PACIFIC BIOMETRICS INC, 424B3, 1996-10-31

PACIFIC BIOMETRICS INC
424B3, 1996-10-31
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE>

PROSPECTUS
PACIFIC BIOMETRICS, INC.
[LOGO]
1,700,000 UNITS
CONSISTING OF
1,700,000 SHARES OF COMMON STOCK AND
1,700,000 REDEEMABLE WARRANTS

------------------------

Each unit (a 'Unit') consists of one share of common stock, par value $.01
per share (the 'Common Stock') and one redeemable Warrant (the 'Warrants') of
Pacific Biometrics, Inc., a Delaware corporation (the 'Company'). The components
of the Units are separately transferable immediately upon issuance and will not
trade as a unit. Each Warrant entitles the registered holder thereof to
purchase, at any time until January 31, 1998 (the 'Expiration Date'), one share
of Common Stock at an exercise price of $12.00, subject to adjustment. The
Warrants are redeemable by the Company under certain conditions, at a redemption
price of $.10 per Warrant, upon at least thirty days' prior written notice,
commencing on April 30, 1997. See 'Description of Securities--Redeemable
Warrants.'

Prior to this Offering, there has been no public market for the Units,
Common Stock or Warrants, and there can be no assurance that any such market
will develop, or if developed, will be maintained. The Common Stock and Warrants
will each be quoted on the National Association of Securities Dealers Automated
Quotation ('Nasdaq') Small Cap Market under the symbols 'PBMI' and 'PBMIW,'
respectively. The Units are not anticipated to trade and will not be listed on
the Nasdaq Small Cap Market or any other exchange.

The initial public offering price of the Units has been determined by
negotiations between the Company and Paradise Valley Securities, Inc. (the
'Underwriter') and does not necessarily relate to the Company's book value, net
worth or other established criteria of value. See 'Underwriting' for information
about factors considered in determining the initial public offering price.

------------------------

THESE ARE SPECULATIVE SECURITIES AND AN INVESTMENT IN THESE SECURITIES INVOLVES
A HIGH DEGREE OF RISK, IS SUBJECT TO IMMEDIATE SUBSTANTIAL DILUTION, AND
ONLY THOSE WHO CAN BEAR THE RISK OF THE ENTIRE LOSS OF THEIR
INVESTMENT SHOULD PARTICIPATE. SEE 'RISK FACTORS'
BEGINNING ON PAGE 9.

------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
---------- ---------------------- -----------
Per Unit..... $4.75 $.475 $4.275
Total(3)..... $8,075,000 $807,500 $7,267,500

(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $242,250 ($.1425
per Unit) ($278,587 if the over-allotment option is exercised by the
Underwriter in full); and (ii) a warrant to purchase up to 170,000 shares of
Common Stock at $5.70 per share, exercisable over a four-year period
commencing one year from the date of this Prospectus (the 'Underwriters's
Purchase Warrant'). In addition, the Company has agreed to indemnify the
Underwriter against certain liabilities under the Securities Act. See
'Underwriting.'

(2) Before deducting other expenses payable by the Company, which are estimated
to be approximately $450,000.

(3) The Company has granted the Underwriter an option exercisable within thirty
days after the date of this Prospectus, to purchase up to an additional
255,000 Units on the same terms as the Units offered hereby to cover
over-allotments, if any. If the option is exercised in full, total 'Price to
Public,' 'Underwriting Discounts and Commissions' and 'Proceeds to Company'
will be $9,286,250, $928,625 and $8,357,625, respectively.

------------------------

The Units are offered by the Underwriter on a 'firm commitment' basis when,
as and if delivered to and accepted by the Underwriter, and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Units will be made
at the offices of Paradise Valley Securities, Inc., Phoenix, Arizona, on or
about November 4, 1996.

------------------------

PARADISE VALLEY SECURITIES, INC.

October 30, 1996

<PAGE>
PBI PRODUCTS

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

OSTEOPATCH(Trademark)

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

OSTEOPATCH(Trademark)

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

SPINPRO(Registered) HDL

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

SALIVASAC(Registered)

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

THESE ARE SPECULATIVE SECURITIES.

<PAGE>
Upon consummation of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the 'Exchange Act'), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the 'Commission'). The Company intends to furnish its stockholders with annual
reports containing audited financial statements examined by the Company's
independent public accountants and quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year.

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriter's over-allotment option is not
exercised. See 'Underwriting.' All references to the 'Company' contained herein
refer to the Company and its wholly-owned subsidiaries, unless the context
otherwise requires, and all information contained herein gives effect to the
Mergers. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview.'

THE COMPANY

The Company develops diagnostic and laboratory products and provides
laboratory services in the fields of cardiovascular disease and osteoporosis
laboratory testing. The Company's strategy is to focus on the development of
cost-effective, non invasive diagnostic tests and improved laboratory techniques
in order to achieve early diagnosis, prevention, and therapeutic monitoring. The
Company plans to (i) finalize development and commercialize a patented skin
patch product that measures bone loss markers in human perspiration (the
'Osteopatch(Trademark)'); (ii) expand its specialty reference laboratory
business; (iii) explore new applications and market opportunities for the
SPINPRO(Registered) product, its sample preparation device used to perform
certain laboratory tests; and (iv) evaluate the feasibility of noninvasive
glucose testing using SalivaSac(Registered), its patented saliva collection
device.

Bone diseases and disorders, including osteoporosis, are a significant
health problem worldwide. An estimated 25 million Americans, and more than 75
million persons worldwide, suffer from osteoporosis. Although the National
Osteoporosis Foundation estimates that the costs associated with osteoporosis
exceed $10 billion annually in the U.S., medical intervention usually occurs
only after symptoms such as pain or fractures appear and when treatment is
generally too late to be effective. The Company believes that over fifty new
therapeutic products are under development and that the osteoporosis therapeutic
market, currently estimated at $2 billion annually, will grow significantly.
Thus, there is a need for diagnostic tools and assessments that will identify
those at risk, allow for early treatment and enhance the physician's ability to
monitor the effectiveness of such treatment.

The Company's specialty reference laboratory has developed an expertise in
the emerging field of osteoporosis laboratory assessments through its work with

diagnostic manufacturers of assays for bone markers (i.e., Ostex International,
Inc. ('Ostex') and Metra BioSystems, Inc. ('Metra')), in addition to
pharmaceutical manufacturers of drugs that prevent bone loss (i.e., Merck & Co.,
Inc. ('Merck') and The Procter & Gamble Company ('Procter & Gamble')). This work
has helped to establish the Company as a leader in its understanding of
biochemical markers for bone formation and bone resorption (loss).

As a result of its work in this field, the Company has recognized the need
for a reliable, cost-effective diagnostic tool that would screen and monitor
individuals that are rapidly losing bone and those at risk of osteoporosis. The
Company has licensed technology for a transdermal collection devise, the
Osteopatch(Trademark), and obtained exclusive rights to antibodies for the
detection of bone loss markers in perspiration. These technologies provide the
Company with the opportunity to develop a unique diagnostic tool, coupled with a
laboratory analytical service, which should prove to be a useful indicator of
bone loss. The Osteopatch(Trademark) product development effort is the Company's
primary focus at this time.

In addition to its work in osteoporosis, the Company's reference laboratory
is recognized as a leader in the fields of laboratory method verification,
technical consulting, clinical trials and reference materials for

3
<PAGE>
cholesterol measurements and related risk factors for coronary heart disease.
The Company, through an affiliated foundation, is one of twelve Centers for
Disease Control ('CDC') reference network laboratories for the standardization
of cholesterol testing. The Company intends to expand the marketing of its
specialty laboratory services to pharmaceutical and diagnostic clients in its
areas of expertise. In addition, through the development and commercialization
of the Osteopatch(Trademark), the Company will expand its business opportunities
into clinical laboratory analysis of bone markers.

The Company also acquired the rights to a sample preparation device which
it markets under the name SPINPRO(Registered). SPINPRO(Registered) simplifies
and improves the methods used for performing certain tests in the laboratory. By
reducing the number of manual steps involved in the testing process, the
laboratory can save labor costs and achieve more consistent and accurate
results. The first application of this device is for the testing of HDL
cholesterol. SPINPRO(Registered) is distributed by Sigma Diagnostics ('Sigma'),
a division of Sigma Chemical Co., a major distributor of diagnostic reagents and
products, to laboratories in the U.S. and Europe. The Company is also
investigating other applications and seeking additional distributors for the
SPINPRO(Registered) technology.

The Company is exploring applications for its proprietary
SalivaSac(Registered) technology, which facilitates the collection of saliva
without contamination from enzymes, food particles, blood and other particulate
matter. Based on preliminary studies conducted by the Company and others, the
Company believes that this product has the potential for numerous applications,
including therapeutic drug monitoring, the detection of drugs of abuse,
measurement of hormones and analytes of infectious diseases. The Company
currently has two National Institute of Health ('NIH') Small Business Innovative

Research ('SBIR') Phase I grants to fund the research of this technology for
diabetes applications. Pending the outcome of the research being conducted under
this grant, the Company intends to continue development in this area by seeking
additional funds through grants or business partners.

The Company owns or is the exclusive licensee of rights under ten issued
U.S. patents and four pending U.S. patents. Two of these patents have been
issued, and the remainder are pending in Europe and Japan.

THE MERGER TRANSACTIONS

The Company conducts its business through its wholly-owned subsidiaries,
Pacific Biometrics, Inc., a Washington corporation ('PBI-WA') and BioQuant,
Inc., a Michigan corporation ('BioQuant'). On June 28, 1996, the Company
completed the mergers (the 'Mergers') whereby BioQuant and PBI-WA became
wholly-owned subsidiaries of the Company in separate stock-for-stock exchange
transactions. In January 1995, Pacific Biometrics, Inc., a Washington
corporation ('Old PBI') and Merchant House Scientific, Inc. ('MHS') were merged
into PBI/MHS Consolidation Corporation, a Washington corporation ('PBI/MHS'),
which subsequently changed its name to Pacific Biometrics, Inc. The Company
believes that the synergies among PBI-WA and BioQuant, through the technical
expertise and research capabilities of their respective personnel, will expedite
current development of the Osteopatch(Trademark) product and the development of
SalivaSac(Registered) diagnostic applications, completion of clinical trials of
these devices and receipt of FDA approval of these devices and their
applications. Additionally, the Company anticipates that its laboratory
facilities will be positioned to capture a significant portion of the analysis
revenues which will be associated with the Osteopatch(Trademark) product. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview' and 'Business--General.'

The Company's principal executive office is located at 1370 Reynolds
Avenue, Suite 119, Irvine, California 92614. The telephone number is (714)
263-9933.

<PAGE>
THE OFFERING

SECURITIES OFFERED....... 1,700,000 Units, each Unit consisting of (i) one share
of Common Stock, and (ii) one Warrant to purchase one
share of Common Stock.

TERMS OF WARRANTS........ Each Warrant is exercisable at any time until January
31, 1998 and entitles the holder thereof to purchase
one share of Common Stock at an exercise price of
$12.00 per share (subject to adjustment in the event
of any stock splits or other similar events). The
Warrants are redeemable by the Company under certain
conditions at any time commencing on April 30, 1997,
upon at least 30 days prior written notice, at $.10
per Warrant. See 'Description of
Securities--Redeemable Warrants.'

COMMON STOCK OUTSTANDING
PRIOR TO OFFERING(1)... 1,948,389 Shares

COMMON STOCK OUTSTANDING
AFTER OFFERING(2)...... 3,648,389 Shares

USE OF PROCEEDS.......... The Company intends to apply the net proceeds of
approximately $6,575,250 from this Offering primarily
for Osteopatch(Trademark) product development
activities, repayment of the Bridge Loan, laboratory
equipment and working capital. See 'Use of Proceeds.'

