Exhibit 10.1











                            PACIFIC BIOMETRICS, INC.

                          SECURITIES PURCHASE AGREEMENT

                                  May 28, 2004




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                                Table of Contents
                                                                            Page
                                                                            ----

1.  Agreement to Sell and Purchase.............................................1

2.  Fees and Warrant...........................................................1

3.  Closing, Delivery and Payment..............................................2
    3.1        Closing.........................................................2
    3.2        Delivery........................................................2

4.  Representations and Warranties of the Company..............................2
    4.1        Organization, Good Standing and Qualification...................3
    4.2        Subsidiaries....................................................3
    4.3        Capitalization; Voting Rights...................................3
    4.4        Authorization; Binding Obligations..............................4
    4.5        Liabilities.....................................................5
    4.6        Agreements; Action..............................................5
    4.7        Obligations to Related Parties..................................6
    4.8        Changes.........................................................6
    4.9        Title to Properties and Assets; Liens, Etc......................7
    4.10       Intellectual Property...........................................8
    4.11       Compliance with Other Instruments...............................8
    4.12       Litigation......................................................9
    4.13       Tax Returns and Payments........................................9
    4.14       Employees.......................................................9
    4.15       Registration Rights and Voting Rights..........................10
    4.16       Compliance with Laws; Permits..................................10
    4.17       Environmental and Safety Laws..................................10
    4.18       Valid Offering.................................................11
    4.19       Full Disclosure................................................11
    4.20       Insurance......................................................11
    4.21       SEC Reports....................................................11
    4.22       Listing........................................................12
    4.23       No Integrated Offering.........................................12
    4.24       Stop Transfer..................................................12
    4.25       Dilution.......................................................12
                                                4.26 Patriot Act
                                                        12

5.  Representations and Warranties of the Purchaser...........................13
    5.1        No Shorting....................................................13
    5.2        Requisite Power and Authority..................................13
    5.3        Investment Representations.....................................13
    5.4        Purchaser Bears Economic Risk..................................14
    5.5        Acquisition for Own Account....................................14
    5.6        Purchaser Can Protect Its Interest.............................14
    5.7        Accredited Investor............................................14
    5.8        Legends........................................................14

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6.  Covenants of the Company..................................................16
    6.1        Stop-Orders....................................................16
    6.2        Listing........................................................16
    6.3        Market Regulations.............................................16
    6.4        Reporting Requirements.........................................17
    6.5        Use of Funds...................................................17
    6.6        Access to Facilities...........................................17
    6.7        Taxes..........................................................17
    6.8        Insurance......................................................17
    6.9        Intellectual Property..........................................18
    6.10       Properties.....................................................18
    6.11       Confidentiality................................................19
    6.12       Required Approvals.............................................19
    6.13       Reissuance of Securities.......................................20
    6.14       Opinion........................................................20
    6.15.....   Margin Stock..................................................19

7.  Covenants of the Purchaser................................................20
    7.1        Confidentiality................................................20
    7.2        Non-Public Information.........................................21

8.  Covenants of the Company and Purchaser Regarding Indemnification..........21
    8.1        Company Indemnification........................................21
    8.2        Purchaser's Indemnification....................................21

9.  Conversion of Convertible Note............................................21
    9.1        Mechanics of Conversion........................................21

10. Registration Rights.......................................................23
    10.1       Registration Rights Granted....................................23
    10.2       Offering Restrictions..........................................23

11. Miscellaneous.............................................................23
    11.1       Governing Law..................................................23
    11.2       Survival.......................................................23
    11.3       Successors.....................................................24
    11.4       Entire Agreement...............................................24
    11.5       Severability...................................................24
    11.6       Amendment and Waiver...........................................24
    11.7       Delays or Omissions............................................24
    11.8       Notices........................................................24
    11.9       Attorneys' Fees................................................25
    11.10      Titles and Subtitles...........................................26
    11.11      Facsimile Signatures; Counterparts.............................26
    11.12      Broker's Fees..................................................26
    11.13      Construction...................................................26

