                         |                                                                                        |                                           |            |          |          |         |        |         
|                                             |                                                                                    |                                                            | Accounts receivable, net                                                               |                                           |            | 523,702  |          |         |        | (690,826 | )      
|                                             |                                                                                    |                                                            | Inventories                                                                            |                                           |            | (158,104 | )        |         |        |         |        
|                                             |                                                                                    |                                                            | Prepaid expenses and other assets                                                      |                                           |            | 24,806   |          |         |        | (57,825  | )      
|                                             |                                                                                    |                                                            | Advances from customers                                                                |                                           |            | 107,530  |          |         |        | (103,872 | )      
|                                             |                                                                                    |                                                            | Accounts payable                                                                       |                                           |            | 358,621  |          |         |        | 18,535   |        
|                                             |                                                                                    |                                                            | Accrued liabilities                                                                    |                                           |            | 287,987  |          |         |        | 64,016   |        
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|                                             |                                                                                    |                                                            |                                                                                        | Net cash provided by operating activities |            |          | 437,253  |         |        |          | 251,269 |  
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Cash flows from investing activities:        |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |        
|                                             | Purchases of capital equipment                                                     |                                                            |                                                                                        | (72,092                                   | )          |          |          | (45,883 | )     
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|                                             |                                                                                    |                                                            |                                                                                        | Net cash used in investing activities     |            |          | (72,092  | )       |        |          | (45,883 | )
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Cash flows from financing activities:        |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |        
|                                             | Payments on notes payable                                                          |                                                            |                                                                                        | (175,265                                  | )          |          |          | (45,192 | )     
|                                             | Payments on notes payable to related parties                                       |                                                            |                                                                                        | (88,346                                   | )          |          |          |        |       
|                                             | Transfer to restricted cash                                                        |                                                            |                                                                                        | (728                                      | )          |          |          | (1,203  | )     
|                                             | Net proceeds from Series B preferred stock                                         |                                                            |                                                                                        | 72,920                                    |            |          |          |        |       
|                                             | Payments on capital lease obligation                                               |                                                            |                                                                                        | (8,602                                    | )          |          |          |        |       
|                                             | Stock split - fractional share payout                                              |                                                            |                                                                                        | (6                                        | )          |          |          |        |       
|                                             | Proceeds from exercise of stock options                                            |                                                            |                                                                                        | 4,241                                     |            |          |          |        |       
|                                             | Proceeds from notes payable                                                        |                                                            |                                                                                        |                                          |            |          |          | 63,000  |       
|                                             | Net repayment of bank borrowings                                                   |                                                            |                                                                                        |                                          |            |          |          | (51,587 | )     
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|                                             |                                                                                    |                                                            |                                                                                        | Net cash used in financing activities     |            |          | (195,786 | )       |        |          | (34,982 | )
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Net change in cash and cash equivalents      |                                                                                    |                                                            | 169,375                                                                                |                                           |            |          | 170,404  |        
|Cash and cash equivalents, beginning of year |                                                                                    |                                                            | 270,951                                                                                |                                           |            |          | 100,547  |        
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Cash and cash equivalents, end of year       |                                                                                    | $                                                          | 440,326                                                                                |                                           |            | $        | 270,951  |        
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Cash paid during the year for interest       |                                                                                    | $                                                          | 35,634                                                                                 |                                           |            | $        | 32,972   |        
|                                             |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |         |       
|Non-Cash Activities:                         |                                                                                    |                                                            |                                                                                        |                                           |            |          |          |        
|                                             |                                                                                    |                                                            | Assets purchased under capital lease                                                   |                                           | $          | 253,500  |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Donated equipment                                                                      |                                           | $          | 70,766   |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Note payable issued in exchange for capital lease obligation                           |                                           | $          | 245,000  |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Common stock issued in exchange for accrued preferred dividends                        |                                           | $          | 909,828  |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Warrants and options issued in exchange for deferred compensation and notes payable    |                                           | $          | 933,472  |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Notes payable issued in exchange for accounts payable                                  |                                           | $          | 75,169   |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Purchase of technology assets and equipment in exchange for common stock (See Note 14) |                                           | $          | 490,698  |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Preferred stock dividends accrued                                                      |                                           | $          | 1,558    |          |         | $      | 248,000  |        
|                                             |                                                                                    |                                                            | Common stock issued and held in trust as security for note payable                     |                                           | $          | 6,667    |          |         | $      |         |        
|                                             |                                                                                    |                                                            | Stock issued in conjunction with restructure agreement with prior landlord             |                                           | $          | 16,001   |          |         | $      |         |        

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

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##### Table of Contents



PACIFIC BIOMETRICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Years ended June 30, 2003 and June 30, 2002