NASDAQ SMALL CAP MARKET
SYMBOLS(3):

Common Stock........... 'PBMI'

Warrants............... 'PBMIW'

RISK FACTORS............. Investment in the Units involves a high degree of risk
and immediate substantial dilution. See 'Risk Factors'
and 'Dilution.'
- ------------------

(1) Does not include Common Stock issuable upon exercise of currently
exercisable options and warrants to purchase 684,904 shares of Common Stock,
154,365 shares of Common Stock reserved for issuance under the Company's
stock option plans and exercise of an aggregate of 300,000 warrants issued
pursuant to a private financing completed in June 1996 (the 'Financing') and
a private placement (the 'Bridge Loan') completed in August 1996, both
consisting of notes and warrants.

(2) Does not include (i) 255,000 shares of Common Stock and 255,000 Warrants
included in the Units issuable pursuant to the Underwriter's over-allotment
option, (ii) 170,000 shares of Common Stock issuable pursuant to the
Underwriter's Purchase Warrant (as hereinafter defined) and (iii) 1,700,000
shares of Common Stock issuable upon exercise of the Warrants offered
hereby. See 'Underwriting.'

(3) A Nasdaq listing does not provide any assurance that an active trading
market will develop or be maintained.

<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION

The following table sets forth, for the periods and dates indicated,
summary historical financial information for the Company (which includes
financial information of PBI-WA), and unaudited proforma combined financial
information for the Company (which includes financial information of PBI-WA) and
BioQuant after giving effect to the merger of BioQuant and a wholly-owned
subsidiary of the Company in a reverse acquisition and the issuance of the Units
offered hereby. The summary historical financial data for the two years ended
June 30, 1996 and 1995, and for the period from inception to June 30, 1996, are
derived from the historical financial statements of the Company (which includes
financial information of PBI-WA) and should be read in conjunction with such
financial statements. The summary unaudited proforma combined financial data for
the Company and BioQuant is derived from and should be read in conjunction with
such financial statements and the notes thereto. The unaudited proforma
statement of operations data assumes the merger of BioQuant and a wholly-owned
subsidiary of the Company occurred on July 1, 1995. The balance sheet
information assumes the transactions occurred on June 30, 1996. No proforma
adjustments have been made to the statement of operations. The unaudited
proforma combined balance sheet data reflects adjustments for the issuance of
the 1,700,000 Units offered hereby as of June 30, 1996 (see Note 2 below).

The proforma adjustment is based upon currently available information and
certain estimates and assumptions and, therefore, the actual adjustment may
differ from the proforma adjustment. Management believes, however, that the
assumptions provide a reasonable basis for presenting the significant effects of
the transactions as they relate to the fiscal year ended June 30, 1996, and that
the proforma adjustment approximates the effect to those assumptions and are
properly applied to the proforma financial information. The following proforma
information should not be used to compare 1995 with 1996, and should not be
deemed indicative of future operating results for the consolidated operations of
the Company.

<PAGE>
STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------ FOR THE PERIOD FROM INCEPTION
1995 1996 TO JUNE 30, 1996
----------- ---------------------------- ------------------------------
PROFORMA PROFORMA
COMBINED COMBINED
ACTUAL ACTUAL (UNAUDITED)(1) ACTUAL(4) (UNAUDITED)(5)
----------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Laboratory revenues and
consulting fees...... $ 566,832 $ 1,657,280 $ 1,662,118 $ 2,224,112 $ 2,248,958
----------- ----------- -------------- ------------ --------------
Operating expenses:
Laboratory........... 373,554 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product
development....... 665,747 604,803 1,113,986 1,464,661 4,635,893
General and
administrative.... 739,149 1,281,100 1,617,229 2,766,434 4,955,532
Purchased in-process
research and
development....... 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of
goodwill.......... 428,368 428,368 428,368
----------- ----------- -------------- ------------ --------------
2,206,818 9,245,605 10,090,917 12,392,719 17,753,049
----------- ----------- -------------- ------------ --------------
Operating loss......... (1,639,986) (7,588,325) (8,428,799) (10,168,607) (15,504,091)
----------- ----------- -------------- ------------ --------------
Other income (expense):
Interest expense..... (26,162) (39,853) (59,526) (66,015) (149,208)
Grants and other
income............ 1,958 67,315 177,721 77,240 2,708,652
----------- ----------- -------------- ------------ --------------
(24,204) 27,462 118,195 11,225 2,559,444
----------- ----------- -------------- ------------ --------------
Net loss............... $(1,664,190) $(7,560,863) $ (8,310,604) $(10,157,382) $ (12,944,647)
----------- ----------- -------------- ------------ --------------
----------- ----------- -------------- ------------ --------------
Net loss per share..... $ (1.68) $ (5.89) $ (2.78) $ (10.16) $ (4.79)
----------- ----------- -------------- ------------ --------------
----------- ----------- -------------- ------------ --------------
Weighted-average number
of common shares
outstanding.......... 988,415 1,284,285 2,984,285(3) 999,479 2,699,479(3)
----------- ----------- -------------- ------------ --------------
----------- ----------- -------------- ------------ --------------
</TABLE>

BALANCE SHEET DATA:

<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------------
PROFORMA
COMBINED
ACTUAL (UNAUDITED)(2)
------------ --------------
<S> <C> <C>
Working capital (deficit)........................... $ (1,723,942) $ 4,851,308
Total assets........................................ $ 840,113 $ 7,415,363
Total liabilities................................... $ 2,224,550 $ 2,224,550
Deficit accumulated during the development stage.... $(10,157,382) $ (10,157,382)
Stockholders' equity (deficit)...................... $ (1,384,437) $ 5,190,813
</TABLE>
- ------------------
(1) Reflects statement of operations data as if the merger of BioQuant into a
wholly-owned subsidiary of the Company had occurred on July 1, 1995.

(2) Reflects balance sheet data after giving proforma effect for the proceeds of
the Offering of 1,700,000 Units for net proceeds of $6,575,250.

(3) The proforma weighted-average number of shares and common stock equivalents
outstanding consists of the weighted-average number of shares and common
stock equivalents actually outstanding during the year, computed as
described in Note 2 to the consolidated financial statements of the Company,
plus the number of shares to be issued pursuant to this Offering.

(4) Inception to date with regard to the Company is for the period from December
1992 to June 30, 1996, with regard to BioQuant, inception to date is for the
period from October 1985 to June 30, 1996.

(5) Reflects the combined results of operations of the Company and BioQuant for
the period from inception to June 30, 1996, assuming that the companies had
been combined for their entire operating period.

<PAGE>
UNAUDITED CONDENSED COMBINED PROFORMA FINANCIAL DATA

The following unaudited condensed combined proforma financial data reflects
the acquisition of BioQuant, as more fully described in the accompanying notes
to the financial statements. The proforma statement of operations for the year
ended June 30, 1996, assumes the transaction described above occurred on July 1,
1995. The historical financial data for the Company (which includes PBI-WA) and
BioQuant for the year ended June 30, 1996, are derived from the historical
financial statements of the Company (which includes PBI-WA) and BioQuant and
should be read in conjunction with such financial statements (including the
notes thereto) which are included elsewhere in this Prospectus. The unaudited
condensed combined proforma financial data is not necessarily indicative of the
results that would have been reported had such events occurred on the dates
specified, nor is it indicative of the Company's future results. In the opinion
of management, all adjustments necessary to present fairly this proforma
information have been made.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996 FOR THE PERIOD FROM
--------------------------------------- INCEPTION TO
UNAUDITED JUNE 30, 1996
PROFORMA, ---------------------------
COMPANY BIOQUANT(1) AS ADJUSTED ACTUAL(4) PROFORMA(5)
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Laboratory revenues and
consulting fees...... $ 1,657,280 $ 4,838 $ 1,662,118 $ 2,224,112 $ 2,248,958
----------- ----------- ----------- ------------ ------------
Operating Expenses:
Laboratory........... 985,818 985,818 1,359,372 1,359,372
Diagnostic research
and product
development........ 604,803 509,183 1,113,986 1,464,661 4,635,893
General and
administrative..... 1,281,100 336,129 1,617,229 2,766,434 4,955,532
Purchased in-process
research and
development(2)..... 6,373,884 6,373,884 6,373,884 6,373,884
Amortization of
goodwill............. 428,368 428,368
----------- ----------- ----------- ------------ ------------
9,245,605 845,312 10,090,917 12,392,719 17,753,049
----------- ----------- ----------- ------------ ------------
Operating loss......... (7,588,325) (840,474) (8,428,799) (10,168,607) (15,504,091)
----------- ----------- ----------- ------------ ------------

Other income (expense):
Interest expense..... (39,853) (19,673) (59,526) (66,015) (149,208)
Grants and other
income............. 67,315 110,406 177,721 77,240 2,708,652
----------- ----------- ----------- ------------ ------------
27,462 90,733 118,195 11,225 2,559,444
----------- ----------- ----------- ------------ ------------
Net loss............... $(7,560,863) $(749,741) $(8,310,604) $(10,157,382) $(12,944,647)
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Net loss per share..... $ (5.89) $ (2.78) $ (10.16) $ (4.79)
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Weighted-average number
of common shares..... 1,284,285 2,984,285(3) 999,479 2,699,479(3)
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>

- ------------------
(1) Includes the historical operations of BioQuant from July 1, 1995 to June 30,
1996, the effective date of the acquisition for accounting purposes.

(2) Represents a one-time noncash charge to operations relating to the write-off
of purchased in-process research and product development in conjunction with
the acquisition of BioQuant that had met several milestones during the
development process, but for which clinical trials had not yet commenced
and, in the opinion of management, had no alternative use. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'

(3) The proforma weighted-average number of shares outstanding consists of the
weighted-average number of shares and common stock equivalents actually
outstanding during the year, computed as described in Note 2 to the audited
consolidated financial statements, plus the number of shares to be issued
pursuant to this Offering.

<PAGE>
RISK FACTORS

An investment in the securities offered hereby is highly speculative and
subject to a high degree of risk, and only those who can bear the risk of the
entire loss of their investment should participate. Prospective investors should
carefully consider the following factors in analyzing this Offering.

1. History of Losses; Uncertainty of Future Profitability. The Company has
incurred significant operating losses since inception. The consolidated net loss
for the fiscal year ended June 30, 1996 was approximately $8,310,000, which
includes a one-time charge of approximately $6,374,000. The Company's
accumulated deficit at June 30, 1996 was approximately $10,157,000, including
one-time charges of an aggregate of approximately $6,802,000. The one-time
charges are related to amortization of goodwill and purchased research and
development, in connection with the Company's mergers with BioQuant and PBI-WA.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.' No assurance can be given that the net loss and accumulated deficit
will not continue to increase or that the Company will ever achieve profitable
operations. The Company has not had an extensive operating history and revenues
to date have been limited. Potential investors should be aware of the problems,
delays, expenses and difficulties encountered by an enterprise in the Company's
stage of development, many of which may be beyond the Company's control. These
include, but are not limited to, unanticipated problems relating to the
competitive and regulatory environment in which the Company operates and
marketing problems and additional costs and expenses that may exceed current
estimates. Potential investors should be aware of the difficulties normally
encountered by new enterprises and the high rate of failure associated with such
enterprises. The likelihood of success must be considered in light of the
problems, expenses, difficulties, complications, delays and competition
encountered in connection with the development of a business in the
biotechnology industry.

The Company will be required to conduct significant research, development,
testing and regulatory compliance activities that, together with projected
general and administrative expenses, are expected to result in significant
operating losses for at least the next twenty-four months. Revenues, if any,
that the Company may receive in the next twenty-four months will be limited to
revenues received from the Company's laboratory operations, payments under
research or product development relationships and payments under license
agreements which may be established and nominal revenues received in connection
with the SPINPRO(Registered) product. There can be no assurance, however, that
the Company will be able to establish any such relationships or enter into any
such license agreements. The Company's ability to achieve profitability depends
upon its ability to successfully complete, either alone or with others,
development of its potential medical diagnostic products, conduct clinical
trials, obtain required regulatory approvals, and manufacture and market its
products or enter into license agreements, on acceptable terms. In the event
that the Company enters into any future license agreements, such license
agreements may adversely affect the Company's profit margins on its potential
products. The Company may never achieve significant revenue or profitable
operations.