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                                LIST OF EXHIBITS
--------------------------------------------------------------------------------
Form of Convertible Term Note.......................................   Exhibit A
Form of Warrant.....................................................   Exhibit B
Form of Opinion.....................................................   Exhibit C
Form of Escrow Agreement............................................   Exhibit D

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                          SECURITIES PURCHASE AGREEMENT

         THIS  SECURITIES  PURCHASE  AGREEMENT  (this  "Agreement")  is made and
entered  into as of May 28, 2004,  by and between  PACIFIC  BIOMETRICS,  INC., a
Delaware  corporation  (the  "Company"),  and Laurus Master Fund, Ltd., a Cayman
Islands company (the "Purchaser").

                                    RECITALS

         WHEREAS,  the Company has  authorized  the sale to the  Purchaser  of a
Convertible  Term Note in the  aggregate  principal  amount of Two Million  Five
Hundred Thousand  ($2,500,000.00)  (the "Note"),  which Note is convertible into
shares of the  Company's  common  stock,  $0.01 par value per share (the "Common
Stock") at an initial fixed  conversion price of $1.06 per share of Common Stock
("Fixed Conversion Price");

         WHEREAS,  the  Company  wishes to issue a warrant to the  Purchaser  to
purchase  up to  681,818  shares  of the  Company's  Common  Stock  (subject  to
adjustment as set forth therein) in connection with Purchaser's  purchase of the
Note;

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

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

                                    AGREEMENT

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

1.       Agreement to Sell and  Purchase.  Pursuant to the terms and  conditions
set forth in this Agreement,  on the Closing Date (as defined in Section 3), the
Company  agrees to sell to the  Purchaser,  and the  Purchaser  hereby agrees to
purchase  from  the  Company,  a  Note  in the  aggregate  principal  amount  of
$2,500,000.00  convertible  in accordance  with the terms thereof into shares of
the  Company's  Common Stock in  accordance  with the terms of the Note and this
Agreement.  The offer and sale of the Note being  purchased  on the Closing Date
shall be known  as the  "Offering."  A form of the  Note is  annexed  hereto  as
Exhibit A. The Note will mature on the  Maturity  Date (as defined in the Note).
Collectively,  the Note and Warrant and Common Stock  issuable in payment of the
Note,  upon conversion of the Note and upon exercise of the Warrant are referred
to as the "Securities."

2.       Fees and Warrant.  On the Closing Date:

     (a)  The  Company  will  issue and  deliver to the  Purchaser  a Warrant to
          purchase up to 681,818  shares of Common Stock in connection  with the
          Offering  (the  "Warrant")  pursuant to Section 1 hereof.  The Warrant

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          must be  delivered  on the Closing  Date. A form of Warrant is annexed
          hereto as Exhibit B. All the representations,  covenants,  warranties,
          undertakings, and indemnification, and other rights made or granted to
          or for the  benefit of the  Purchaser  by the  Company are hereby also
          made and  granted as of the date  hereof in respect of the Warrant and
          shares of the  Company's  Common Stock  issuable  upon exercise of the
          Warrant (the "Warrant Shares").

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

     (c)  The Company shall reimburse the Purchaser for its reasonable  expenses
          including  legal fees and expenses)  incurred in  connection  with the
          preparation   and  negotiation  of  this  Agreement  and  the  Related
          Agreements  (as  hereinafter   defined),   and  expenses  incurred  in
          connection with the  Purchaser's  due diligence  review of the Company
          and its  Subsidiaries  (as  defined  in Section  6.8) and all  related
          matters.  Amounts  required to be paid under this Section 2(c) will be
          paid on the Closing  Date and shall be  $29,500.00  for such  expenses
          referred to in this Section 2(c).

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

3.       Closing, Delivery and Payment.


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

         3.2 Delivery.  Pursuant to the Funds Escrow  Agreement , at the Closing
on the Closing  Date,  the Company  will deliver to the  Purchaser,  among other
things,  a Note in the form  attached as Exhibit A  representing  the  aggregate
principal amount of $2,500,000.00  and a Warrant in the form attached as Exhibit
B in the Purchaser's name representing  681,818 Warrant Shares and the Purchaser
will deliver to the Company,  among other  things,  the amounts set forth in the
Disbursement Letter by certified funds or wire transfer of immediately available
funds as set forth in the Disbursement Letter.