|                                                                                          |  |                    |           |                    |  |              |        |        |  |        |        |        |  |   |     |  |  |  |           |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------ | --------- | ------------------ |  | ------------ | ------ | ------ |  | ------ | ------ | ------ |  | - | --- |  |  |  | --------- | - |  | - | ------- | -
|                                                                                          |  | Series A Preferred |           | Series B Preferred |  |              |        |        |  |        |        |       
|                                                                                          |  | Stock              |           | Stock              |  | Common Stock
|                                                                                          |  |                    |           |                    |  |             
|                                                                                          |  | Shares             |           | Amount             |  | Shares       |        | Amount |  | Shares |        | Amount
|                                                                                          |  |                    |           |                    |  |              |        |        |  |        |        |       
|Balance, July 1, 2001                                                                     |  |                    | 1,550,000 |                    |  | $            | 15,500 |        |  |        |       |        |  | $ |    |  |  |  | 1,270,057 |   |  | $ | 38,102  |  
|Net earnings                                                                              |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|Preferred stock dividends                                                                 |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|Fair value adjustment to options                                                          |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|                                                                                          |  |                    |           |                    |  |              |        |        |  |        |        |        |  |   |     |  |  |  |           |   |  |   |         |  
|Balance, June 30, 2002                                                                    |  |                    | 1,550,000 |                    |  |              | 15,500 |        |  |        |       |        |  |   |    |  |  |  | 1,270,057 |   |  |   | 38,102  |  
|Net earnings                                                                              |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|Issuance of common stock for purchase
of assets                                           |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 7,000,000 |   |  |   | 210,000 |  
|Common stock contributed towards
development of purchased assets                          |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | (10,000   | ) |  |   |        |  
|Issuance of common stock in exchange for
accrued preferred dividends                      |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 150,000   |   |  |   | 4,500   |  
|Issuance of common stock warrants in
exchange for deferred compensation
and notes payable |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|Fair value adjustment to options                                                          |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|Common stock issued in conjunction with
troubled debt restructure                         |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 50,000    |   |  |   | 1,500   |  
|Exercise of stock options                                                                 |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 75,141    |   |  |   | 2,255   |  
|Donated equipment                                                                         |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|1 for 3 reverse stock split of common stock
and payment of fractional shares              |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | (73       | ) |  |   | (2      | )
|Proceeds from Series B preferred stock,
net of issuance costs of $28,417                  |  |                    |          |                    |  |              |       |        |  |        | 33,666 |        |  |   | 337 |  |  |  |          |   |  |   |        |  
|Common stock issued and held in trust
as security for note payable                        |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 666,666   |   |  |   | 6,667   |  
|Common stock issued in conjunction with
prior landlord restructure agreement              |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  | 16,667    |   |  |   | 167     |  
|Preferred stock dividends                                                                 |  |                    |          |                    |  |              |       |        |  |        |       |        |  |   |    |  |  |  |          |   |  |   |        |  
|                                                                                          |  |                    |           |                    |  |              |        |        |  |        |        |        |  |   |     |  |  |  |           |   |  |   |         |  
|Balance June 30, 2003                                                                     |  |                    | 1,550,000 |                    |  | $            | 15,500 |        |  |        | 33,666 |        |  | $ | 337 |  |  |  | 9,218,458 |   |  | $ | 263,189 |  
|                                                                                          |  |                    |           |                    |  |              |        |        |  |        |        |        |  |   |     |  |  |  |           |   |  |   |         |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                          |  |          |       |         |  |                  |            |       |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------- |  | -------- | ----- | ------- |  | ---------------- | ---------- | ----- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                          |  |          |       |         |  | Additional       |            | Total |  |   |             |  
|                                                                                          |  | Treasury |       | Paid-in |  | Stockholders    |            |       |  |  
|                                                                                          |  | Stock    |       | Capital |  | Equity (Deficit) |            | Total
|                                                                                          |  |          |       |         |  |                  |            |      
|Balance, July 1, 2001                                                                     |  | $        |      |         |  | $                | 18,185,590 |       |  | $ | (23,502,356 | ) |  | $ | (5,263,164 | )
|Net earnings                                                                              |  |          |      |         |  |                  |            |       |  |   | 950,169     |   |  |   | 950,169    |  
|Preferred stock dividends                                                                 |  |          |      |         |  |                  | (248,000   | )     |  |   |            |   |  |   | (248,000   | )
|Fair value adjustment to options                                                          |  |          |      |         |  |                  | 2,076      |       |  |   |            |   |  |   | 2,076      |  
|                                                                                          |  |          |       |         |  |                  |            |       |  |   |             |   |  |   |            |  
|Balance, June 30, 2002                                                                    |  |          |      |         |  |                  | 17,939,666 |       |  |   | (22,552,187 | ) |  |   | (4,558,919 | )
|Net earnings                                                                              |  |          |      |         |  |                  |           |       |  |   | 1,457,344   |   |  |   | 1,457,344  |  
|Issuance of common stock for purchase
of assets                                           |  |          |      |         |  |                  | 281,400    |       |  |   |            |   |  |   | 491,400    |  
|Common stock contributed towards
development of purchased assets                          |  |          | (702  | )       |  |                  |           |       |  |   |            |   |  |   | (702       | )
|Issuance of common stock in exchange for
accrued preferred dividends                      |  |          |      |         |  |                  | 905,328    |       |  |   |            |   |  |   | 909,828    |  
|Issuance of common stock warrants in
exchange for deferred compensation
and notes payable |  |          |      |         |  |                  | 933,472    |       |  |   |            |   |  |   | 933,472    |  
|Fair value adjustment to options                                                          |  |          |      |         |  |                  | 181,169    |       |  |   |            |   |  |   | 181,169    |  
|Common stock issued in conjunction with
troubled debt restructure                         |  |          |      |         |  |                  | 21,000     |       |  |   |            |   |  |   | 22,500     |  
|Exercise of stock options                                                                 |  |          |      |         |  |                  | 1,986      |       |  |   |            |   |  |   | 4,241      |  
|Donated equipment                                                                         |  |          |      |         |  |                  | 70,766     |       |  |   |            |   |  |   | 70,766     |  
|1 for 3 reverse stock split of common stock
and payment of fractional shares              |  |          |      |         |  |                  | (4         | )     |  |   |            |   |  |   | (6         | )
|Proceeds from Series B preferred stock,
net of issuance costs of $28,417                  |  |          |      |         |  |                  | 72,583     |       |  |   |            |   |  |   | 72,920     |  
|Common stock issued and held in trust
as security for note payable                        |  |          |      |         |  |                  |           |       |  |   |            |   |  |   | 6,667      |  
|Common stock issued in conjunction with
prior landlord restructure agreement              |  |          |      |         |  |                  | 15,834     |       |  |   |            |   |  |   | 16,001     |  
|Preferred stock dividends                                                                 |  |          |      |         |  |                  | (1,558     | )     |  |   |            |   |  |   | (1,558     | )
|                                                                                          |  |          |       |         |  |                  |            |       |  |   |             |   |  |   |            |  
|Balance June 30, 2003                                                                     |  |          | $(702 | )       |  | $                | 20,421,642 |       |  | $ | (21,094,843 | ) |  | $ | (394,877   | )
|                                                                                          |  |          |       |         |  |                  |            |       |  |   |             |   |  |   |            |  

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

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##### Table of Contents



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 through its wholly owned subsidiaries,
Pacific Biometrics, Inc., a Washington corporation (PBI-WA) and BioQuant,
Inc., a Michigan corporation. All material intercompany balances and
transactions have been eliminated in the accompanying consolidated financial
statements.

On August 28, 2002, the Company, and its wholly-owned subsidiary, PBI-WA,
consummated an asset purchase transaction pursuant to an Asset Purchase

Agreement, dated as of June 27, 2002, as amended (collectively, the Asset
Purchase Agreement), with Saigene Corporation, a Delaware corporation
(Saigene), providing for the purchase by PBI-WA of certain technology,
intellectual property and equipment in connection with certain DNA
amplification and cell viability and related technologies and processes.
Pursuant to the Asset Purchase Agreement, as consideration for the purchased
assets, the Company issued to Saigene 6,541,430 shares, and to certain of
Saigenes designees an additional 458,570 shares, of PBIs common stock, par
value $.01 per share (the Common Stock). See Note 14 - Related Party
Transactions for further details.

The Company had previously been engaged in the development and
commercialization of non-invasive diagnostics to improve the detection and
management of chronic diseases. Due to a lack of significant resources, the
Company has suspended such activities for the foreseeable future. The Company
has developed two patented platform technologies that permit the use of sweat
and saliva as diagnostic fluids. Except for the revenues from laboratory
services, nominal revenues have been generated from the Companys products. In
prior years, the Company was considered to be a development stage enterprise,
but since the laboratory services now constitute the majority of the Companys
commercial efforts, the Company is no longer considered to be in the
development stage.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable are stated at amounts due from and billed to customers net
of an allowance for doubtful accounts. Credit is extended based on evaluation
of a customers financial condition, and collateral is not required. In
determining the adequacy of the allowance, management identifies specific
receivables for which collection is not certain and estimates the potentially
uncollectible amount based on the most recently available information. The
Company writes off accounts receivable when they are determined to be
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. For the years ended June 30,
2003 and 2002, respectively, the Company wrote off $1,578 and $7,281 of
accounts receivable deemed uncollectible.

Inventories

Inventories consist of supplies purchased in advance of being used for the
related laboratory services they support. The laboratory services, and the
related supplies used in performing those services, are recognized as revenue
and expense, respectively, in the period that the laboratory services are
performed. Inventories are stated at lower of cost or market; cost is
determined using the first-in, first-out method.

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##### Table of Contents



Restricted Cash

During 1997, in connection with the signing of an operating lease for
laboratory and office facilities in Seattle, Washington, the Company was
required to set aside $100,000 as a security deposit, throughout the term of
the lease. This amount has been reduced to $71,074 as of June 30, 2003 and has
been recorded as restricted cash on the accompanying consolidated balance
sheet.

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.

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

In connection with the Asset Purchase Agreement, (see Note 14), the Company
acquired from Saigene a DNA technology platform called LIDA (Logarithmic
Isothermal DNA Amplification). LIDA is a chemistry designed to rapidly
replicate DNA. The Company also acquired from Saigene another technology
relating to Cell Viability, a chemistry platform that can distinguish a live
cell from a dead cell. Applications for this Cell Viability technology could
include antibiotic susceptibility testing, sterility testing and environmental
monitoring in the water and beverage industries.