2. Explanatory Paragraph in Independent Accountants' Report. The Company's

independent auditors have included an explanatory paragraph in their report on
the Company's financial statements to the effect that certain matters raise
substantial doubt about the Company's ability to continue as a going concern,
which is contingent upon the Company's ability to secure financing and attain
profitable operations. In addition, the Company's ability to continue as a going
concern must be considered in light of the problems, expenses and complications
frequently encountered by development stage companies, introduction of new
products and the competitive environment in which the Company operates. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'Business,' 'Report of Independent Auditors' and 'Financial
Statements.'

3. Early Stage of Development; Regulatory and Technological
Uncertainties. The Company is at an early stage of development. Except for the
SPINPRO(Registered) HDL cholesterol product and revenues from its laboratory,
all of the Company's potential products are currently in research and
development, and no revenues have been generated to date. A significant portion
of the Company's resources have been, and for the foreseeable future will
continue to be, dedicated to the Company's research programs and the development
of potential medical diagnostic products emanating therefrom. There can be no
assurance that the Company will be able to develop a commercial product from
these projects. The Company currently has three potential products in
preclinical development, none of which have entered human clinical trials. While
the Company believes that the results attained to date in such preclinical
studies support further research and development of these potential products,
results attained in preclinical studies are not necessarily indicative of
results that will be obtained in human clinical trials.

9
<PAGE>
The potential medical diagnostic products currently under development by
the Company may require significant additional research and development and
preclinical testing and will require extensive clinical testing prior to
submission of any regulatory application for commercial use. The Company's
potential products are subject to the risks of failure inherent in the
development of medical diagnostic products based on new technologies. These
risks include the possibilities that the Company's novel approach to diagnosis
will not be successful; that any or all of the Company's potential products will
not be found to be safe and effective or otherwise fail to receive necessary
regulatory clearances; that the products, if safe and effective, will be
difficult to manufacture on a large scale or uneconomical to market; that
proprietary rights of third parties will preclude the Company from marketing
such products; or that third parties will market superior or equivalent
products. As a result, there can be no assurance that the Company's research and
development activities will result in any commercially viable products.

4. Future Capital Needs; Uncertainty of Additional Funding. The Company
will require substantial additional funds in order to continue the research and
development programs and preclinical testing of its potential diagnostic
products and to conduct clinical trials and marketing of such products that may
be developed. The Company's capital requirements depend on numerous factors,
including the progress of its research and development programs, the progress of
preclinical and clinical testing, the time and costs involved in obtaining

regulatory approvals, the cost of filing, prosecuting, defending and enforcing
any patent claims and other intellectual property rights, competing
technological and market developments, changes in the Company's existing license
and supply relationships, the ability of the Company to establish collaborative
arrangements, the development of commercialization activities and arrangements,
and the purchase of additional capital equipment. Other than the Company's
laboratory revenues and nominal revenues from sales of the SPINPRO(Registered)
product, the Company has no current source of revenues or capital beyond the
proceeds of this Offering. Based upon its current plans, which the Company
anticipates will include commencing human clinical trials on the
Osteopatch(Trademark) during the next twelve months, the Company believes that
the net proceeds of this Offering, together with cash flows from operations,
will be sufficient to meet the Company's operating expenses and capital
requirements for approximately eighteen months.

If the Company's current and projected needs change due to unanticipated
events or otherwise, the Company may be required to obtain additional capital.
The Company intends to seek such additional funding through public or private
financings or collaborative or other arrangements with corporate partners. There
can be no assurance, however, that additional financing will be available from
any of these sources, or if available, will be available on acceptable terms. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate one or more of its research and development programs,
including but not limited to the development of the Osteopatch(Trademark), or to
obtain funds through entering into arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies or potential products that the Company would not otherwise
relinquish.

5. Possible Inability to Meet Obligations. Historically, the Company has
had difficulty in meeting its obligations as they come due. In fiscal 1996 the
Company defaulted on a $200,000 bank line of credit, which was subsequently
converted into a term loan. The Company is making monthly payments of principal
and interest thereon, however, should the Company default on any such payments
and the term loan is accelerated, the Company may have to reallocate its
anticipated use of proceeds from this Offering. See 'Use of Proceeds.'
Additionally, the Company was required to make a minimum royalty payment in June
1996 under the SPINPRO(Registered) license agreement in order to maintain
exclusivity of the technology. The Company elected not to utilize its sparse
resources to make such payment and believes that the loss of exclusivity, of
which the Company has not yet been notified, will not have a material adverse
effect on the business or prospects of the Company or give the Company's
competitors any material advantage. Further, the Company had borrowed an
aggregate of $660,000 from certain stockholders, which borrowings matured in May
1995. The Company did not have sufficient resources to satisfy its obligations
to these stockholders, however, no demand was made by such stockholders for
repayment. Subsequent to June 30, 1996, $460,000 of such borrowings were
converted into 142,274 shares of Common Stock and the remaining $200,000 was
refinanced in connection with the Bridge Loan. See 'Certain Relationships and
Related Transactions.' Although the Company believes that the net proceeds of
this Offering, together with anticipated revenues, will be sufficient to meet
the Company's operating expenses and capital requirements for approximately

eighteen months, there can be no assurance that such funds will, in fact, be
sufficient or that the Company will be able to meet all of its obligations as
they come due.

6. Discretionary Use of Proceeds; Repayment of Debt. Although the Company
anticipates utilizing the proceeds of this Offering as stated herein, management
of the Company will have broad discretion as to the

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<PAGE>
actual uses of such proceeds. Additionally, circumstances currently expected may
change in the future resulting in a reallocation of resources from that
originally contemplated. Approximately $1,015,000 of the proceeds received in
this Offering will be utilized to repay amounts outstanding under the Bridge
Loan. Of such amount, approximately $58,000 is held by a director of the
Company. See 'Use of Proceeds.'

7. Dependence on Collaborators. The Company's strategy for the research,
development and commercialization of its potential medical diagnostic products
has and will require the Company to enter into various arrangements with
corporate and academic collaborators, licensors, licensees and others, and may
therefore be dependent upon the subsequent success of these outside parties in
performing their responsibilities. There can be no assurance that the Company
will be able to establish collaborative arrangements or license agreements that
the Company deems necessary or acceptable to develop and commercialize its
potential products or that such collaborative arrangements or license agreements
will be successful. Moreover, certain of the collaborative arrangements that the
Company may enter into in the future may place responsibility for preclinical
testing and human clinical trials and for preparing and submitting applications
for regulatory approval for potential products on the collaborative partner.
Should a collaborative partner fail to develop or commercialize successfully any
potential product to which it has rights, the Company's business, financial
condition and results of operations may be materially adversely affected. In
addition, there can be no assurance that the collaborative partner will not be
pursuing alternative competing technologies or developing competing products
either on their own or in collaboration with others, including the Company's
competitors, as a means for developing diagnostic processes for the diseases or
disorders targeted by the Company's collaborative programs.

8. Dependence on Licenses; Sale of Underlying Patents; Conflict of
Interest. The Company has licensed technologies developed by various companies
and research institutes and universities. Pursuant to the terms of those
agreements, the Company is obligated to exercise diligence in bringing potential
products to market and to make certain royalty payments that in some instances
may be substantial. The Company is also obligated to make royalty payments on
the sales, if any, of licensed products. In addition, in some instances, the
Company is responsible for making minimum royalty payments without generating
sales and may incur costs of filing and prosecuting patent applications. Each

license agreement is terminable by either party, upon notice, if the other party
defaults in its obligations. The Company licensed the technology for development
of its Osteopatch(Trademark) product from the owner of the patents covering such
technology pursuant to arrangements requiring minimum quarterly royalty
payments. The Company is aware that the owner of such patents is in the process
of seeking a buyer therefor. Additionally, the owner of such patents has
contracted with an affiliate of a director of the Company to facilitate the sale
process. Although the Company believes that its license agreement will not be
affected by any sale of the patents which are the subject of such license
because such license is valid and enforceable and the Company has been informed
by the director of the Company involved in the sale that any conflicts will be
resolved in favor of the Company, there can be no assurance that such patents
will not be sold to a competitor of the Company, that any conflicts of interest
involving the director of the Company engaged to facilitate the sale will be
resolved in favor of the Company or that any buyer of the patents will honor the
Company's license agreement, in which case the Company will be required to
enforce its rights under the license when it may not have the resources to do
so. See 'Business--Material Contracts.' The termination or cancellation of any
of the Company's licensing arrangements would have a material adverse effect on
the Company's business, financial condition and results of operations.

9. Uncertainty of Protection of Patents and Intellectual Property Rights;
Risk of Patent Infringement Liability. The Company's success depends on its
ability to obtain future patents, protect existing patents, licenses,
intellectual property rights, trade secrets, and to operate without infringing
upon the proprietary rights of others and prevent others from infringing on the
intellectual property rights of the Company. In addition, the Company has
exclusive licenses from third parties under various U.S. patents and pending
U.S. patent applications to the technology covered in whole or in part by the
claims therein. Since a patent may be invalid or circumvented by alternative
technologies, there can be no assurance as to the breadth of protection that any
such patents may afford the Company. In the event the Company is held liable for
patent infringement, insurance may not cover any or all of the infringement
damages and as such, any infringement liability would adversely affect the
business, financial condition and results of operations of the Company.

There can be no assurance that any patent applications relating to the
Company's potential products or processes will result in patents being issued,
or that resulting patents, if any, or existing patents, will provide protection
against competitors who successfully challenge the Company's patents, obtain
patents that may have an adverse effect on the Company's ability to conduct
business, or are able to circumvent the Company's patent position. It is
possible that other parties have conducted research or made discoveries of
processes that preceded the Company's discoveries, which could prevent the
Company from obtaining patent protection of these

11
<PAGE>
discoveries. A substantial number of patents have been applied for by and issued
to other pharmaceutical, biotechnology and biopharmaceutical companies, and
other companies may have filed applications for, may have been issued patents or

may obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company. In view of the time delay in
patent approval and the secrecy afforded patent applications, the Company does
not know if there are patent applications belonging to others which have
priority over applications belonging to the Company. There can be no assurance
that others will not independently develop products similar to or obsoleting
those under development by the Company, or, notwithstanding the Company's
intellectual property protections, duplicate any of the Company's products. The
Company may determine there is no economic benefit in commencing or continuing a
patent infringement action. Further, as stated above, there can be no assurance
that the Company's current or future exclusive licenses will not be challenged
or that such license arrangements will be honored by those granting such
licenses or their successors in interest. In such event, the Company would be
required to enforce its intellectual property rights at a time when it does not
have the resources to do so, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

10. No Marketing, Sales, Clinical Testing or Regulatory Compliance
Experience. In view of the early stage of the Company and its research and
development programs, the Company has restricted hiring to research scientists
and a small administrative staff and has relied on external consulting resources
for support in regulatory compliance and marketing. The Company has made no
investment in marketing, product sales or regulatory compliance resources. If
the Company successfully develops any commercially marketable medical diagnostic
product, it may seek to enter into a joint venture, sublicense or other
marketing arrangement with parties that have an established marketing
capability, or it may choose to pursue the commercialization of such products on
its own. There can be no assurance, however, that the Company will be able to
enter into such marketing arrangements on acceptable terms, if at all. Further,
the Company will need to hire additional personnel skilled in the clinical
testing and regulatory compliance process and in marketing or product sales if
it develops products with commercial potential that it determines to
commercialize itself. There can be no assurance, however, that it will be able
to acquire such personnel. In addition, the Company's laboratory business is
subject to federal regulation under the Clinical Laboratory Improvement
Amendments of 1988 ('CLIA') and regulations promulgated thereunder and the FDA's
Good Laboratory Practices for Nonclinical Laboratory Studies regulations.
Failure to comply with applicable regulations could result in loss of
certification under CLIA and disqualification resulting in the exclusion of
studies performed in the laboratory from consideration in support of FDA
submissions, as well as civil and criminal sanctions.