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

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

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

         4.3 Capitalization; Voting Rights.

          (a)  The  authorized  capital  stock  of the  Company,  as of the date
               hereof  consists of 35,000,000  shares,  of which  30,000,000 are
               shares of Common  Stock,  par value  $0.01 per share,  13,061,721
               shares of which were issued and outstanding on May 20, 2004 , and
               5,000,000  are shares of  preferred  stock,  par value  $0.01 per

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               share  of which  1,550,000  shares  are  designated  as  Series A
               convertible   preferred   stock  all  of  which  are  issued  and
               outstanding)  and  1,666,667  shares  are  designated   Series  B
               convertible preferred stock (33,666.66 shares of which are issued
               and outstanding). The authorized capital stock of each Subsidiary
               of the Company is set forth on Schedule 4.3.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       7
<PAGE>

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

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

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

         4.10 Intellectual Property.

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

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

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

         4.11 Compliance with Other Instruments.  Neither the Company nor any of
its  Subsidiaries  is in  violation or default of (x) any term of its Charter or
Bylaws,  or (y) of any  provision  of  any  indebtedness,  mortgage,  indenture,
contract,  agreement or  instrument to which it is party or by which it is bound
or of any judgment,  decree,  order or writ, which violation or default,  in the
case of this  clause  (y),  has had,  or could  reasonably  be expected to have,
either  individually  or in  the  aggregate,  a  Material  Adverse  Effect.  The
execution,  delivery and  performance of and compliance  with this Agreement and

                                       8
<PAGE>

the Related  Agreements to which it is a party, and the issuance and sale of the
Note by the Company and the other Securities by the Company each pursuant hereto
and thereto,  will not, with or without the passage of time or giving of notice,
result in any such  material  violation,  or be in conflict with or constitute a
default  under any such term or  provision,  or  result in the  creation  of any
mortgage,  pledge,  lien,  encumbrance  or charge upon any of the  properties or
assets of the Company or any of its Subsidiaries or the suspension,  revocation,
impairment,  forfeiture or nonrenewal of any permit,  license,  authorization or
approval  applicable  to the Company,  its business or  operations or any of its
assets or properties.

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

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

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

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

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

         4.14 Employees. Neither the Company nor any of its Subsidiaries has any
collective  bargaining  agreements with any of its employees.  There is no labor
union  organizing  activity pending or, to the Company's  knowledge,  threatened
with respect to the Company or any of its  Subsidiaries.  Except as disclosed in
the Exchange Act Filings,  neither the Company nor any of its  Subsidiaries is a
party to or bound  by any  currently  effective  employment  contract,  deferred
compensation  arrangement,  bonus plan,  incentive  plan,  profit  sharing plan,
retirement  agreement or other employee  compensation plan or agreement.  To the
Company's knowledge, no employee of the Company or any of its Subsidiaries,  nor

                                       9
<PAGE>

any consultant with whom the Company or any of its  Subsidiaries has contracted,
is in violation of any term of any employment contract,  proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed  by, or to  contract  with,  the Company or any of its  Subsidiaries
because of the nature of the  business to be  conducted by the Company or any of
its Subsidiaries; and to the Company's knowledge the continued employment by the
Company or any of its Subsidiaries of its present employees, and the performance
of  the  Company's  and  its   Subsidiaries'   contracts  with  its  independent
contractors,  will not result in any such violation. Neither the Company nor any
of its  Subsidiaries  is aware that any of its employees is obligated  under any
contract (including  licenses,  covenants or commitments of any nature) or other
agreement,  or  subject  to any  judgment,  decree  or  order  of any  court  or
administrative  agency, that would interfere with their duties to the Company or
any of its  Subsidiaries.  Neither the Company nor any of its  Subsidiaries  has
received any notice  alleging that any such  violation has occurred.  Except for
employees who have a current effective  employment agreement with the Company or
any of its  Subsidiaries,  no employee of the Company or any of its Subsidiaries
has been granted the right to continued  employment by the Company or any of its
Subsidiaries or to any material compensation following termination of employment
with the Company or any of its  Subsidiaries.  The Company is not aware that any
officer,  key  employee or group of employees  intends to terminate  his, her or
their  employment  with the  Company  or any of its  Subsidiaries,  nor does the
Company or any of its  Subsidiaries  have a present  intention to terminate  the
employment of any officer, key employee or group of employees.