The Company will begin amortizing its technology assets over their then
remaining useful lives at the point the related technologies become
commercially available for sale. The Companys technology assets currently
still require additional development prior to commercialization and their
future value as well as the timing of their ongoing development is dependent
upon additional capital being available to fund continuing research and
development. (See Note 3.) Management does not believe that an impairment
event has occurred to date related to the technology assets.

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

Customer Advances

The Company receives advances from certain customers to perform consulting,
laboratory services, and clinical studies. These advances are deferred and
recognized as revenue in the period the related services are performed.

Income Taxes

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

Financial Instruments

The carrying amounts of cash and cash equivalents approximate fair value due to
the short-term maturities of these instruments. The carrying value of the
Companys debt approximates their estimated fair values because the rates of
interest on the debt approximate current interest rates for similar obligations
with like maturities.

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##### Table of Contents



Stock-Based Compensation

The Company has a stock-based employee compensation plan, which is described
more fully in Note 11. The Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plan. The Company has adopted the disclosure-only provisions of SFAS No. 123.
In August 2003, in conjunction with deferred compensation agreements with
senior executives, the Company granted 183,917 stock options and 117,624
warrants to purchase common stock at $0.51 per share which expire in August
2012. (See Note 14  Related Party Transactions  Deferred Compensation
Agreements with Senior Executives.) These stock options and warrants were
granted in exchange for amounts otherwise due the senior executives. No
incentive-based stock options were granted under incentive compensation plans
during 2003 or 2002. Had compensation cost been determined based on the fair
value of stock options granted in a manner consistent with the method
promulgated by SFAS No. 123, the Companys net earnings and earnings per share
would have been changed to the pro forma amounts below:

|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- |  |  |  |  | - | -------------------- | ---- | ---- | - | ------- | ---- | 
|                                                                                                                                            |                       |  |  |  |  |   | Years Ended June 30,
|                                                                                                                                            |                       |  |  |  |  |   |                     
|                                                                                                                                            |                       |  |  |  |  |   | 2003                 |      | 2002
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |     
|Net earnings, as reported                                                                                                                   |                       |  |  |  |  | $ | 1,457,344            |      |      | $ | 950,169 |     
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects |                       |  |  |  |  |   | 93,798               |      |      |   | 18,434  |     
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     
|Pro forma net earnings                                                                                                                      |                       |  |  |  |  | $ | 1,363,546            |      |      | $ | 931,735 |     
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     
|Net earnings per share:                                                                                                                     |                       |  |  |  |  |   |                      |      |      |   |         |     
|                                                                                                                                            | Basic  - as reported  |  |  |  |  |   | $                    | 0.20 |      |   | $       | 0.75 | 
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     
|                                                                                                                                            | Diluted - as reported |  |  |  |  |   | $                    | 0.17 |      |   | $       | 0.53 | 
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     
|                                                                                                                                            | Basic  - pro forma    |  |  |  |  |   | $                    | 0.19 |      |   | $       | 0.73 | 
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     
|                                                                                                                                            | Diluted - pro forma   |  |  |  |  |   | $                    | 0.16 |      |   | $       | 0.52 | 
|                                                                                                                                            |                       |  |  |  |  |   |                      |      |      |   |         |     

To estimate compensation expense, the Company uses the Black-Scholes
option-pricing model and assumptions deemed reasonable by management. There
were no options granted for the year ended June 30, 2002. The following
assumptions were used to compute the fair value of option grants for the year
ended June 30, 2003:

|                        |  |  |          | 
|----------------------- |  |  | -------- | 
|Expected volatility     |  |  | 304%     | 
|Expected dividend yield |  |  | 0%       | 
|Risk-free interest rate |  |  | 3.83%    | 
|Expected life           |  |  | 10 years | 

Stock Split

On January 10, 2003, the Companys Board of Directors approved a one-for-three
reverse stock split of the Companys common stock. The reverse split was
subsequently approved by the stockholders of the Company and became effective
on March 14, 2003. All shares and per share calculations set forth herein
reflect the one-for-three reverse stock split.

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. Renegotiated amounts are not included
in net revenues until earned, and realization is assured. Advance payments on
service contracts are deferred and recognized as revenue in the period the
related services are performed.

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##### Table of Contents



Estimates of costs to complete are made, as appropriate, to provide for losses
expected on contracts. Costs are not deferred in anticipation of contracts
being awarded, but instead are expensed as incurred. All out-of-pocket costs
are included in total revenues and expenses.

Research and Development Expenses

Expenditures for research and development are expensed as incurred.

Earnings Per Share

Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding stock options and warrants using the treasury stock method and
the effect of preferred stock on an as-converted basis. All per share
calculations exclude treasury shares, and shares held in trust as security for
a note payable. Net earnings applicable to common stockholders includes
cumulative dividends on the convertible preferred stock of $1,558 and $248,000,
respectively, for the years ended June 30, 2003 and 2002.

The components of basic and diluted earnings per share were as follows for the
years ended June 30:

|                                                                                                        |               |   |           |      |      |   |           |      | 
|------------------------------------------------------------------------------------------------------- | ------------- | - | --------- | ---- | ---- | - | --------- | ---- | 
|                                                                                                        |               |   | 2003      |      | 2002
|                                                                                                        |               |   |           |      |     
|Net earnings (A)                                                                                        |               | $ | 1,457,344 |      |      | $ | 950,169   |     
|Preferred stock dividend accrued                                                                        |               |   | (1,558    | )    |      |   | (248,000  | )   
|                                                                                                        |               |   |           |      |      |   |           |     
|Net earnings applicable to common shareholders (B)                                                      |               | $ | 1,455,786 |      |      | $ | 702,169   |     
|                                                                                                        |               |   |           |      |      |   |           |     
|Weighted average number of outstanding shares of
common stock (C)                                       |               |   | 7,315,103 |      |      |   | 1,270,057 |     
|                                                                                                        |               |   |           |      |      |   |           |     
|Diluted, weighted average number of outstanding shares of
common stock and common stock equivalents (D) |               |   | 8,333,313 |      |      |   | 1,796,416 |     
|                                                                                                        |               |   |           |      |      |   |           |     
|Earnings per share:                                                                                     |               |   |           |      |      |   |           |     
|                                                                                                        | Basic (B/C)   |   | $         | 0.20 |      |   | $         | 0.55 | 
|                                                                                                        |               |   |           |      |      |   |           |     
|                                                                                                        | Diluted (A/D) |   | $         | 0.17 |      |   | $         | 0.53 | 
|                                                                                                        |               |   |           |      |      |   |           |     

As of June 30, 2003, options to purchase 281,111 shares of common stock and
warrants to purchase 339,472 shares of common stock were outstanding, of which
209,947 and 257,929, respectively, were included in the computation of diluted
earnings per share after giving effect to the treasury stock method. In
addition, 1,550,000 shares of Series A Preferred Stock and
33,666.66 shares of
Series B Preferred Stock convertible into 516,667 and 33,666 shares of common
stock, respectively, were included in the computation of diluted earnings per
share.

As of June 30, 2002, options to purchase 203,529 shares of common stock were
outstanding, of which 9,692 were included in the computation of diluted
earnings per share after giving effect to the treasury stock method. In
addition, 1,550,000 shares of Series A Preferred Stock convertible into 516,667
shares of common stock were included in the computation of diluted earnings per
share. Warrants to purchase 151,683 shares of common stock were not included
in the computation of diluted net income per share because the exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would be anti-dilutive.

Use of Estimates

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (US 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.

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Reclassifications

Certain reclassifications have been made to the consolidated statement of
operations for 2002 in order to conform to the 2003 presentation.

Risks and Uncertainties

The Companys securities were delisted from the Nasdaq Stock Market in 1999.
The stock currently is quoted on the OTC Bulletin Board in the over-the-counter
market under the symbol PBME.