11. Risk of Product Liability; Product Liability Insurance May Be
Insufficient or Unavailable. Sales of the Company's products entails the risk
of product liability claims. The Company faces financial exposure to product
liability claims in the event that use of its products results in personal
injury. The Company also faces the possibility that defects in the design or
manufacture of its products might necessitate a product recall. There can be no
assurance that the Company will not experience losses due to product liability
claims or recalls in the future. The Company currently maintains product
liability insurance with coverage limits and there can be no assurance that the

coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. No assurance can be given that product
liability insurance can be maintained in the future at a reasonable cost or in
sufficient amounts to protect the Company against losses due to liability. Any
inability to maintain insurance at an acceptable cost or to otherwise protect
against potential product liability could prevent or inhibit the continued
commercialization of the Company's products. In addition, a product liability
claim in excess of relevant insurance coverage or product recall could have a
material adverse effect on the Company's business, financial condition and
results of operations.

12. Government Regulation and Product Approval. The U.S. Food and Drug
Administration ('FDA') and comparable agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the testing,
manufacturing and marketing of therapeutic and diagnostic products, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures. Satisfaction of these
requirements may take several years or more and varies substantially based upon
the type, complexity and novelty of the diagnostic product.

Although the Company believes that its products currently under development
will be classified as 'Class II' medical devices allowing the Company to use the
more expedient 510(k) notification procedure, there can be no assurance that the
FDA will not require the Company to submit the more cumbersome and lengthy
pre-market approval ('PMA') application. The Company will attempt to market its
products pursuant to Section 510(k) of the Food, Drug and Cosmetic Act (the 'FDC
Act'), which would require filing a 510(k) submission, but not a

12
<PAGE>
PMA application. According to the FDA's Office of Device Evaluation Annual
Report, during 1995, the average 510(k) review time was approximately six
months, significantly shorter than the PMA application review process, which
approximated one year. There can be no assurance, however, that the 510(k)
review process will not take more than six months or that the FDA will not
require the Company to submit a PMA application. The 510(k) process requires
that the Company show, among other things, that its product is substantially
equivalent to another legally marketed product. The Company may begin marketing
once the FDA issues an order allowing the product to be marketed. If a medical
device does not qualify for the 510(k) notification procedure, the Company must
file a PMA application, which requires more extensive clinical testing and
submissions and involves a longer process of regulatory review and approval.

The Company believes that its osteoporosis product will be classified as a
'Class II' medical device, which will permit the Company to use the 510(k)
notification procedure. The Company is relying on (i) the fact that the FDA has
already cleared the skin patch, which has been licensed to the Company by
Sudormed, Inc. ('Sudormed') as a general sample collection device and as a
perspiration collection device for diagnosis of five drugs of abuse (opiates,
PCP, THC, cocaine and amphetamines) and thereby may be expected to clear the

skin patch as a collection device for pyridinoline ('Pyd') and deoxypyridinoline
('Dpd') and (ii) the fact that the FDA has cleared Metra's 510(k) submissions
for its immunoassay test kits, which measure Pyd and Dpd levels in 'first
morning void' urine samples. If the Company is able to demonstrate a correlation
between Pyd and/or Dpd levels in perspiration and measurable physiologic changes
in patients, the Company believes that its osteoporosis product can be shown to
be substantially equivalent to medical devices (i.e., diagnostic kits for
measurement of Pyd and/or Dpd levels in urine) which the FDA has already cleared
for marketing and thus qualifying the Company's product for the 510(k)
notification procedure. The FDA may respond to the Company's 510(k)
notification, however, by directing the Company to file a PMA application for
the osteoporosis product because, despite the Company's correlation studies and
clinical tests, the FDA may consider perspiration too different from urine as a
medium for Pyd and/or Dpd. If the Company is required to file a PMA application
for its osteoporosis product, the Company would be required to conduct
substantial additional research and clinical tests before doing so, and would be
unable to file a PMA application for approximately 12 to 18 months. Even if the
FDA permits the Company to proceed with a 510(k) notification, the FDA may
require the Company to support its notification with additional research and
clinical test data, resulting in a longer process of regulatory review than is
typical for 510(k) notifications.

The Company has relied on scientific, technical, clinical, commercial and
other data supplied or disclosed by others, including its collaborators, and may
rely on such data in support of applications to enter human clinical trials for
its potential products. Although the Company has no reason to believe that this
information contains errors or omissions of fact, there can be no assurance that
there are no errors or omissions of fact that would materially change the
Company's view of the likelihood of FDA approval or commercial viability of
these potential products. There can be no assurance that clinical data from
studies performed by others will be available to the Company or acceptable to
the FDA or other regulatory agencies in support of the Company's applications
for regulatory approval, and the FDA may, among other things, require the
Company to collect additional data and conduct controlled clinical studies prior
to acceptance of any such applications.

The effect of government regulation may be to delay for a considerable
period of time or prevent the marketing of any product that the Company may
develop and/or to impose costly requests for additional animal, human or other
data upon the Company, the result of which may be a delay in the marketing of
its products, thus furnishing an advantage to its competitors. There can be no
assurance that the FDA or other regulatory approval for any products developed
by the Company will be granted on a timely basis or at all. Any such delay in
obtaining or failure to obtain such approvals would adversely affect the
marketing of the Company's proposed products and the ability to earn product
revenues or royalties. As with all investigational products, additional
government regulations may be promulgated requiring additional research and data
to be submitted that could delay marketing approval of the Company's potential
products. The Company cannot predict whether any adverse government regulation
might arise from future legislation or other governmental action.

While the Company believes it is aware of all the permits it is required to
obtain and all of the governmental regulations it is required to comply with,
and believes that it can obtain such permits and comply with all such

regulations in the future, there can be no assurance that this will be the case,
that such compliance might not increase the expenses the Company will incur or
that such regulations will not be modified, making it increasingly difficult for
the Company to operate its business as it presently anticipates. See 'Business--
Government Regulation.'
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<PAGE>

13. Risks Inherent in International Transactions. The Company plans to
market its products to customers both in the U.S. and abroad. International
sales and operations may be limited or disrupted by the imposition of government
controls, export license requirements, economic and political instability, price
controls, trade restrictions, and changes in tariffs or difficulties with
foreign distributors. Foreign regulatory agencies often establish product
standards different from those in the U.S. and any inability to obtain or
maintain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's international business operations. Additionally,
the Company's business, financial condition and results of operations may be
materially and adversely affected by fluctuations in currency exchange rates as
well as increases in duty rates and difficulties in obtaining required licenses
and permits. There can be no assurance that the Company will be able to
successfully commercialize its products in any foreign market. In addition, the
laws of some countries do not protect the Company's proprietary rights to the
same extent as do the laws of the U.S.

Distribution of the Company's products outside the U.S. is subject to
extensive government regulation. These regulations, including the requirements
for approvals or clearance to market, the time required for regulatory review
and the sanctions imposed for violations, vary from country to country. There
can be no assurance that the Company will obtain regulatory approvals in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals. In addition, the
export by the Company of certain of its products which have not yet been cleared
for domestic commercial distribution may be subject to FDA export restrictions.
Failure to obtain necessary regulatory approvals, the restriction, suspension or
revocation of existing approvals or any other failure to comply with regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Business--Government
Regulation.'

14. Uncertainty of Market Acceptance. The commercial success of the
Company's products will depend upon their acceptance by the medical community
and third-party payors as clinically useful, cost-effective and safe. Pyridinium
crosslinks to measure bone loss, the technology used with the Company's
Osteopatch(Trademark), is a relatively new technology. Market acceptance will
depend on several factors, including the establishment of clinical utility of
these biochemical markers, the receipt of regulatory clearances in the U.S. and
elsewhere, the development of diagnostic tests that can be processed using
commercially available automated systems, the availability of third-party
reimbursement, extensive physician education and the approval and commercial
acceptance of therapies for the treatment of osteoporosis. There can be no
assurance that the Company's products will gain market acceptance. Failure to

achieve market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations.

15. Manufacturing Limitations. The Company currently does not have the
capability to manufacture products under the current Good Manufacturing
Practices regulations ('GMP') promulgated by the FDA. Accordingly, the Company
intends to outsource its manufacturing requirements relating to the
Osteopatch(Trademark) and the chemical reagent and test tubes to be used in
laboratory analysis. The Company has established or is in the process of
establishing arrangements with contract manufacturers to supply sufficient
quantities of such products to conduct clinical trials as well as for the
manufacture, packaging, labeling and distribution of finished products if its
potential products are approved for commercialization. If such arrangements are
terminated and if the Company is unable to manufacture or contract for a
sufficient supply of its potential products on acceptable terms, the Company's
preclinical and human clinical testing schedule may be delayed, resulting in the
delay of submission of products for regulatory approval and initiation of new
development programs, which may have a material adverse effect on the Company's
business, financial condition and results of operations. Contract manufacturers
used by the Company currently adhere to GMP. The FDA may require, prior to
510(k) clearance, and would require prior to approval of a PMA application, that
the manufacturing facility pass a GMP inspection. The Company may also be
required to obtain a license from the state in which the products will be
manufactured in order to manufacture any investigational products, which license
will be issued only if the Company is in compliance with, among others, GMP
regulations. The Company's dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit margins and its ability
to develop and deliver such products on a timely and competitive basis. The
Company has limited experience in the manufacture of diagnostic products or
medical devices in clinical quantities and for commercial purposes. Should the
Company determine to manufacture products itself, the Company would be subject
to the regulatory requirements described above, would be subject to similar
risks regarding delays or difficulties encountered in manufacturing

14
<PAGE>
any such products and would require substantial additional capital. In addition,
there can be no assurance that the Company will be able to manufacture any
products successfully and in a cost-effective manner. The Company has entered
into a supply agreement with an affiliate of the licensor of the technology
relating to the Osteopatch(Trademark) for the production of the
Osteopatch(Trademark) product. The supply agreement requires minimum annual
purchases of the Osteopatch(Trademark) product commencing during the twelve
month period ending March 31, 1997. Failure to purchase the required annual
minimum amounts would result in a default under the license agreement relating
to the technology incorporated into the Osteopatch(Trademark). Loss of such
license, loss of the supplier or failure of the supplier to comply with GMP will
have a material adverse effect on the Company's business, financial conditions
and results of operations.

16. Competition and Technological Change. There are many companies, both
public and private, including well-known pharmaceutical companies, chemical
companies and specialized biotechnology companies, engaged in developing medical
diagnostic products for certain of the applications being pursued by the
Company. Many of these companies have substantially greater capital, research
and development, manufacturing, marketing and human resources and experience
than the Company and represent substantial long-term competition for the
Company. Such companies may develop products more quickly or products that are
more effective and less costly than any that may be developed by the Company.
The industry in which the Company proposes to compete is characterized by
extensive research efforts and rapid technological progress. New developments
are expected to continue and there can be no assurance that discoveries by
others will not render the Company's products or potential products
noncompetitive. Competition may increase further as a result of advances that
may be made in the commercial applicability of technologies and greater
availability of capital for investment in these fields. See 'Business--
Competition.'

17. Uncertainty of Product Pricing; Healthcare Reform and Related
Matters. The levels of revenues and profitability of pharmaceutical and
biotechnology companies may be affected by the continuing efforts of
governmental and third party payors to contain or reduce the costs of healthcare
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals and medical diagnostic processes
are subject to government control. In the U.S., there have been, and the Company
expects that there will continue to be, a number of federal and state proposals
to implement similar government control. It is uncertain what legislative
proposals will be adopted or what actions federal, state or private payors for
healthcare goods and services may take in response to any healthcare reform
proposals or legislation. The Company cannot predict the effect healthcare
reforms may have on its business, and no assurance can be given that any such
reforms will not have a material adverse effect on the Company's business,
financial condition and results of operations. Further, to the extent that such
proposals or reforms have a material adverse effect upon the business, financial
condition and profitability of other companies that are prospective
collaborators for certain of the Company's potential products, the Company's
ability to commercialize its potential products may be adversely affected. In
addition, in both the U.S. and elsewhere, sales of medical products are
dependent in part on the availability of reimbursement to the consumer from
third party payors, such as government and private insurance plans. If the
Company succeeds in bringing one or more products to the market, there can be no
assurance that third party payors will provide sufficient reimbursement to the
consumer to allow the Company to sell its products competitively.