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

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

         4.17  Environmental and Safety Laws. Neither the Company nor any of its
Subsidiaries has received notice of any violation of any applicable statute, law

                                       10
<PAGE>

or regulation relating to the environment or occupational health and safety, and
to its knowledge,  no material  expenditures are or will be required in order to
comply with any such existing statute, law or regulation. Except as set forth on
Schedule  4.17, no Hazardous  Materials (as defined below) are used or have been
used,  stored, or disposed of by the Company or any of its Subsidiaries  (except
as would not have a Material Adverse Effect) or, to the Company's knowledge,  by
any other person or entity on any property owned,  leased or used by the Company
or any  of its  Subsidiaries.  For  the  purposes  of  the  preceding  sentence,
"Hazardous Materials" shall mean:

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

          (b)  any petroleum products or nuclear materials.

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

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

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

         4.21 SEC Reports.  Except as set forth on Schedule 4.21 or as disclosed
in its Exchange Act Filings, the Company has filed all proxy statements, reports
and other documents required to be filed by it under the Securities Exchange Act
1934, as amended (the  "Exchange  Act").  The Company has made  available to the
Purchaser at www.sec.gov copies of: (i) its Annual Report on Form 10-KSB for its
fiscal years ended June 30, 2003;  and (ii) its Quarterly  Report on Form 10-QSB

                                       11
<PAGE>

for its fiscal  quarter  ended  March 31,  2004,  and (iii) the Form 8-K filings
which it has made  during the fiscal year 2004 to date  (collectively,  the "SEC
Reports").  Except as set forth on  Schedule  4.21,  each SEC Report was, at the
time of its filing,  in  substantial  compliance  with the  requirements  of its
respective form and none of the SEC Reports,  nor the financial  statements (and
the notes thereto)  included in the SEC Reports,  as of their respective  filing
dates,  contained any untrue  statement of a material fact or omitted to state a
material fact required to be stated  therein or necessary to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.

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

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

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

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

         4.26 Patriot Act. The Company  certifies that, to the best of Company's
knowledge,  neither the Company nor any of its Subsidiaries has been designated,
and is not  owned or  controlled,  by a  "suspected  terrorist"  as  defined  in
Executive Order 13224. The Company hereby  acknowledges that the Purchaser seeks
to comply with all  applicable  laws  concerning  money  laundering  and related
activities.  In  furtherance of those  efforts,  the Company hereby  represents,
warrants and agrees that:  (i) none of the cash or property  that the Company or
any of its Subsidiaries will pay or will contribute to the Purchaser has been or
shall be derived from, or related to, any activity that is deemed criminal under
United States law; and (ii) no  contribution or payment by the Company or any of
its  Subsidiaries  to the  Purchaser,  to the  extent  that they are  within the
Company's  and/or its  Subsidiaries'  control shall cause the Purchaser to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering  Control Act of 1986 or the United States  International  Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company shall

                                       12
<PAGE>

promptly notify the Purchaser if any of these representations  ceases to be true
and  accurate  regarding  the  Company or any of its  Subsidiaries.  The Company
agrees to provide the Purchaser any additional information regarding the Company
or any of its  Subsidiaries  that the Purchaser deems necessary or convenient to
ensure  compliance  with all applicable  laws  concerning  money  laundering and
similar activities. The Company understands and agrees that if at any time it is
discovered  that  any of the  foregoing  representations  are  incorrect,  or if
otherwise  required by applicable law or regulation  related to money laundering
similar  activities,  the Purchaser may undertake  appropriate actions to ensure
compliance  with  applicable  law or  regulation,  including  but not limited to
segregation and/or redemption of the Purchaser's  investment in the Company. The
Company further  understands that the Purchaser may,  pursuant to a court order,
release confidential  information about the Company and its Subsidiaries and, if
applicable,  any  underlying  beneficial  owners,  to proper  authorities if the
Purchaser, in its sole discretion, determines that it is required under relevant
rules and regulations under the laws set forth in subsection (ii) above provided
that the  Purchaser  shall first  provide the Company  with notice of such court
order and an opportunity to seek a protective order.