New Accounting Pronouncements

In June 2002 the FASB, issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Statement No. 146 states that a liability
for a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for a liability for one-time termination benefits that are
incurred over a period of time. The standard will be effective for exit or
disposal activities initiated after December 31, 2002. We do not expect the
adoption of SFAS 146 to have a significant impact on our financial position or
results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies
the requirements of SFAS No. 5, Accounting for Contingencies, relating to the
guarantors accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of FIN 45 are effective for financial
statements of periods that end after December 15, 2002. However, the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002. We do not expect the adoption of FIN 45 to have a significant impact on
our financial position or results of operations.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS No. 148 Amends SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 148 requires accounting
policy note disclosures to provide the method of stock option accounting for
each year presented in the financial statements and, for each year until all
years presented in the financial statements recognize the fair value of
stock-based compensation. Also, SFAS No. 148 provides two additional transition
methods that eliminate the ramp-up effect resulting from applying the expense
recognition provisions of SFAS No. 123. The transition provisions and annual
statement disclosure requirements of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002. The interim statement disclosure
requirements are effective for the first interim statement that includes
financial information after December 15, 2002. We do not believe there will be
a material financial effect from the adoption of this new standard unless we
were to make a change in our accounting policy and account for stock option
grants as compensation expense.

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities. FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of
the beginning of the applicable interim or annual period. The Company does not
believe there will be a material effect upon its financial condition or results
of operations from the adoption of the provisions of FIN 46.

In May 2003, FASB issued Statement
150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. Statement 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. Statement
150 is effective for all financial

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instruments entered into or modified after May 31, 2003. The Company does not
believe there will be a material effect upon its financial condition or results
of operations from the adoption of the provisions of Statement 150.

3. Managements Plans

Although the Company had net earnings in 2003 and 2002, it experienced a net
loss from operations in 2003, has experienced recurring losses from operations
in prior years and has had cash flow shortages. Additionally, the Company has
deficiencies in working capital and stockholders equity and has significant
amounts of past due debt. These matters raise substantial doubt about the
Companys ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Management has taken steps to revise its operating and financial requirements,
which it believes are sufficient to provide the Company with the ability to
continue in existence for the near term. These steps include expansion of
business development efforts and the renegotiation of contractual commitments
with Transamerica Business Corporation and entering into a Loan and Security
Agreement whereby the Company can borrow up to $250,000 no later than November
15, 2003 (See Note 16). In addition, the purchase of certain assets (primarily
intangible assets) of Saigene, which concluded on August 28, 2002 (See Note
14), included restructuring of certain debt and equity.

Even after the steps the Company has taken to revise its operating and
financial requirements and completion of the Asset Purchase Transaction on
August 28, 2002 as noted above, the Company still has significant debts and
claims that need to be settled. The Company will continue to review its
operating and financial requirements and attempt to settle outstanding debts
with cash generated from its operations, with stock, and/or with technology
assets. There can be no assurance that the Company will be successful in these
negotiations and may have to seek protection from creditors under the
bankruptcy laws.

4. Concentration of Credit Risk

One customer individually accounted for approximately 76% and 63% of the
Companys total sales in fiscal 2003 and 2002, respectively. Sales to the
Companys five largest customers represented approximately 88% and 72% of total
sales in fiscal 2003 and fiscal 2002, respectively.

5. Property and Equipment

Property and equipment consists of the following at June 30:

|                                                |  |      |         |      |  |   |           | 
|----------------------------------------------- |  | ---- | ------- | ---- |  | - | --------- | 
|                                                |  | 2003 |         | 2002
|                                                |  |      |         |     
|Laboratory equipment                            |  | $    | 648,407 |      |  | $ | 770,538   | 
|Computer equipment                              |  |      | 156,609 |      |  |   | 132,242   | 
|Office furniture and equipment                  |  |      | 63,539  |      |  |   | 63,539    | 
|Leasehold improvements                          |  |      | 61,531  |      |  |   | 36,268    | 
|                                                |  |      |         |      |  |   |           | 
|Total property and equipment                    |  |      | 930,086 |      |  |   | 1,002,587 | 
|Less: accumulated depreciation and amortization |  |      | 497,026 |      |  |   | 904,044   | 
|                                                |  |      |         |      |  |   |           | 
|Net property and equipment                      |  | $    | 433,060 |      |  | $ | 98,543    | 
|                                                |  |      |         |      |  |   |           | 

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6. Accrued Liabilities

Accrued liabilities consist of the following at June 30:

|                                                                                      |  |      |         |      |  |   |         | 
|------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                      |  | 2003 |         | 2002
|                                                                                      |  |      |         |     
|Accrued payroll and related payroll taxes                                             |  | $    | 137,490 |      |  | $ | 106,982 | 
|Accrued consulting expense (See Note 14)                                              |  |      | 100,000 |      |  |   |        | 
|Accrued vacation                                                                      |  |      | 74,650  |      |  |   | 74,814  | 
|Accrued commissions                                                                   |  |      | 55,313  |      |  |   | 53,623  | 
|Accrued board of directors fees                                                       |  |      | 50,000  |      |  |   |        | 
|Accrued professional services                                                         |  |      | 47,500  |      |  |   | 52,500  | 
|Accrued supply expense reimbursement under
Saigene Management Agreement (See Note 14) |  |      | 30,941  |      |  |   |        | 
|Accrued fees due to PBRF (See Note 14)                                                |  |      | 9,602   |      |  |   | 7,835   | 
|Other                                                                                 |  |      | 58,282  |      |  |   | 64,929  | 
|                                                                                      |  |      |         |      |  |   |         | 
|                                                                                      |  | $    | 563,778 |      |  | $ | 371,445 | 
|                                                                                      |  |      |         |      |  |   |         | 

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 7.5% to 11% and mature at various dates through 2008.
Annual future minimum lease payments for years subsequent to June 30, 2003 are
as follows:

|                                   |  |   |         | 
|---------------------------------- |  | - | ------- | 
|2004                               |  | $ | 75,548  | 
|2005                               |  |   | 63,361  | 
|2006                               |  |   | 62,253  | 
|2007                               |  |   | 62,253  | 
|2008                               |  |   | 52,008  | 
|                                   |  |   |         | 
|Total minimum payments             |  |   | 315,423 | 
|Less: amount representing interest |  |   | 48,467  | 
|                                   |  |   |         | 
|Obligations under capital leases   |  |   | 266,956 | 
|Less: current portion              |  |   | 58,239  | 
|                                   |  |   |         | 
|Long term portion                  |  | $ | 208,717 | 
|                                   |  |   |         | 

In December 2002, the Company restructured a capital lease obligation of
approximately $470,000 with Transamerica Business Credit Corporation
(Transamerica), exchanging it for 50,000 shares of restricted common stock
and a promissory note for $245,000. Title to the previously leased assets,
subject to security interest retained by Transamerica, was conveyed to the
Company as part of the restructuring. Saigene and the Company are co-makers on
the promissory note. A gain of $169,384 was recognized on this debt
restructure during fiscal 2003.