18. Reliance on Distributors, Suppliers and Manufacturers. The Company is,
and expects that it will continue to be, highly dependent upon certain
distributors, suppliers and manufacturers and the Company's ability to operate
competitively will depend, at least in part, on its ability to assure continuous
and reliable sources of distribution and supply. If the suppliers become unable

or unwilling to continue to produce products or components for the Company
according to the Company's specifications, or to meet the Company's delivery
schedules, the Company's operations could be materially disrupted, especially
over the short term, resulting in a material adverse effect on its results of
operations or the success or timing of necessary clinical trials. There is no
assurance that the Company's distributors and suppliers will remain in business
or honor their arrangements with the Company. See 'Business--Material
Contracts.'

19. Dependence on Major Customers. Revenues received from laboratory
operations are generally pursuant to short-term contracts. The Company's five
largest customers with respect to its laboratory business represented
approximately 63.0 percent and 64.8 percent of total sales in fiscal 1996 and
fiscal 1995, respectively. Except for Parke-Davis, Inc. ('Parke-Davis'), which
represented approximately 29.5 percent and

15
<PAGE>
43.9 percent of the Company's total sales in fiscal 1996 and fiscal 1995,
respectively, none of these customers were significant in more than one year.
The Company has no long term contracts or agreements with its customers. Each
contract is negotiated separately with the pharmaceutical manufacturer or
research organization and is usually limited to a specific project with limited
duration. The cancellation of any contracts with existing customers or the
failure to replace such contracts upon expiration or termination could have a
material adverse effect on the Company's laboratory operations. See 'Business--
Major Customers.'

20. Dependence on Key Personnel. The Company's success depends upon the
continued contribution of Ellen Rudnick, Chairman, Paul Kanan, President, G.
Russell Warnick, Chief Scientific Officer and Elizabeth Teng Leary, Vice
President and Director of Laboratories, and its ability to attract and retain
qualified personnel in the future. The loss of services of, or a material
reduction in the amount of time devoted to the Company by, any of such persons
could impair the development of the Company's programs and may have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company entered into employment agreements with each of Ms.
Rudnick, Mr. Kanan, Mr. Warnick and Ms. Leary. See 'Management--Employment
Agreements.' The Company does not maintain key person life insurance on any of
its key employees.

21. Effective Control by Principal Stockholders. The officers and
directors of the Company currently beneficially own approximately 69.8 percent
of the Common Stock of the Company (approximately 42.4 percent after this
Offering) and will have the ability to elect or significantly influence the
election of all of the directors of the Company and otherwise control or
significantly influence the affairs of the Company.

22. Arbitrary Determination of Offering Price. The offering price of the
securities offered hereby was arbitrarily determined by the Company and the
Underwriter and bears no relationship to the Company's assets, book value,
results of operations or other established criteria of value. The factors
considered in determining the public offering price, in addition to prevailing
estimates of the business potential and earning prospects of the Company, the
present state of the Company's development and an assessment of the Company's
management, as well as the consideration of the foregoing factors in relation to
market valuations of comparable companies, do not necessarily bear any
relationship to the Company's assets, accounting results or the book value of
the Company or other generally accepted criteria of value. See 'Underwriting'.

23. Absence of Dividends. The Company has not paid any cash dividends on
its capital stock and does not anticipate paying any such cash dividends in the
foreseeable future. Earnings, if any, will be retained to finance future growth.

24. Certain Anti-Takeover Measures. The Board of Directors has the
authority to issue up to 5,000,000 shares of undesignated Preferred Stock and to
determine the rights, preferences, privileges and restrictions of such shares
without any further vote or action by the stockholders. The issuance of
Preferred Stock under certain circumstances could have the effect of delaying or
preventing a change in control of the Company or otherwise adversely affecting
the rights of the holders of Common Stock. The Company does not plan to issue
any Preferred Stock in the foreseeable future. The issuance of Preferred Stock,
however, could be used, under certain circumstance, as a method of preventing a
takeover of the Company. The Board of Directors, without any action of the
holders of the Common Stock, could issue shares of Preferred Stock which could
have detrimental effect on the rights of holders of the Common Stock, including
loss of voting control. Anti-takeover provisions that could be included in the
Preferred Stock when issued may have a depressive effect on the market price of
the Company's securities and may limit a stockholder's ability to receive a
premium on their shares of Common Stock by discouraging takeover and tender
offer bids. Additionally, the Company is subject to the provisions of Section
203 of the General Corporation Law of the State of Delaware, an anti-takeover
statute enacted in 1988, which may make it more difficult for the Company to
engage in a business combination with an 'interested stockholder' as defined in
the statute. See 'Description of Securities.'

25. Substantial Dilution of Book Value. The officers, directors and
present stockholders of the Company have acquired their interest in the Company
at a cost substantially less than that which investors will pay for the Common
Stock offered hereby. An investment in such securities will result in an
immediate and substantial dilution of $3.22, or 68 percent, per share to
investors and an increase of $2.45, or 266 percent, per share in the book value
of the securities held by the present stockholders, including management. Future
issuances of securities by the Company will further dilute the ownership of
investors purchasing securities in this Offering.

<PAGE>

26. Underwriter's Purchase Warrant. Upon completion of this Offering, the
Company will grant the Underwriter a warrant to purchase 170,000 shares of
Common Stock at an exercise price of $5.70 per share. The Underwriter's Purchase
Warrant is being registered as part of this Offering. The issuance of this
Warrant and underlying securities may be considered to be additional
compensation to the Underwriter. During the four-year term (commencing one year
from the date hereof) that the Underwriter's Purchase Warrant is exercisable,
the holders thereof are given the opportunity to profit from a rise in the
market price of the Company's Common Stock. The holders of the Underwriter's
Purchase Warrant would be most likely to exercise the option at a time when the
Company could obtain capital by a new offering of securities, on terms more
favorable than those provided by the Underwriter's Purchase Warrant.
Consequently, the terms on which the Company could obtain additional capital
during such period may be adversely affected. Furthermore, if any or all of the
Underwriter's Purchase Warrant is exercised, the percentage of the Company's
Common Stock held by investors purchasing in this Offering will be reduced. See
'Underwriting.'

27. No Prior Public Trading Market. Prior to this Offering, there has been
no public trading market for the Units, the Common Stock or the Warrants. There
can be no assurance that a regular trading market will be established for the
Common Stock or the Warrants at the conclusion of this Offering or if
established, that such market will be sustained. There will be no market for, or
listing of, the Units. Purchasers of the securities offered hereby may,
therefore have difficulties in selling such securities should they desire to do
so. The market price for the Company's securities following this Offering may be
highly volatile. Factors such as the Company's financial results, introduction
of new products in the marketplace, and various factors affecting the healthcare
industry generally may have a significant impact on the market price of the
Company's securities, as well as price and volume volatility affecting small and
emerging growth companies, in general, and not necessarily related to the
operating performance of such companies. See 'Underwriting.'

28. Possible Restrictions on Market Making Activities in Company's
Securities. The Underwriter has advised the Company that it intends to make a
market in the Company's securities following consummation of this Offering. Rule
10b-6 promulgated under the Exchange Act may prohibit the Underwriter from
engaging in any market making activities with regard to the Company's securities
for the period from two or nine business days (or such other applicable period
as Rule 10b-6 may provide) prior to any solicitation by the Underwriter of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Underwriter may have to receive a fee for the exercise of Warrants following
such solicitation. As a result, the Underwriter may be unable to provide a
market for the Company's securities during the period the Warrants are
exercisable. Any temporary cessation of such market-making activities could have
an adverse effect on the market price of the Company's securities. See
'Underwriting.'

29. Future Sales of Common Stock Under Rule 144 or Otherwise. Of the
1,948,389 issued and outstanding shares of Common Stock as of the date of this
Prospectus, 623,236 shares are 'restricted securities,' as that term is defined
under Rule 144 promulgated under the Securities Act of 1933, as amended (the
'Securities Act'). Of the total shares outstanding, 1,522,097 shares are subject
to the restrictions contained in certain agreements with the Underwriter and
officers, directors and certain stockholders of the Company restricting the sale
or other disposition of such persons' Common Stock for 12 months (180 days with
respect to 263,356 shares) following the date of this Prospectus without the
prior written consent of the Underwriter. Subsequent to such 12 month
restriction, there will be 427,551 restricted shares which will be eligible for
sale under Rule 144 prior to or during August 1998. In general, under Rule 144,
a person (or persons whose shares are aggregated) who has satisfied a two-year
holding period may sell 'restricted securities' within any three-month period
limited to a number of shares which does not exceed the greater of one percent
of the then outstanding shares or the average weekly trading volume during the
four calendar weeks prior to such sale. Rule 144 also permits the sale (without
any quantity limitation) of 'restricted securities' by a person who is not an
affiliate of the issuer and who has satisfied a three-year holding period.
Accordingly, the 1,258,741 shares held by management will be subject to the
volume limitations described above so long as such persons are deemed affiliates
of the Company. See 'Shares Eligible for Future Sale' and 'Principal
Stockholders.'

30. Current Prospectus and State Registration Required to Exercise
Warrants. Purchasers of Units will be able to exercise the Warrants only if a
current prospectus relating to the securities underlying the Warrants is then in
effect and only if such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside. Although the Company will use its best
efforts to maintain the effectiveness of a current prospectus covering the
securities underlying the Warrants, there can be no assurance that the Company
will be able to do so. The Company will be unable to issue Common
17
<PAGE>
Stock to those persons desiring to exercise their Warrants if a current
prospectus covering the Common Stock issuable upon the exercise of the Warrants
is not kept effective or if such Common Stock is not qualified nor exempt from
qualification in the states in which the holders of the Warrants reside. See
'Description of Securities-- Warrants.'

31. No Assurance of Nasdaq Small Cap Market Listing. The Company has
applied to have the Common Stock and Warrants quoted on the Nasdaq Small Cap
Market. In order to have its securities quoted on the Nasdaq Small Cap Market,
an issuer is required to have total assets of at least $4,000,000, capital and
surplus of at least $2,000,000, a minimum price per share of not less than
$3.00, at least 100,000 publicly held common shares with a market value of at
least $1,000,000 and there must be a minimum of two registered and active market
makers. No assurance can be given that the Common Stock and Warrants will be
accepted for inclusion on the Nasdaq Small Cap Market or otherwise remain

qualified for quotation on the Nasdaq Small Cap Market. If for any reason the
Common Stock and Warrants are not eligible for quotation or do not remain
qualified for quotation on the Nasdaq Small Cap Market, then in such case the
securities are expected to be traded in the over-the-counter market through the
OTC Electronic Bulletin Board. Even assuming Nasdaq Small Cap Market
eligibility, there can be no assurance that an active trading market will
develop for the Company's securities.

32. Possible Delisting of Securities from Nasdaq Small Cap Market;
Disclosure Relating to Low-Priced Stocks. The Company's failure to meet
Nasdaq's Small Cap Market listing maintenance criteria in the future for any
reason may result in the discontinuance of the inclusion of the Company's
securities on the Nasdaq Small Cap Market. In order to remain quoted on the
Nasdaq Small Cap Market, a company must maintain $2,000,000 in assets, a
$200,000 market value of the public float and $1,000,000 in total capital and
surplus. In addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share; provided, however, that if a company falls
below such minimum bid price, it will remain eligible for inclusion in Nasdaq
Small Cap Market if the market value of the public float is at least $1,000,000
and the company has $2,000,000 in capital and surplus. In the event of Nasdaq
Small Cap Market delisting, trading, if any, in the Company's securities may
then continue to be conducted on the OTC Electronic Bulletin Board or in the
non-Nasdaq over-the-counter market. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of the Company's securities. In addition, the Company would be subject to Rule
l5g-9 (the 'Rule') promulgated under the Exchange Act, which imposes various
sales practice requirements on broker-dealers who sell securities governed by
the Rule to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5,000,000 or individuals with
a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by the Rule, the
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the Rule may have an adverse effect on the ability of
broker-dealers to sell the Company's securities and may affect the ability of
purchasers in this Offering to sell the Company's securities in the secondary
market and otherwise affect the trading market in the Company's securities.