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

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

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

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

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

         5.3  Investment   Representations.   Purchaser   understands  that  the
Securities are being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon  Purchaser's  representations
contained in the Agreement, including, without limitation, that the Purchaser is
an "accredited investor" within the meaning of Regulation D under the Securities
Act of 1933, as amended (the "Securities  Act"). The Purchaser  confirms that it
has  received  or has had  full  access  to all  the  information  it  considers
necessary or appropriate to make an informed investment decision with respect to
the Note and the Warrant to be purchased by it under this Agreement and the Note
Shares and the Warrant  Shares  acquired by it upon the conversion of or payment
on the Note and the exercise of the Warrant, respectively.

                                       13
<PAGE>

The Purchaser  further  confirms that it has had an opportunity to ask questions
and  receive   answers  from  the  Company   regarding  the  Company's  and  its
Subsidiaries'  business,  management  and  financial  affairs  and the terms and
conditions  of the Offering,  the Note,  the Warrant and the  Securities  and to
obtain  additional  information  (to  the  extent  the  Company  possessed  such
information  or  could  acquire  it  without  unreasonable  effort  or  expense)
necessary to verify any  information  furnished to the Purchaser or to which the
Purchaser had access.

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

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

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

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

         5.8 Legends.

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

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

                                       14
<PAGE>

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

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

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

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

          5.9 Patriot Act. Purchaser  certifies that, to the best of Purchaser's
knowledge,  the  Purchaser  has  not  been  designated,  and  is  not  owned  or
controlled,  by a "suspected terrorist" as defined in Executive Order 13224. The
Purchaser hereby  acknowledges that the Purchaser and the Company seek to comply
with all applicable laws concerning money laundering and related activities.  In
furtherance  of those efforts,  the Purchaser  hereby  represents,  warrants and
agrees that:  (i) none of the cash or property  that the  Purchaser  will pay or
will contribute to the Company has been or shall be derived from, or related to,
any  activity  that is deemed  criminal  under  United  States law;  and (ii) no
contribution  or payment by the Purchaser to the Company to the extent that they
are within the  Purchaser's  control shall cause the Purchaser or the Company to
be in  violation  of the United  States  Bank  Secrecy  Act,  the United  States
International  Money  Laundering  Control  Act  of  1986  or the  United  States
International  Money Laundering  Abatement and  Anti-Terrorist  Financing Act of

                                       15
<PAGE>

2001.  The  Purchaser  shall  promptly  notify  the  Company  if  any  of  these
representations  ceases to be true and accurate. The Purchaser agrees to provide
the Company any additional  information regarding the Purchaser that the Company
deems  necessary or convenient to ensure  compliance  with all  applicable  laws
concerning money laundering and similar  activities.  The Purchaser  understands
and  agrees  that if at any  time it is  discovered  that  any of the  foregoing
representations  are  incorrect,  or if otherwise  required by applicable law or
regulation  related to money  laundering  similar  activities,  the  Company may
undertake  appropriate  actions  to ensure  compliance  with  applicable  law or
regulation,  including but not limited to segregation  and/or  redemption of the
Purchaser's  investment in the Company.  The Purchaser further  understands that
the Purchaser may, pursuant to a court order, release  confidential  information
about the Purchaser and, if applicable,  any underlying  beneficial  owners,  to
proper  authorities if the Company , in its sole discretion,  determines that it
is required  under relevant  rules and  regulations  under the laws set forth in
subsection  (ii)  above  provided  that the  Company  shall  first  provide  the
Purchaser  with  notice  of  such  court  order  and an  opportunity  to  seek a
protective order.