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8. Notes Payable

Notes Payable to Related Parties

The Company had the following notes payable to a related parties as of June 30:

|                                                                                                                                                                  |  |      |         |      |  |   |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                                                                                                  |  | 2003 |         | 2002
|                                                                                                                                                                  |  |      |         |     
|Promissory
note to Saigene, original principal of $223,697, dated
August 28, 2002, 8% interest, monthly payments of $10,000
including interest until paid in full |  | $    | 135,351 |      |  | $ |        | 
|Notes payable to senior executives related to deferred compensation,
7% interest (See Note 14)                                                                    |  |      |        |      |  |   | 552,171 | 
|                                                                                                                                                                  |  |      |         |      |  |   |         | 
|Less: Current Portion                                                                                                                                             |  |      | 123,576 |      |  |   | 552,171 | 
|                                                                                                                                                                  |  |      |         |      |  |   |         | 
|                                                                                                                                                                  |  | $    | 11,775  |      |  | $ |        | 
|                                                                                                                                                                  |  |      |         |      |  |   |         | 

Other Notes Payable

The Company had the following other notes payable as of June 30:

|                                                                                                                                                                                                                                                                                               |  |      |         |      |  |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                                                                                                                                                                                                                               |  | 2003 |         | 2002
|                                                                                                                                                                                                                                                                                               |  |      |         |     
|Promissory note to prior landlord, secured by common stock held
in escrow, 10% interest, quarterly payments of $25,000,
due July 31, 2005 (See Note 13)                                                                                                                                        |  | $    | 311,404 |      |  | $ |        | 
|Promissory note to prior landlord, 10% default interest, monthly
payments of $10,000 (See Note 13)                                                                                                                                                                                             |  |      |        |      |  |   | 414,016 | 
|Promissory demand note to prior landlord, 12% interest (See Note 13)                                                                                                                                                                                                                           |  |      |        |      |  |   | 21,167  | 
|Promissory note to creditor, 9% interest, monthly payments
of $4,000, balloon payment of $7,912 due December 2004                                                                                                                                                                              |  |      | 71,484  |      |  |   |        | 
|Note payable to Transamerica, secured by security interest in
previously
leased assets, 8% interest October 1, 2003 to February 28, 2004,
14.123% beginning March 1, 2004, monthly payments including
interest of $2,000 through February 28, 2004 and $14,500
thereafter, due October 1, 2005 |  |      | 241,265 |      |  |   |        | 
|Demand notes payable, 18% interest, current monthly payments of
interest only                                                                                                                                                                                                                  |  |      | 18,935  |      |  |   | 63,000  | 
|                                                                                                                                                                                                                                                                                               |  |      |         |      |  |   |         | 
|                                                                                                                                                                                                                                                                                               |  |      | 643,088 |      |  |   | 498,183 | 
|                                                                                                                                                                                                                                                                                               |  |      |         |      |  |   |         | 
|Less: Current Portion                                                                                                                                                                                                                                                                          |  |      | 172,392 |      |  |   | 498,183 | 
|                                                                                                                                                                                                                                                                                               |  |      |         |      |  |   |         | 
|                                                                                                                                                                                                                                                                                               |  | $    | 470,696 |      |  | $ |        | 
|                                                                                                                                                                                                                                                                                               |  |      |         |      |  |   |         | 

Aggregate maturities of notes payable are approximately as follows for the
years ending June 30:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2004       |  | $ | 172,392 | 
|2005       |  |   | 261,239 | 
|2006       |  |   | 209,457 | 
|Thereafter |  |   |        | 
|           |  |   |         | 
|           |  | $ | 643,088 | 
|           |  |   |         | 

9. Preferred Stock

Series A

The Companys Series A Convertible Preferred Stock (the Series A Preferred
Stock) is convertible into shares of the Companys Common Stock at the option
of the holders at any time on a three-for-one basis, subject to adjustment for
stock splits, dividends and the like. Initially, the Series A Preferred Stock
provided for a cumulative cash dividend payable quarterly in arrears at an
annual rate of 8%; however, the Series A Preferred Stock no longer carries a
mandatory dividend. On August 28, 2002, in connection with the Asset Purchase
Agreement (see Note 15

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 Related Party Transactions), the holders of Series A Preferred Stock
consented to an amendment of the Certificate of Designation with respect to the
rights and preferences of the Series A Preferred Stock, which included
elimination of future dividends and converted approximately $910,000 in accrued
dividends thereon into an aggregate of 150,000 shares of Common Stock. The
Company has the right to force conversion of the Series A Preferred Stock in
the event the price per share of the Common Stock is $6.00 or more for 20
consecutive trading days. The Series A Preferred Stock has a liquidation
preference of $2.00 per share along with full participation as a common
stockholder on an as-converted basis. The Company has agreed to use
commercially reasonable efforts to effect the registration of the Common Stock
into which the Series A Preferred Stock is convertible. To date, no such
efforts have been undertaken.

Series B

In March 2003 the Company began a best efforts offering of up to $5 million of
Series B, 8% convertible, cumulative redeemable $0.01 par value preferred stock
at $3.00 per share (the Series B Preferred Stock or Series B). The Series
B Preferred Stock is convertible at the holders discretion on a one for one
basis into Common Stock, and at the Companys discretion beginning March 11,
2004 if the Companys Common Stock trades for at least $5.00 per share for at
least 10 trading days. In conjunction with the Series B offering, the
placement agent received a $20,000 non-refundable advance against a
non-accountable expense allowance of 2% of Series B Preferred Stock sold and a
sales commission of 8% totaling $8,080. Subsequent to year-end, pursuant to
the terms of the offering, the placement agent was entitled to receive 3,366
warrants to purchase common stock at $3.00 per share, expiring January 31,
2005. As of June 30, 2003, the Company had sold 33,666.66 shares of Series B
preferred stock for total net proceeds of $72,920. The private placement
expired according to its terms on July 31, 2003 without the sale of additional
shares of Series B Preferred Stock.

10. Income Taxes

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

|                                                       |  |      |          |      |  |   |          |  
|------------------------------------------------------ |  | ---- | -------- | ---- |  | - | -------- | -
|                                                       |  | 2003 |          | 2002
|                                                       |  |      |          |     
|Tax expense computed at federal statutory rate         |  | $    | 495,000  |      |  | $ | 323,000  |  
|Permanent differences                                  |  |      | 2,000    |      |  |   | 1,000    |  
|Tax benefit of recognizing prior year NOL carryforward |  |      | (497,000 | )    |  |   | (324,000 | )
|                                                       |  |      |          |      |  |   |          |  
|                                                       |  | $    |         |      |  | $ |         |  
|                                                       |  |      |          |      |  |   |          |  

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:

|                         |                                         |   |            |           |      |   |            |           | 
|------------------------ | --------------------------------------- | - | ---------- | --------- | ---- | - | ---------- | --------- | 
|                         |                                         |   | 2003       |           | 2002
|                         |                                         |   |            |           |     
|Net deferred tax asset:  |                                         |   |            |           |      |   |            |          
|                         | Net operating loss carryforward         |   | $          | 3,311,000 |      |   | $          | 3,865,000 | 
|                         | Research and experimentation credit     |   |            | 324,000   |      |   |            | 324,000   | 
|                         | Effect of stock option variable pricing |   |            | 62,000    |      |   |            | 1,000     | 
|                         | Accrued liabilities                     |   |            | 44,000    |      |   |            |          | 
|                         | Allowance for bad debts                 |   |            | 8,000     |      |   |            | 9,000     | 
|                         | Depreciation and amortization           |   |            | 31,000    |      |   |            | 36,000    | 
|                         |                                         |   |            |           |      |   |            |          
|                         |                                         |   | 3,780,000  |           |      |   | 4,235,000  |          
|Less valuation allowance |                                         |   | (3,780,000 | )         |      |   | (4,235,000 | )        
|                         |                                         |   |            |           |      |   |            |          
|                         |                                         | $ |           |           |      | $ |           |          
|                         |                                         |   |            |           |      |   |            |          

At June 30, 2003, operating loss carryforwards of approximately $10 million
expiring through 2021 are available to offset future taxable income. For
financial reporting purposes, a valuation allowance of approximately $3,780,000

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has been recognized to offset the deferred tax asset related to those
carryforwards due to the uncertainty of future utilization of net operating
loss carryforwards and realization of other deferred tax assets. For the year
ended June 30, 2003, the valuation allowance was decreased by approximately
$455,000.