The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in 'penny stocks.' Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules, which generally became effective January 1, 1993, require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
Commission that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the

customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker dealer and
salesperson compensation information must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
If the Company's securities become subject to the penny stock rules, investors
in this Offering may find it more difficult to sell their securities. The
Company's securities will, however, upon consummation of the Offering, be
outside the definitional scope of a penny stock under the rules.

<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the Units offered hereby
are estimated to be $6,575,250 ($7,629,037 if the Underwriter's over-allotment
option is exercised in full) after deducting underwriting discounts and
commissions of approximately $1,049,750 ($1,207,213 if the Underwriter's over
allotment option is exercised in full) and expenses of this Offering of
approximately $450,000. The Company anticipates that the net proceeds of this
Offering will be applied substantially as follows:

<TABLE>
<CAPTION>
APPROXIMATE
ALLOCATION OF PROCEEDS DOLLAR AMOUNT PERCENT
- -------------------------------------------------- ------------- -------
<S> <C> <C>
Osteopatch(Trademark) product development
activities...................................... $ 3,800,000 57.8%
Repayment of bridge loan.......................... 1,015,000 15.4%
Laboratory equipment.............................. 500,000 7.6%
Working capital................................... 1,260,250 19.2%
------------- -------
Total...................................... $ 6,575,250 100%
------------- -------
------------- -------
</TABLE>

The Bridge Loan funds were used by the Company for working capital
purposes, including the payment of license fees, repayment of certain
indebtedness including a $50,000 loan to the Company from Terry Giles, a
director of the Company, salaries and general and administrative expenses, and
for the purchase of laboratory equipment. Bridge Loan borrowings bear interest
at the rate of 14 percent per annum. Craig Goldstone, a director of the Company,
holds $58,334 of Bridge Loan notes that will be repaid with a portion of the net
proceeds of this Offering. See 'Certain Relationships and Related Transactions--
Bridge Financing.'

The Company anticipates using the proceeds of this Offering allocated to
working capital to fund anticipated growth in the laboratory operations and for
employee salaries and for general and administrative expenses.

The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds of this Offering, together with
projected revenues from operations, will be sufficient to satisfy its
contemplated cash requirements for approximately eighteen months. In the event
that the Company's plans change or its assumptions change or prove to be
inaccurate or if the proceeds of this Offering or projected revenues prove to be
insufficient to fund operations (due to unanticipated expenses, technical
problems, difficulties or otherwise), the Company may find it necessary or
advisable to reallocate some of the proceeds within the above-described
categories. The Company has no current arrangements with respect to, or sources
of, additional financing. There can be no assurance that any such additional

financing will be available to the Company on commercially reasonable terms, or
at all. See 'Risk Factors--Discretionary Use of Proceeds; Repayment of Debt.'

If the Underwriter's over-allotment option is exercised in full, additional
net proceeds of $1,053,787 will be added to working capital. Pending utilization
of the proceeds of the Offering, the Company may make temporary investments in
bank certificates of deposit, prime commercial paper, U.S. Government
obligations, investments in money-market funds or other similar short-term
low-risk investments.

CAPITALIZATION

The following table sets forth the Company's capitalization at June 30,
1996, and as adjusted to give effect to the issuance and the sale of the
1,700,000 Units offered hereby and the application of the estimated net proceeds
therefrom. This table should be read in connection with the Company's financial
statements.

<TABLE>
<CAPTION>
JUNE 30, 1996(1)
-------------------------------
ACTUAL PRO FORMA(2)(3)
------------ ---------------
<S> <C> <C>
Current liabilities............................... $ 2,224,550 $ 2,224,550
Stockholders' deficit:
Common stock, par value $.01 per share,
30,000,000 shares authorized; 1,739,215
shares outstanding; 3,439,215 shares pro
forma........................................ 17,392 34,392
------------ ---------------
Additional paid-in-capital...................... 8,755,553 15,313,803
Accumulated deficit............................. (10,157,382) (10,157,382)
------------ ---------------
Total Stockholders' equity (deficit)....... $ (1,384,437) $ 5,190,813
------------ ---------------
------------ ---------------
</TABLE>

(Footnotes on next page)
19
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Does not reflect the conversion of certain indebtedness into 142,274 shares
of Common Stock and the issuance of 66,900 shares of Common Stock,
subsequent to June 30, 1996, none of which are being registered pursuant to
this Offering.

(2) Reflects gross proceeds of this Offering of $8,075,000 and estimated net
proceeds of $6,575,250.

(3) Does not give effect to (a) $1,211,250 gross proceeds ($1,053,787 of
estimated net proceeds) that will be realized if the Underwriter's
over-allotment option to acquire an additional 255,000 Units is exercised in
full, and (b) the exercise of the Warrants.

DILUTION

At June 30, 1996, the Company had a negative net tangible book value of
$(1,596,380) or $(0.92) per share. Negative net tangible book value per share
represents the amount of the Company's tangible assets less the amount of its
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to (i) the sale of 1,700,000 Units offered hereby, (ii) the
Company's receipt of the net proceeds of this Offering less underwriting
discounts and commissions and other estimated offering expenses, and (iii) the
conversion of certain debt of management into 142,274 shares of Common Stock at
the rate of $3.45 per share on August 1, 1996, but without giving effect to the
exercise of the Warrants, the Underwriter's over-allotment option, or the
Underwriter's Unit Purchase Warrant, the net tangible book value of the Company,
as adjusted, at June 30, 1996 would have been $5,469,715 or $1.53 per share.
This represents an immediate dilution to the public investors of $3.22 per share
or 68 percent and an aggregate increase in net tangible book value to the
present stockholders of $2.45 per share or 266 percent. The following table
illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share.................................. $4.75
Negative net tangible book value per share before the
Offering.................................................... $(0.92)
Increase per share attributable to new investors............... $ 2.45
Pro forma net tangible book value per share after the Offering... $1.53
-----
Dilution per share to new investors.............................. $3.22
-----
-----
</TABLE>

The following table summarizes on a pro forma basis, as of August 31, 1996,
the differences between existing stockholders and purchasers of shares in this
Offering with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average purchase price per share:

<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
-------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Current Stockholders... 1,948,389 53.4% $ 4,968,313 38.1% $2.55
New investors.......... 1,700,000 46.6% $ 8,075,000 61.9% $4.75
--------- ------- ----------- -------
Total.................. 3,648,389 100.0% $13,043,313 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>

- ------------------------

The above table assumes no exercise of the Warrants, the Underwriter's
over-allotment option, the Underwriter's Unit Purchase Warrant or currently
outstanding options and warrants (including the Bridge Warrants, as hereinafter
defined). To the extent that the over-allotment option, the Warrants, the
Underwriter's Purchase Warrant and currently outstanding options and warrants
(including the Bridge Warrants), for which an aggregate of 3,649,744 shares are
reserved for issuance upon exercise of such warrants and options (not including
those options available for grant under the Company's Stock Incentive Plan), are
exercised, there will be further dilution to new investors.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Prospectus.

OVERVIEW

The Company was incorporated in Delaware on May 9, 1996 and conducts its
businesses through two wholly-owned subsidiaries, BioQuant and PBI-WA. On June
28, 1996, the Company completed the Mergers whereby BioQuant and PBI-WA became
wholly-owned subsidiaries of the Company in stock-for-stock exchanges. The
Merger with BioQuant was treated as a purchase by PBI-WA for accounting purposes
in accordance with generally accepted accounting principles ('GAAP'). As a
result of this transaction, the Company's results of operations for the year
ended June 30, 1996, as reported in the financial statements included elsewhere
in this Prospectus, include only the operations of PBI-WA for the year.

In January 1995, Old PBI and MHS merged into PBI/MHS, which merger was
treated as a purchase for accounting purposes in accordance with GAAP. As a
result of that transaction, the Company's results of operations for the year
ended June 30, 1995, include only five months of the results of operations of
Old PBI whereas fiscal 1996 results include a full year of PBI-WA (i.e., Old PBI
and MHS) operations. The comparisons in the discussions of results of operations
below are based on proforma information which assumes that both PBI-WA and
BioQuant were merged with the Company's subsidiaries on July 1, 1994. This
information is not necessarily indicative of the results that would have been
reported had such events occurred on the dates specified, nor is it indicative
of the Company's future results.

As a result of the mergers described above, the Company operates a
reference laboratory that services the pharmaceutical and medical diagnostics
industries, produces a disposable HDL cholesterol testing device and is
currently developing the Osteopatch(Trademark) diagnostic product. The Company
is also conducting research relating to the feasibility of developing products
utilizing SalivaSac(Registered).

To date, the Company's revenues have consisted primarily of fees charged by
the laboratory for services provided to customers, a nominal amount of sales
from the SPINPRO(Registered) HDL cholesterol testing device, and U.S. Government
grants awarded to the Company under the NIH SBIR programs to support research
activities.

Expenses consist, and are expected to continue to consist, primarily of
operating expenses necessary to conduct the commercial laboratory operation,
research and development costs for products under development, administration
expenses and payment of license and royalty fees to acquire and maintain the
Company's intellectual property rights.

Through June 30, 1996, the Company had an accumulated deficit of
approximately $10,157,000, including a one-time charge of approximately
$6,374,000 for purchased research and development expenses relating to the

Company's merger with BioQuant and a one-time charge of approximately $428,000
relating to the merger involving Old PBI and MHS. See footnote 1 of Notes to
Financial Statements.

The audited consolidated financial statements of the Company reflect the
historical results of BioQuant as of June 28, 1996 and not for the full fiscal
year. The following discussion reflects the proforma results of operations of
the Company and its subsidiaries on a combined basis giving effect to the merger
transactions described above as if they were consummated on the first day of the
fiscal periods presented.

RECENT DEVELOPMENTS

For the three month period ended September 30, 1996, the Company estimates
that its revenues and net loss for such quarterly period will be approximately
$577,000 and $(525,000), respectively. The laboratory operations accounted for
in excess of 90 percent of total revenues for the period, which trend management
expects to continue until the introduction of additional products into the
marketplace. Operating expenses are estimated to be $1,043,000 which is
consistent with prior quarterly periods and includes a one-time charge of
approximately $221,000 in connection with the issuance of Common Stock to
certain executive officers and directors. Included in other expenses of $105,000
is the commission paid to the underwriter of this Offering in connection with
the Bridge Loan, which commission amounted to $64,000.

21
<PAGE>
RESULTS OF OPERATIONS

Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995

Revenues. Revenues increased by $608,110, or 57.7 percent, to $1,662,118
in fiscal 1996 as compared to $1,054,008 in fiscal 1995. The laboratory
operations accounted for substantially all of the increase in the Company's
revenues. The increase in laboratory revenues was due to an increase in the
number and size of clinical trials on new pharmaceutical products and diagnostic
devices, which the Company's laboratory conducted for third parties.
Additionally, revenues were enhanced as a result of the beginning of commercial
sales of the SPINPRO(Registered) HDL cholesterol device in January 1996. In
addition to the foregoing, the Company received certain NIH SBIR program and
other revenues aggregating approximately $177,000.

Expenses. Expenses related to the operation of the laboratory and managing
customer clinical trials increased by $115,477, or 13.3 percent, to $985,818 in
fiscal 1996 as compared to $870,341 in fiscal 1995. This increase was directly
related to the increase in laboratory revenues. The Company benefited from a
productivity increase, resulting in an increase in operating margin of the
laboratory operations from 17.4 percent to 40.7 percent. General and
administrative expenses increased by $86,835, or 5.7 percent, to $1,617,229 in
fiscal 1996 as compared to $1,530,394 in fiscal 1995. This increase was due
principally to increased salaries and personnel. Research and product
development expenses increased to $1,113,986 in fiscal 1996 and from $973,850 in

fiscal 1995. The increase was due mainly to increased activity relating to the
Osteopatch(Trademark), including assay development and laboratory evaluation of
various technical details relating to the product specifications in preparation
for clinical trials necessary for FDA approval. Further, increased resources
were devoted to research on two potential applications for the
SalivaSac(Registered) technology relating to diabetes. In the coming twelve to
eighteen months, the Company expects increases in product development
activities, particularly to fund clinical trials for the Osteopatch(Trademark).