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

         6.8 Insurance.  Each of the Company and its Subsidiaries  will keep its
assets  which are of an insurable  character  insured by  financially  sound and
reputable  insurers  against loss or damage by fire,  explosion  and other risks
customarily  insured against by companies in similar business similarly situated
as the  Company  and its  Subsidiaries  in such  amounts  as the  Company  shall
reasonably  determine  appropriate;  and the Company and its  Subsidiaries  will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner  which the Company  reasonably  believes is  customary  for  companies in

                                       17
<PAGE>

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

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

         6.10 Properties.  Each of the Company and each of its Subsidiaries will
keep its properties in good repair, working order and condition, reasonable wear
and tear  excepted,  and from time to time make all needful and proper  repairs,
renewals,  replacements,  additions and  improvements  thereto;  and each of the
Company  and  each  of its  Subsidiaries  will at all  times  comply  with  each

                                       18
<PAGE>

provision  of all  leases  to which it is a party  or  under  which it  occupies
property if the breach of such provision  could,  either  individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

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

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

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

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

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

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

          (e)  (i)  create,  incur,  assume or suffer to exist any  indebtedness
               (exclusive  of trade  debt  and  debt  incurred  to  finance  the
               purchase of equipment  (not in excess of ten ( percent  (10%) per
               annum of the fair market value of the Company's  assets)  whether
               secured or unsecured other than (x) the Company's indebtedness to
               Laurus,  or other  indebtedness  issued by the  Company on a pari
               passu basis with Laurus as  contemplated  in that certain  letter
               agreement  dated as of May 28,  2004  between the Company and the
               Purchaser (y) indebtedness set forth on Schedule 6.12(e) attached
               hereto  and  made  a  part   hereof  and  any   refinancings   or
               replacements  thereof on terms no less favorable to the Purchaser

                                       19
<PAGE>

               than the indebtedness  being refinanced or replaced,  and (z) any
               debt  incurred in  connection  with the purchase of assets in the
               ordinary course of business,  or any refinancings or replacements
               thereof  on terms no less  favorable  to the  Purchaser  than the
               indebtedness  being refinanced or replaced;  (ii) cancel any debt
               owing to it in excess of $50,000 in the  aggregate  during any 12
               month  period;  (iii)  assume,  guarantee,  endorse or  otherwise
               become  directly or  contingently  liable in connection  with any
               obligations  of any  other  Person,  except  the  endorsement  of
               negotiable  instruments  by the Company for deposit or collection
               or similar  transactions  in the  ordinary  course of business or
               guarantees of indebtedness  otherwise permitted to be outstanding
               pursuant to this clause (e); and

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

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

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

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

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

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

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



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

         7.1  Confidentiality.  The Purchaser  agrees that it will not disclose,
and will not include in any public announcement, the name of the Company, unless

                                       20
<PAGE>

expressly  agreed to by the  Company  or unless  and until  such  disclosure  is
required by law or  applicable  regulation,  and then only to the extent of such
requirement.

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

8.          Covenants of the Company and Purchaser Regarding Indemnification.

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

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

9.          Conversion of Convertible Note.

         9.1 Mechanics of Conversion.

          (a)  Provided   the   Purchaser   has  notified  the  Company  of  the
               Purchaser's intention to sell the Note Shares and the Note Shares
               are  included  in an  effective  registration  statement  or  are
               otherwise  exempt  from  registration  when  sold:  (i)  upon the
               conversion of the Note or part thereof, the Company shall, at its
               own cost and expense,  take all necessary  action  (including the
               issuance of an opinion of counsel  reasonably  acceptable  to the
               Purchaser  following a request by the  Purchaser)  to assure that
               the Company's  transfer agent shall issue shares of the Company's
               Common  Stock in the name of the  Purchaser  (or its  nominee) or

                                       21
<PAGE>

               such other  persons as  designated by the Purchaser in accordance
               with  Section  9.1(b)  hereof  and in  such  denominations  to be
               specified  representing  the number of Note Shares  issuable upon
               such   conversion;   and  (ii)  the  Company   warrants  that  no
               instructions  other than these  instructions have been or will be
               given to the  transfer  agent of the  Company's  Common Stock and
               that,  subject  to  Section  7(d)  of  the  Registration   Rights
               Agreement,  after  the  Effectiveness  Date  (as  defined  in the
               Registration  Rights  Agreement)  the Note Shares  issued will be
               freely   transferable   subject   to  the   prospectus   delivery
               requirements  of the  Securities  Act and the  provisions of this
               Agreement,  and will not contain a legend  restricting the resale
               or transferability of the Note Shares.