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

11. Stock Option Plan

1996 Stock Incentive Plan

In July 1996, the Company adopted a Stock Incentive Plan (the Plan) with
333,333 shares of common stock reserved for issuance under this Plan. In
November 1997, the stockholders approved that the number of shares reserved for
issuance would be increased to 666,667. Options granted under this 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, 2003, 289,988 shares of common stock remained
available for future grant under the Plan.

On May 3, 2002, the Board of Directors voted to reduce the exercise price of
all then outstanding options to $0.06 per share. No initial expense was
recognized on this repricing, as the new exercise price equaled the market
value of the Companys stock on that date. For the periods ended June 30, 2003
and 2002, in accordance with accounting for options under variable pricing
rules, the Company recognized approximately $181,000 and $2,000, respectively,
in compensation expense representing the increase in the market price of the
Companys common shares to $1.40 and $0.07 per share. The Company will
recognize compensation expense in the future for all outstanding repriced stock
options if the market value of the common stock increases, and will recognize
income if the market value decreases.

The following is a summary of the activity in the Plan for the years ended June
30, 2003 and 2002:

|                                     |                    |  |                     |          |                    |   |                  |       |  |  |   |      | 
|------------------------------------ | ------------------ |  | ------------------- | -------- | ------------------ | - | ---------------- | ----- |  |  | - | ---- | 
|                                     |                    |  | Shares Under Option
|                                    
|                                     |                    |  | Number              |          | Weighted Average   |   | Weighted Average
|                                     |                    |  | Of                  |          | Exercise Price per |   | Fair Value of   
|                                     |                    |  | Shares              |          | share              |   | Options Granted 
|                                     |                    |  |                     |          |                    |   |                 
|Options outstanding
at June 30, 2001 |                    |  | 318,349             |          |                    | $ | 4.89             |       |  |  |   |     
|                                     |                    |  |                     |          |                    |   |                  |       |  |  |   |     
|                                     | Repriced-old price |  |                     | (625,587 | )                  |   |                  | 1.92  |  |  |   |      | 
|                                     | Repriced-new price |  |                     | 625,587  |                    |   |                  | 0.06  |  |  |   |      | 
|                                     | Terminated         |  |                     | (114,820 | )                  |   |                  | 10.05 |  |  |   |      | 
|                                     |                    |  |                     |          |                    |   |                  |       |  |  |   |     
|Options outstanding
at June 30, 2002 |                    |  | 203,529             |          |                    |   | 0.06             |       |  |  |   |     
|                                     | Granted            |  |                     | 183,917  |                    |   |                  | 0.51  |  |  | $ | 0.51 | 
|                                     | Exercised          |  |                     | (75,139  | )                  |   |                  | 0.06  |  |  |   |      | 
|                                     | Terminated         |  |                     | (31,196  | )                  |   |                  | 0.06  |  |  |   |      | 
|                                     |                    |  |                     |          |                    |   |                  |       |  |  |   |     
|Options outstanding
at June 30, 2003 |                    |  | 281,111             |          |                    | $ | 0.35             |       |  |  |   |     
|                                     |                    |  |                     |          |                    |   |                  |       |  |  |   |     

The weighted average contractual life remaining of options outstanding at June
30, 2003 is approximately 6.22 years. In August 2003, in conjunction with
deferred compensation agreements with senior executives, the Company granted
183,917 stock options and 117,624 warrants to purchase common stock at $0.51
per share which expire in August 2012. As of June 30, 2003, outstanding
options had exercise periods which expired over the following time periods:

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|                                |  |                   |         | 
|------------------------------- |  | ----------------- | ------- | 
|Remaining Life (in years)       |  | Number of Options
|                                |  |                  
|Less than 1                     |  |                   | 86,055  | 
|Greater than 1 and less than 2  |  |                   | 3,237   | 
|Greater than 2 and less than 3  |  |                   | 7,902   | 
|Greater than 9 and less than 10 |  |                   | 183,917 | 
|                                |  |                   |         | 
|                                |  |                   | 281,111 | 
|                                |  |                   |         | 

12. Stock Purchase Warrants

During 1997, the Company issued 17,143 warrants to an institutional lender in
conjunction with a capital equipment leasing facility. Each warrant entitled
the holder to purchase one share of the Companys common stock at an exercise
price of $7.89. In December of 1998 the Company reduced the exercise price to
$1.50 as part of a debt forbearance agreement. In August 1999, the Company
reduced the exercise price of these warrants to $0.27 per share. In February
2000, the Company further reduced the exercise price of 13,333 of these
warrants to $0.1875 per share. The warrants expire on December 31, 2007. No
discount was recorded for the value of the warrants because the amount was not
material.

In January 1999, the principals of the landlord of the Companys previously
occupied Lake Forest facility advanced the Company $15,000 and received 15,000
warrants related to the advance. Each warrant entitles the holder to purchase
one share of the Companys common stock at an exercise price of $1.005. The
warrants expire on March 13, 2004. A discount of approximately $23,400 was
recorded for the value of the warrants.

In March 1999, a bank lender was issued 31,008 warrants in conjunction with a
previous credit agreement. Each warrant entitles the holder to purchase one
share of the Companys common stock at an exercise price of $0.8062. In
conjunction with anti-dilution provisions of the warrants (as triggered by the
November 1999 repricing of warrants to an institutional lender discussed
below), these warrants were replaced with like warrants to purchase 139,536
shares of common stock at $0.1875 per share (and are included in warrants
granted in fiscal 2003 in the table below). The warrants expire on March 13,
2004. A discount of $26,047 was recorded for the value of the warrants.

In August 1999, the Company issued 50,169 warrants to an institutional lender
as part of a debt forbearance agreement. Each warrant entitles the holder to
purchase one share of the Companys common stock at an exercise price of $0.27.
Also, as noted above, in August of 1999 the Company reduced the exercise price
to $0.27 on 13,333 of the 17,142 previously issued warrants as part of the debt
forbearance agreement. The warrants expire on December 31, 2007. No discount
was recorded for the value of the warrants because the amount was not material.

In November 1999, the Company reduced the exercise price from $0.27 to $0.1875
on the 50,169 warrants and 13,333 of the 17,142 warrants referred to above. The
reduced price was in excess of the fair value of the Companys per share stock
price at that time.

In August 2002, in connection with the Asset Purchase Agreement, the Company
converted deferred compensation notes, deferred compensation liabilities and
other accrued compensation due to senior executives and other current and
former employees into 117,624 warrants and 183,917 options to purchase shares
of Common Stock (see Note 14  Related Party Transactions  Deferred
Compensation Agreements with Senior Executives). Each warrant and option
entitles the holder to purchase one share of the Companys common stock at an
exercise price of $0.51. The warrants expire on March 13, 2004.

The following is a summary of outstanding warrants as of June 30, 2003 and
2002:

|                                      |  |                |                  |                |  |                  |      |  |  |  |         | 
|------------------------------------- |  | -------------- | ---------------- | -------------- |  | ---------------- | ---- |  |  |  | ------- | 
|                                      |  |                |                  |                |  | Weighted Average |      |  |  | 
|                                      |  | Exercise Price |                  | Exercise Price |  |                  |      | 
|                                      |  | per Share      |                  | per Share      |  | Shares          
|                                      |  |                |                  |                |  |                 
|Warrants outstanding at June 30, 2002 |  | $              | 0.1875 - $9.9375 |                |  | $                | 2.72 |  |  |  | 151,683 | 
|                                      |  |                |                  |                |  |                  |      |  |  |  |         | 
|Warrants outstanding at June 30, 2003 |  | $              | 0.1875 - $1.005  |                |  | $                | 0.34 |  |  |  | 339,472 | 
|                                      |  |                |                  |                |  |                  |      |  |  |  |         | 

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13. Commitments and Contingencies

Operating Leases

The Company has entered into non-cancelable operating leases for office
facilities. Under these leases, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area maintenance
costs. Rent expense was $253,292 and $260,405 for the years ended June 30,
2003 and 2002, respectively.