Net Loss. Net loss increased by $5,566,859, or 202.9 percent to $8,310,604
in fiscal 1996 as compared to $2,743,745 in fiscal 1995. The net loss reported
in fiscal 1996 includes a one-time charge of approximately $6,374,000 for
purchased research and development expenses relating to the Company's merger
with BioQuant. The net loss in fiscal 1995 includes a one-time charge of
$428,000 for amortization of goodwill relating to the PBI-WA/MHS merger.
Excluding the effect of the one-time charges associated with the Mergers in
fiscal 1996 and the merger of PBI-WA with MHS in fiscal 1995, net loss for
fiscal 1996 declined by approximately $379,000 from $2,315,000 as compared to
$1,936,000 in fiscal 1995. The Company, however, expects normal operating losses
to increase substantially for at least two years due to anticipated increases in
research and development activities associated with the Osteopatch(Trademark)
product, establishment of a marketing program for the reference laboratory and
general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

Based on the Company's audited financial statements, the Company sustained
a deficit cash flow from operations of $729,534 for the year ended June 30,
1996, as compared with a deficit cash flow from operations of $865,981 for the
year ended June 30, 1995. The decrease in the deficit cash flow from operations
is attributable principally to an increase in revenue for the year. This deficit
cash flow was financed principally by loans from stockholders of $464,461 and
sales of common stock amounting to $360,000. In June 1996, the Company issued
promissory notes amounting to $250,000 in connection with a private placement of
debt financing. These funds were used to support additional investment in
equipment, to pay expenses associated with the Company's proposed initial public
offering ('IPO'), to provide working capital, to support the Company's product
development and to pay administrative expenses.

Successful future operations depend primarily upon the Company's ability to
complete development of the Osteopatch(Trademark) product, obtain FDA clearance,
and achieve successful product commercialization. The Company's operations also
depend on its ability to successfully grow a profitable reference laboratory
operation. In order to achieve these results, the Company will need substantial
additional capital to fund product development and invest in the growth of
laboratory operations. Accordingly, the Company expects to continue to incur
substantial losses for at least the next two years as it funds these activities.

The Company and its subsidiaries have funded their operations to date
principally through equity financings and, to a lesser extent, through debt
financings. The debt financing includes term debt and leases used to fund
equipment purchases, as well as a bank line of credit and stockholder loans. In

June 1996, the remaining balance

22
<PAGE>
on a line of credit was converted to a term loan. At June 30, 1996, the Company
had $181,127 in term debt obligations outstanding (including capital leases) and
a working capital deficit of $1,723,942. At June 30, 1996, the Company had
$615,703 in trade payables and accrued liabilities. The Company reported a
negative cash flow from operations of $729,534 for the year ended June 30, 1996.
This cash flow deficit has been funded principally through stockholder loans and
sales of common stock. In addition to the cash flow deficit from operations, the
Company's requirements to service its term debt were $62,105 for the year ended
June 30, 1996, and are expected to approximate $180,000 in the current fiscal
year due to monthly principal and interest payments.

The Company is obligated under its manufacturing agreement dated March 1,
1994 (the 'Manufacturing Agreement') to reimburse the supplier of the
SPINPRO(Registered) product for certain costs, approximately $317,000, incurred
by the supplier to produce the product. The supplier is entitled to add a
surcharge to the cost of the SPINPRO(Registered) product until such production
costs are fully recovered. The Company and certain of the Company's directors
and stockholders have guaranteed the Company's obligations under the
Manufacturing Agreement. The Company has the right to purchase such molds and
additional equipment for a purchase price equal to the unamortized portion of
the cost of such equipment. Additionally, the Company was required to make a
minimum royalty payment in June 1996 under the SPINPRO(Registered) license
agreement in order to maintain exclusivity of the technology. The Company
elected not to make such payment and believes that the loss of exclusivity, of
which the Company has not yet been notified, will not have a material adverse
effect on the business or prospects of the Company.

The Company had a $200,000 line of credit with a bank that was converted to
a term loan in June 1996 as a consequence of an earlier payment default. The
balance at the date of conversion was $159,445. This loan bears interest at the
bank's index rate plus 2.5 percent (10.75 percent at June 30, 1996), and is
payable monthly at the rate of $14,127, including interest. The loan is due in
June 1997. The Company also has a loan from a bank with a balance outstanding of
$16,522 at June 30, 1996. This loan bears interest at the prime rate plus 1.4
percent (9.9 percent at June 30, 1996), and is payable monthly at the rate of
$2,085, including interest. The loan is due in January 1997. The above loans are
collateralized by the Company's accounts receivable and equipment, and by
personal guarantees from certain stockholders.

In June 1996, pursuant to a private financing, the Company received
$250,000 in exchange for promissory notes and 50,000 warrants. The notes issued
in connection with the Financing bear annual interest at the rate of 14 percent
and were repaid out of the proceeds of the Bridge Loan. The warrants issued in
connection with the Financing are exercisable until April 30, 1998, subject to a
six-month lock-up period until April 30, 1997 (which may be reduced at the
discretion of the Underwriter), at an exercise price of $5.70 per share.

In August, 1996, the Company completed a private placement of units

consisting of an aggregate of $1,000,000 in principal amount of promissory notes
and 250,000 warrants to purchase Common Stock. The Company received net proceeds
of $936,000 from the Bridge Loan, which was used to repay certain indebtedness,
including the notes issued in the Financing, to support product development
activities and for working capital. The promissory notes issued in connection
with the Bridge Loan bear annual interest at the rate of 14 percent and are
payable upon consummation of this Offering. The Warrants issued in connection
with the Bridge Loan are exercisable until January 31, 1998, subject to a twelve
month lock-up period until October, 1997 (which may be reduced at the discretion
of the Underwriter), at an exercise price of $5.70 per share.

In addition to the debt financings described above, the Company raised
$360,000 during the year ended June 30, 1996 and an additional $10,005
subsequent to the fiscal year end through private sales of its Common Stock. The
proceeds were used to support the Company's product development activities.

At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings were uncollateralized and bore interest at an
index rate plus 1 percent (approximately 9.5 percent at June 30, 1996).
Subsequent to year end, the Company issued 142,274 shares at a price of $3.45
per share in satisfaction of loans amounting to $460,000 plus accrued interest.
Additionally, $200,000 of such loans were refinanced in connection with the
Company's Bridge Loan completed in August 1996.

The Company believes that the net proceeds of this Offering, together with
anticipated revenues from operations, will be sufficient to meet the Company's
operating expenses and capital requirements, including the purchase of
laboratory equipment of approximately $500,000, for approximately eighteen
months.

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BUSINESS

GENERAL

The Company is a holding company that was formed on May 9, 1996 for the
purpose of holding all of the outstanding shares of stock of PBI-WA and BioQuant
following the mergers on June 28, 1996 of wholly-owned subsidiaries of the
Company with and into PBI-WA and BioQuant, respectively. See 'Prospectus
Summary--The Merger Transactions.'

PBI-WA was founded in 1989 as a specialized lipoprotein laboratory that
became recognized as a leader in the fields of laboratory method verification,
technical consulting, clinical trials and reference materials for cholesterol
measurements and related risk factors for coronary heart disease. Through an
affiliated not-for-profit foundation, PBI-WA became one of twelve CDC reference
network laboratories established for standardization of cholesterol testing in
the world. The Company's specialty reference laboratory has developed an
expertise in the emerging field of osteoporosis laboratory assessments through
its work with diagnostic manufacturers of assays for bone markers (i.e., Ostex
and Metra), in addition to pharmaceutical manufacturers of drugs that prevent
bone loss (i.e., Merck and Procter & Gamble). This has helped to establish the
Company as a leader in its understanding of biochemical markers for bone
formation and bone resorption (loss).

In January 1995, PBI-WA completed a merger with one of its former clients,
Merchant House Scientific, Inc. This merger enabled PBI-WA to offer its first
disposable product to the laboratory testing market, SPINPRO(Registered), a
sample preparation device which simplifies and improves the methods for
performing certain kinds of tests in the laboratory setting. This technology
facilitates sample preparation for tests that are performed 'off-line' or
involve a 'pretreatment' step prior to obtaining results, thus making the
testing procedure less labor intensive resulting in lower overall cost and more
consistent and accurate results.

The Company's BioQuant subsidiary was founded in 1985 and conducted
extensive research and development, mostly funded by government grants, relating
to various immunoassays. In 1989, BioQuant patented a device known as the
SalivaSac(Registered) that facilitates the collection of saliva without
contamination from enzymes, food particles, mucopolysaccharides, blood, and
other particulate matter. The SalivaSac(Registered) enables non-invasive
diagnostic testing through collection of saliva. Based on preliminary studies
conducted by the Company and others, this product has the potential for numerous
applications, including therapeutic drug monitoring, the detection of drugs of
abuse, measurement of hormones and analytes of infectious disease. The Company
currently has two NIH SBIR Phase I grants to fund the research of this
technology for diabetes applications. In 1993, BioQuant acquired a license to
utilize skin patch technology for use in the field of osteoporosis. In 1995,
BioQuant acquired rights to antibodies specific to biochemical markers of bone
loss for use with the skin patch technology. The Company has focused its efforts
on developing a product that the Company believes will become a useful indicator
of bone loss leading to osteoporosis.

The Company believes that the synergies among PBI-WA and BioQuant, through
the technical expertise and research capabilities of their respective personnel,
will expedite current development of the Osteopatch(Trademark) product and the
development of SalivaSac(Registered) diagnostic applications, completion of
clinical trials of these devices and receipt of FDA approval or clearance of
these devices and their applications. Additionally, the Company anticipates that
its laboratory facilities will be positioned to capture a significant portion of
the analysis revenues which will be associated with the Osteopatch(Trademark)
product.

The Company's strategy is to (i) finalize development and commercialize the
Osteopatch(Trademark); (ii) expand its specialty reference laboratory business;
(iii) explore new applications and market opportunities for the
SPINPRO(Registered); and (iv) evaluate the feasibility of noninvasive glucose
testing using, SalivaSac(Registered).

Osteoporosis. The human body and its major organs are supported and
protected by a matrix of connective tissues. Major connective tissue systems in
the body include bone, cartilage, tendons and skin. The body's principal
connective tissue systems are bone and cartilage. Major diseases and disorders
affecting bone and cartilage include osteoporosis, Paget's disease, cancers that
metastasize to bone, osteoarthritis and other disorders. Many of these diseases
and disorders can be disabling, can affect the quality of life, and can
eventually lead to death.

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Bone is a dynamic tissue that is continually regenerated and remodelled.
This process consists of bone formation and resorption (loss) and is necessary
to maintain skeletal integrity. Between 10 percent and 20 percent of the adult
skeleton is replaced each year by the remodeling process. From childhood to
early adulthood, bone formation exceeds resorption, causing bone mass to
increase. After reaching peak bone mass between the ages of thirty and forty,
bone resorption begins to exceed formation, and both men and women experience a
slow, age-related phase of bone loss, lasting for the rest of their lives. Many
women also experience an accelerated phase of bone loss for several years
following menopause, primarily due to the cessation of estrogen production.

Bone resorption occurs when cells called 'osteoclasts' excavate small pits
throughout the bone. This process is followed by bone formation, in which cells
called 'osteoblasts' produce and deposit bone collagen to fill the pits
excavated by the osteoclasts. Remodeling takes place continuously throughout the
skeleton, at multiple locations and in different phases at the same time. The
osteoclastic and osteoblastic processes produce fragments of collagen and other
proteins, which are released into the bloodstream and eventually appear in other
bodily fluids, including urine and perspiration.