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

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

                                       22
<PAGE>

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

10.          Registration Rights.

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

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

11.          Miscellaneous.

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

         11.2  Survival.   The   representations,   warranties,   covenants  and
agreements made herein shall survive any investigation made by the Purchaser and
the  closing of the  transactions  contemplated  hereby to the  extent  provided

                                       23
<PAGE>

therein for three (3) years from the Closing Date.  All statements as to factual
matters  contained in any  certificate  or other  instrument  delivered by or on
behalf of the  Company  pursuant  hereto  in  connection  with the  transactions
contemplated  hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

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

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

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

         11.6 Amendment and Waiver.

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

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

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

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

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

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

                                       24
<PAGE>

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

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

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

All communications shall be sent as follows:

         If to the Company, to:     PACIFIC BIOMETRICS, INC.
                                    220 West Harrison Street
                                    Seattle, WA  98119

                                    Attention:        Chief Executive  Officer
                                    Facsimile:        (206) 298-9838

                                    with a copy to:
                                     Cairncross & Hemplemann, P.S.
                                    524 Second Avenue Suite 500
                                    Seattle, WA  98104

                                    Attention:        Timothy M. Woodland, Esq.
                                    Facsimile: (206) 587-2308

         If to the Purchaser, to:   Laurus Master Fund, Ltd.
                                    c/o Ironshore Corporate Services ltd.
                                    P.O. Box 1234 G.T.
                                    Queensgate House, South Church Street
                                    Grand Cayman, Cayman Islands
                                    Facsimile:        345-949-9877

                                    with a copy to:

                                    John E. Tucker, Esq.
                                    825 Third Avenue 14th Floor
                                    New York, NY 10022
                                    Facsimile:        212-541-4434

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

         11.9  Attorneys'  Fees.  In the  event  that  any  suit  or  action  is
instituted to enforce any provision in this Agreement,  the prevailing  party in
such dispute shall be entitled to recover from the losing party all fees,  costs
and  expenses  of  enforcing  any right of such  prevailing  party under or with

                                       25
<PAGE>

respect to this Agreement,  including,  without limitation, such reasonable fees
and  expenses  of  attorneys  and  accountants,  which  shall  include,  without
limitation, all fees, costs and expenses of appeals.

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

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

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

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



             [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK


                                       26
<PAGE>

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

COMPANY:                                    PURCHASER:

PACIFIC BIOMETRICS, INC.                    LAURUS MASTER FUND, LTD.


By:     /s/ Ronald R. Helm             By:     /s/
        -----------------------------          ---------------------------------
Name:   Ronald R. Helm                 Name:
        -----------------------------          ---------------------------------
Title:  Chief Executive Officer        Title:
        -----------------------------          ---------------------------------



                                       27
<PAGE>

                                       A-1
                                    EXHIBIT A

                            FORM OF CONVERTIBLE NOTE

                                      A-1
<PAGE>

                                       B-1
                                    EXHIBIT B

                                 FORM OF WARRANT



                                      B-1
<PAGE>

                                                     EXHIBIT C

                                                  FORM OF OPINION

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

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

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

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

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

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

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

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

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

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

                                                        C-1
<PAGE>

of the Warrant for Warrant Shares are not subject to any  preemptive  rights or,
to such counsel's knowledge, rights of first refusal that have not been properly
waived or complied with.

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

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

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

                                      C-2
<PAGE>

                                    EXHIBIT D

                            FORM OF ESCROW AGREEMENT


                                      D-1