Future minimum lease payments are as follows:

|                    |      |   |           |         | 
|------------------- | ---- | - | --------- | ------- | 
|Year Ended June 30, |      |   |           |        
|                    |      |   |           |        
|                    | 2004 |   | $         | 257,615 | 
|                    | 2005 |   |           | 234,483 | 
|                    | 2006 |   |           | 226,252 | 
|                    | 2007 |   |           | 232,180 | 
|Thereafter          |      |   | 78,052    |        
|                    |      |   |           |        
|                    |      | $ | 1,028,582 |        
|                    |      |   |           |        

Promissory Note to Prior Landlord

In May 2003, the Companys prior landlord, the Company, and Saigene entered
into a settlement agreement confirming amounts due the prior landlord
(including attorneys fees of $20,541) of $320,315 as of May 31, 2003, and
granting the landlord 16,667 shares of Common Stock. Under the terms of the
settlement agreement, the Company and Saigene jointly and severally entered
into a promissory note dated May 31, 2003 to the landlord for $320,315,
providing for an initial payment of $10,000 by June 30, 2003, and quarterly
payments of $25,000 thereafter until the promissory note is paid in full. The
promissory note bears interest at 10% and provides that all amounts due under
the promissory note shall be paid no later than the first to occur of: an
equity funding by either Saigene or the Company of at least $4 million; sale of
the Companys laboratory; sale of PBI-WA; or, July 31, 2005. In conjunction
with the promissory note and settlement agreement, and to secure performance
thereunder, the Company also entered into an escrow agreement, providing for
666,666 shares of the Companys common stock to be held in escrow for the
benefit of the landlord. The shares held in escrow will be released to the
Company for cancellation at the rate of 83,333 for each calendar quarter that
the landlord receives at least $50,000 in payment under the terms of the
promissory note. Upon payment of the promissory note in full, all remaining
shares will be returned to the Company. As of June 30, 2003, the balance of
the promissory note was $311,915 and the Company had made payments in the
quarter ended June 30, 2003, sufficient to request that the first 83,333 of
escrow shares be released to the Company. Subsequent to fiscal year-end, the
escrow agent released the first 83,333 of escrow shares to the Company, and the
shares were cancelled and no longer outstanding.

Reversal of Technology License Payable

In December 1997, the Company entered into an exclusive license agreement and
supply agreement with Sudormed, Inc. The technology licensed from Sudormed was
the basis for the Companys development of its sweat and saliva products. Due
to a lack of funding and the Companys failure to obtain FDA approval for the
products, all development efforts relating to the products were suspended in
August 1998. The license agreement required the Company to make a $1.6 million
license payment in December 1998, which was subsequently extended to March
1999. In May 1999, Sudormed terminated the license agreement and the supply
agreement due to the Companys failure to make the $1.6 million license
payment.

The Minnesota Mining and Manufacturing Company (3M) manufactured certain of
the products that Sudormed supplied to the Company pursuant to the supply
agreement. As described above, Sudormed terminated both the license agreement
and the supply agreement in May 1999 due to the Companys failure to make
required payments. 3M subsequently foreclosed upon certain assets of Sudormed
and became a party in possession of secured property of Sudormed. In May 2000,
3M notified the Company that, in its capacity as a secured party in possession
of the Sudormed assets, it demanded payment in full of the $1.6 million plus
accrued interest and fees due under the Sudormed license agreement. The
Company disputes 3Ms demand, and will vigorously defend any action that 3M

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may bring. The Company has not had any correspondence or communication with 3M
since 2000, and to managements knowledge no action has been filed.

During fiscal 2003, the Company reassessed its potential liability to 3M.
Management believes based on advice from legal counsel that any claims by 3M
under the license agreement are now barred by the applicable statute of
limitations (having expired in the third and fourth quarters of fiscal 2003),
and accordingly that the likelihood of liability to 3M is remote. The Company
previously reserved on its balance sheet a contingent liability in the amount
of $2,240,040, representing the full potential amount owing under the
technology license plus accrued interest and fees. At June 30, 2003, the
Company reversed the reserve and removed the contingent liability from the
balance sheet.

14. Related Party Transactions

Asset Purchase Transaction

On June 27, 2002, the Company, and its wholly-owned subsidiary, PBI-WA, entered
into an Asset Purchase Agreement, as amended by Amendment Number One to Asset
Purchase Agreement, dated as of August 28, 2002 (collectively, the Asset
Purchase Agreement) with Saigene Corporation, a Delaware corporation
(Saigene), providing for the purchase by PBI-WA of certain technology,
intellectual property and equipment assets in connection with certain DNA
amplification and cell viability and related technologies and processes. On
August 28, 2002, pursuant to the Asset Purchase Agreement, as consideration for
the purchased assets, the Company issued to Saigene 6,541,430 shares, and to
certain of Saigenes designees an additional 458,570 shares, of PBIs common
stock, par value $.01 per share. Of the shares issued to Saigene, 333,333
shares were held in escrow in the event that PBI is required to satisfy certain
anti-dilution protections granted to one of Saigenes designees (the
Anti-Dilution shares), and 333,333 shares are held in escrow in the event
that PBI incurs any liabilities with respect to any of Saigenes creditors that
have not consented to the purchase transaction (the Saigene Creditor shares).
Subsequent to yearend, the Anti-Dilution shares were released back to Saigene
as of August 28, 2003 as the anti-dilution provisions were not triggered. The
Saigene Creditor shares remain in escrow pending resolution of those
obligations, with in excess of 75% of Saigenes creditors consenting to the
purchase transaction. Additionally, PBI-WA issued two promissory notes in favor
of Saigene (and guaranteed by PBI) in the principal amounts of $223,697 and
$219,109, respectively. The first note, which has a remaining principal balance
of $135,351 at June 30, 2003, is payable at the rate of $10,000 per month and
bears interest at the rate of 8% per annum until fully paid; provided, however,
that in the event PBI obtains equity financing in the minimum amount of $6
million, then this note will become immediately due and payable. The second
note matured in 12 months and bore interest at the annual rate of 12% per
annum, however, this second note, along with $9,721 of accrued interest, was
subsequently forgiven by Saigene as part of a December 2002 contribution toward
the development and commercialization of certain technologies discussed below.
Upon consummation of the transactions contemplated in the Asset Purchase
Agreement, Saigene owned approximately 77% of the Common Stock of PBI.

In connection with the asset purchase transaction, PBI-WA and Saigene executed
an Option Agreement whereby PBI-WA may purchase certain additional assets of
Saigene (the Option Assets) in exchange for, at PBI-WAs election, either
$5,147,118 in cash or the issuance by PBI of an additional 1,715,706 shares of
Common Stock and the assumption of certain additional liabilities associated
with such transferred assets. The Companys option under the Option Agreement
expires on August 28, 2003, extended by one day for each day that Saigene
allows certain encumbrances to remain on the Option Assets subsequent to
October 31, 2002. As of September 2003, the encumbrances were still on the
Option Assets.

Further, in connection with the consummation of the transactions contemplated
by the Asset Purchase Agreement, (1) the parties executed an amendment to the
Management Agreement dated September 15, 1999 (the Management Agreement),
whereby Saigene will continue to operate the PBI-WA laboratory in exchange for
monthly payments by PBI to Saigene equal to $90,000, which arrangement may be
terminated by either PBI or Saigene upon 30 days prior written notice, and
which arrangement was amended as of June 18, 2003 to reduce the management fee
to $70,000 per month effective July 1, 2003; (2) the Purchase Agreement dated
June 22, 2000, relating to the purchase by Saigene of the laboratory operations
of PBI-WA was terminated; (3) the holders of PBIs Series A Convertible
Preferred Stock, par value $0.01 per share, consented to an amendment of the
Certificate of Designation with respect to the rights and preferences of the
Preferred Stock and converted all accrued dividends thereon into an aggregate
of

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150,000 shares of Common Stock; (4) PBI entered into consulting arrangements
with Paul Kanan and Terry Giles; (5) PBI converted $933,472 of deferred
compensation and notes payable to warrants and options to purchase an aggregate
of 301,541 shares of Common Stock; and (6) each of Saigene, Paul Kanan, Terry
Giles and Burkhalter, Michaels, Kessler & George, LLP, agreed, for a period of
one year, not to sell any PBI securities, except at a price per share equal to
or greater than $3.00, in a private transaction, in a transaction solely for
estate planning, or, in the event PBI completes a private financing, at a per
share price equal to or greater than the per share price set forth in such
private financing.

On December 19, 2002, toward the development and commercialization of certain
technologies acquired by the Company from Saigene in connection with the Asset
Purchase Agreement, Saigene entered into an agreement with the Company in which
Saigene: (i) executed a promissory note in the principal amount of $200,000 in
favor of the Company payable on or before September 30, 2003, at Saigenes
election, either in cash or by the tender of shares of common stock of the
Company currently held in Saigenes name at an attributed value equal to the
greater of $3.00 per share or the average trading price of our common stock
over a five day period, (ii) forgave a creditor obligation assumed by the
Company from Saigene pursuant to the Asset Purchase Agreement in the aggregate
amount of approximately $229,000, (iii) settled a credit obligation in the
aggregate amount of approximately $150,000, and (iv) surrendered to the Company
for cancellation 10,000 shares of Company common stock that had been held in
Saigenes name. As a result of the December 19, 2002 agreement, an adjustment
to decrease the value of the acquired technology assets in the approximate
amount of $430,000 was recorded.

Consulting Agreements

On August 28, 2002, in connection with the Asset Purchase Agreement, the
Company entered into a consulting agreement with Terry M. Giles, a former
director of the Company and greater than 5% stockholder. Pursuant to the
consulting agreement, the Company agreed to engage Mr. Giles as a consultant
and to pay Mr. Giles compensation of $10,000 per month until the conversion of
Mr. Giles shares of Series A Preferred Stock into Common Stock, and until such
shares are either (a) registered pursuant to an effective registration
statement, or (b) deemed tradable pursuant to Rule 144. Pursuant to the
consulting agreement, the first years payments (totaling $120,000) will be
accrued, and paid over the following four years (i.e., an additional $2,500 per
month over 48 months beginning September 2003), with any accrued amounts due
being payable upon termination of the consulting agreement, if terminated
earlier than 60 months. As of June 30, 2003, accrued expenses included
$100,000 related to this consulting agreement.

On August 28, 2002, in connection with the Asset Purchase Agreement, the
Company entered into a consulting agreement with Paul G. Kanan, a director and
former officer of the Company. Pursuant to the consulting agreement, the
Company agreed to engage Mr. Kanan as a consultant for a period of 12 months
beginning September 1, 2002, and to pay Mr. Kanan $3,000 per month. The
consulting arrangement may be extended on a month-to-month basis for up to 12
additional months until such time as the shares of Common Stock held by Mr.
Kanan have been registered for resale pursuant to an effective registration
statement filed with the SEC. In addition, should Mr. Kanan meet certain
performance targets (to be negotiated), the consulting arrangement may be
extended for a second additional 12 month period.

Co-Maker Notes Payable

In September 2001 and November 2001, respectively, the Company was named as a
co-maker with Saigene on promissory notes for $150,000 and $100,000. In
December 2002, in conjunction the Investment Agreement between Saigene and the
Company, Saigene assumed all liabilities of the Company under these notes.
These notes payable are not recorded on the Companys financial statements as
of June 30, 2003, however, the Company may have a contingent liability on these
notes should Saigene not make required payments thereunder. (See Note 14 
Related Party Transactions  Asset Purchase Transaction)

Deferred Compensation Agreements with Senior Executives

The Company had entered into deferred compensation agreements with four of its
senior executives. The agreements provided that a specified portion of their
salaries (from prior to fiscal 2002) be deferred until they elected to receive
the deferred amount. During prior years, certain deferred compensation amounts
had been

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converted to promissory notes bearing annual interest at 7% and payable on
demand. These notes were included with Notes Payable to Related Parties in
prior years on the accompanying consolidated balance sheet and, with accrued
interest totaled $552,171 as of June 30, 2002. The Company made no interest
payments on these amounts since September of 1998. Additional deferred
compensation, not converted to notes, of $295,368 to senior executives and
other current and former employees was also due as of June 30, 2002. On August
28, 2002, in connection with the Asset Purchase Agreement, PBI converted all
deferred compensation notes, deferred compensation liabilities, and $85,933 of
other accrued compensation into warrants and options to purchase an aggregate
of 301,541 shares of Common Stock. (See Note 14  Related Party Transactions 
Asset Purchase Transaction).

Pacific Biometrics Research Foundation

The Company is affiliated with Pacific Biometrics Research Foundation (PBRF),
one of five laboratories in the CDC (Centers for Disease Control) /NHLBI
sponsored Cholesterol Reference Method Laboratory Network. PBRF is organized
as a non-profit organization corporation under Section 501(c)(3) of the
Internal Revenue Code. The Company provides laboratory testing services,
invoicing and collection services in connection with PBRFs service offerings.
In consideration for this arrangement, the Company receives 85% of the revenues
generated through the testing services offered by PBRF. For the fiscal year
ended June 30, 2003, the Company recorded approximately $60,000 in revenues
related to services provided for PBRF. As of June 30, 2003, the Company had
approximately $40,000 in accounts receivable from PBRF.

15. Retirement Plan

The Company has a 401(k) Plan, which had fallen out of compliance with the
Internal Revenue Service (the IRS) due to prior year filing delinquencies.
Subsequent to yearend, the Company engaged a consultant to assist in regaining
compliance through the IRS Delinquent Filer Voluntary Compliance Program (the
DFVCP) and has filed the returns which had been delinquent. The Company
believes that it is now in compliance with the IRS reporting regulations, and,
under the DFVCP, will incur no additional material expenses associated with
late filings. The Company made no matching contributions to the 401(k) Plan
during fiscal 2003 or 2002.

16. Subsequent Events

On August 5, 2003, the Company entered into a Loan and Security Agreement (the
Loan Agreement) whereby the Company can borrow up to $250,000 no later than
November 15, 2003. Amounts borrowed under the Loan Agreement bear interest at
17.64% and are amortized over 36 months, with a final balloon payment due at
maturity on August 5, 2006. The Loan Agreement is secured by specific
equipment, and provides for warrants to purchase common stock to the lender
(priced as of the date of borrowing) at the rate of 5,000 per $50,000 borrowed.
As of September 26, 2003, the Company had borrowed $150,000 under this Loan
Agreement, and the lender was entitled to warrants to purchase common stock of
5,000 at $1.10 per share, 5,000 at $0.95 per share, and 5,000 at $1.00 per
share.

On September 17, 2003, the Companys Board of Directors approved an amendment
to the Companys 1996 Stock Incentive Plan to increase the number of shares
available for issuance under the 1996 Stock Incentive Plan to 1,800,000 shares,
subject to stockholder approval.

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