In general, the bone resorption and formation processes are tightly coupled
and balanced. When this process becomes unbalanced or exaggerated, bone disease
occurs. Additionally, certain drugs or medications can have an adverse side
effect of increasing bone loss.

Osteoporosis is a disease characterized by low bone mass and a

deterioration of the structural integrity of bone, which significantly increases
the risks of bone fractures, primarily of the spine, hip, wrist and pelvis, and
of back pain and spinal deformity. There are three basic forms of osteoporosis:
(i) postmenopausal osteoporosis; (ii) age-associated osteoporosis, affecting men
and women over the age of seventy; and (iii) idiopathic osteoporosis, affecting
premenopausal women and middle-aged men and of unknown cause. In addition, there
is a related condition known as secondary osteoporosis, in which bone loss
results from an identifiable agent or disease, such as certain gastrointestinal
diseases or the use of steroids to treat autoimmune diseases.

By far the most common form of osteoporosis is postmenopausal osteoporosis,
which accounts for approximately 80 percent of the individuals who suffer from
osteoporosis. Postmenopausal osteoporosis typically begins to affect women
within fifteen to twenty years after menopause as a result of an accelerated
rate of bone resorption related to an estrogen deficiency caused by menopause.

Osteoporosis is widespread and represents a major health care problem. An
estimated 25 million Americans and more than 75 million people worldwide suffer
from osteoporosis. In the U.S. alone, approximately 1.5 million hip and other
bone fractures occur each year as a result of osteoporosis, and many of the
elderly women and men who incur these fractures are confined to wheelchairs or
have to enter nursing homes as a result and may also suffer additional
complications.

According to the National Osteoporosis Foundation, forty percent of all
women in the U.S. will have at least one fracture by the age of seventy and
expenditures in the U.S. related to osteoporosis currently exceed $10 billion
annually, with such costs expected to triple by the year 2020 resulting from the
expected increase in the aged population. The Company believes that delaying the
onset of severe osteoporosis could reduce the incidence of fractures and thereby
result in treatment cost savings and improved quality of life.

Therapeutic Options. Treatment exists to prevent continued bone loss, but
as yet there is no effective treatment to restore bone mass in individuals with
advanced osteoporosis.

Estrogen replacement therapy, calcium supplementation and exercise are used
to prevent or at least forestall continued bone loss. In the U.S., estrogen
replacement therapy is the treatment of choice for women with postmenopausal
osteoporosis. Recent studies suggest that estrogen replacement therapy is
required for a minimum of seven years following menopause (and possibly for
life) in order to provide protection against osteoporosis.

Estrogen replacement therapy has a number of potential side effects,
including increased risk of endometrial cancer, possibly increased risks of
breast and other cancers, and increased risks of gallbladder disease. As a
result, approximately 70 percent of American women taking estrogen (which is
prescribed for a number of purposes, including the treatment of menopausal
symptoms and the prevention of cardiovascular disease) stop doing so after the
first year of use. In addition, recent studies have suggested that the standard
dosage is inadequate to stop bone loss in approximately 15 percent of the women
using estrogen replacement therapy.

<PAGE>
The effective use of estrogen replacement therapy is hampered because there
is no effective means of monitoring the rate of bone loss at relatively short
intervals in order (i) to enable patients to decide whether the efficacy of
treatment outweighs the risks of its side effects and (ii) to determine the
approximately 15 percent of the women using estrogen replacement therapy for
whom the standard dosage is inadequate and serves only to expose them to the
side effects of therapy without its benefits.

A number of pharmaceutical companies worldwide are currently developing
other drugs for the treatment of osteoporosis. Most of these new drugs are
designed to stop bone resorption, although some effort is directed toward agents
that will stimulate bone growth. Many of these drugs are in various stages of
pre-clinical and clinical trials in the U.S., Europe and Japan, and some of them
are expected to become commercially available in the next two years. For
example, Merck received FDA approval in October 1995 for their new
bisphosphonate drug, Fosamax(Registered). The bisphosphonates act to stop bone
resorption and are expected to increase the need for diagnostic testing in order
to identify those patients who are losing bone rapidly, and to verify that the
dose prescribed is adequate to stop bone loss in a particular patient. Eli Lily
& Co. and Procter & Gamble also have new drugs in Phase III clinical trials.

Diagnosis. Osteoporosis is a 'silent' disease in which rapid bone loss
occurs years, and even decades, before clinical symptoms appear. Diagnosis of
osteoporosis frequently occurs only at the time of a bone fracture.

At present, bone densitometry involving quantitative computed tomography
(in the case of the vertebrae) and dual-energy absorptiometry (in the case of
the spine and hip), is used to measure the amount of bone loss in order to
diagnose osteoporosis or to assess the risks of osteoporosis. Bone densitometry
has a considerable limitation, however, because it does not permit a convenient
measurement of the rate of bone loss. In order to evaluate the rate of bone
loss, bone densitometry requires a baseline measurement and successive
measurements over a period of one to two years in order to determine the changes
in bone mass of a patient with actively progressing osteoporosis experiencing
the average rate of bone loss of 2 to 4 percent per year. Measurements must be
spread over an even longer period in order to measure rates of bone loss lower
than 2 to 4 percent annually.

Because of the long period of time required to measure the rate of bone
loss, the Company believes current bone densitometry techniques are not suitable
for general screening of women in the early stages of menopause or for
monitoring the efficacy of treatments for osteoporosis. More recently,
biochemical markers have been identified that are reliable indicators of the
rate of bone loss.

In a diagnostic context, a biochemical marker is a chemical produced by the
body whose presence is highly specific to a particular disease or condition.
During the last five years, there has been considerable research devoted to
developing a biochemical marker for bone resorption sufficiently sensitive to
permit rates of resorption to be determined.

Most research attention has been directed to four biochemical markers: Pyd,
Dpd, N-telopeptide and C-telopeptide. All of these markers identify the presence
of bone collagen fragments in body fluids. Collagen is the major protein
component of bone. Collagen cross-links provide structural stability and
insolubility to collagen and are released when collagen breaks down during bone
resorption.

All the markers appear highly specific to bone loss, although there is
debate in the scientific community on the specificity of each marker. All the
markers have been studied extensively in urine. These studies have shown that
(i) the markers are released into the blood stream (and ultimately into urine,
as the kidneys extract them as a waste) only when mature bone breaks down and
not when new bone is formed, (ii) markers are not metabolized further once
released into the blood stream and thus directly reflect bone resorption and
(iii) marker levels are not affected by diet (e.g. foods containing collagen).

In addition to biochemical markers for resorption, markers have been
discovered for bone formation. These include certain molecules that are released
into the blood as a result of osteoblastic activity, such as alkaline
phosphatase and osteocalcin.

Research suggests that urine tests may not provide the most accurate
information concerning resorption, particularly because urine test results
reflect only a 'snapshot' of the patient's bone marker levels which may be
affected by many external variables such as exercise, hormone levels and
medications. Studies have indicated that urine tests to detect signs of
resorption are subject to variations in excess of 30 percent, much too high to
be

26
<PAGE>
considered a predictor of risk of osteoporosis. Such variability limits the
utility of urine tests to measuring the effectiveness of resorption-blocking
drugs during treatment only after osteoporosis has been conclusively diagnosed
by other means. This high variability rate could be avoided by using multiple
urine samplings over a twenty-four hour period, but at high cost and
inconvenience to the patient. To date, no effective blood serum test for bone
markers is commercially available, although several are under development. The
Company believes that the Osteopatch(Trademark) provides a solution to the wide
variations experienced in urine sampling, resulting in a more accurate
measurement of bone loss, which in turn will improve the ability to detect
subtle changes in bone resorption, and, when compared to control group
standards, identify individuals who are losing bone rapidly and are subject to
increased risk of fracture due to osteoporosis.

THE COMPANY'S OSTEOPATCH(TRADEMARK)

The Company holds exclusive worldwide rights to the use of a transdermal
perspiration collection device, the Osteopatch(Trademark), for measuring bone
loss that may assist in the detection of osteoporosis. Seven patents have been
issued to the inventors of this device and one patent is expected to be granted
to the Company and additional patents are pending. The Osteopatch(Trademark) is
designed for extended wear (e.g. several days) and is particularly useful in
capturing biochemical markers via continuous collection from perspiration over

an extended time period. The Company will be measuring markers of bone
resorption (loss) from perspiration as an early indicator of bone loss. Since
bone metabolism is known to vary during the day and from day-to-day, the Company
believes the Osteopatch(Trademark) will enable the Company to reduce this
variation and thereby be able to distinguish a disease state of bone loss from
normal biological variations due to physical exertion, fluctuating hormone
levels and other factors. Along with the patented collection device, the Company
has exclusive rights to patented antibodies that are specific to known
biochemical markers of bone loss. The Company is developing a proprietary,
highly sensitive immunoassay that can measure the bone loss markers in human
perspiration.

The Company has under development a skin patch test to measure both Pyd and
Dpd in perspiration as a screening, monitoring and early diagnostic test for
osteoporosis. Pyd and Dpd are well known biochemical markers of bone resorption
that have been characterized by numerous clinical studies and publications from
around the world. These markers have been reported in the scientific literature
to be highly specific to the breakdown of bone collagen and sensitive to
diseases and therapies affecting bone metabolism and in one recent study,
predictive of osteoporosis associated fractures. The Company has exclusive
rights, relating to bone resorption in human perspiration, to use patented
antibodies for these markers owned by Metra, a developer and marketer of bone
loss urine tests. The Company expects to introduce its Osteopatch(Trademark)
test in the U.S. and possibly abroad in the first half of 1998, following
completion of its immunoassay and clinical trials, which introduction is subject
to approval or clearance by the FDA. See 'Risk Factors--Government Regulation
and Product Approval.' The skin patch test is expected to provide patient
convenience, ease of laboratory collection and processing, and superior
accuracy.

The Company believes that the 'ease of use' of the Osteopatch(Trademark)
will make it attractive to the 'point of care' testing market. Point of care
testing occurs in the physician's office, outpatient sites and in the patient's
home. The Company believes that the point of care testing marketplace will grow
substantially over the next several years.

It is the Company's strategy to develop alliances and distribution
agreements with organizations that either currently market to the point of care
testing marketplace or are positioning themselves for this marketplace,
including pharmaceutical companies, diagnostic distributors, and consumer health
related entities. The Company has had numerous discussions with many entities
and intends to establish strategic relationships once the Company has filed its
510(k) application with the FDA, which the Company expects will occur in
approximately twelve months. The Company has also received inquiries from
distributors outside the U.S. and will continue to explore the international
marketplace for its products.

The Company believes that the education of physicians, patients, and
insurers about the long term benefits of early diagnosis and treatment of bone
disorders is important to the success of the Company's products. As managed care
becomes increasingly more prevalent in the U.S., emphasis on disease prevention
should increase along with the demand for early and cost-effective diagnostic
tests. This emphasis on preventive health care along with the availability of
advanced drug therapies for osteoporosis from pharmaceutical companies will

27
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continue to increase the need for cost-effective diagnostic devices that detect
osteoporosis and monitor the effectiveness of drug therapies.

LABORATORY OPERATIONS

The Company has a fully equipped 6,000 square feet laboratory in Seattle,
Washington that supports product development in the diagnostics and
pharmaceutical industries. This facility provides full service laboratory
analysis, development of reference methods, protocol development, data
management and consulting services to a large number of clients, including
Abbott, Bristol-Myers Squibb, DuPont, Genzyme, Merck, Metra, Ostex, Procter &
Gamble and Parke-Davis. The Company also maintains a 1,000 square feet
development laboratory in Irvine, California, to support the development and
manufacture of the SalivaSac(Registered) product.

The Company's laboratory has supported numerous Phase I through IV
pharmaceutical clinical trials as well as diagnostic product clinical trials.
The Company's expertise in lipid analysis includes in-house CDC reference
methodologies for total cholesterol, LDL cholesterol, HDL cholesterol and
triglycerides. Research and routine methodologies include quantitation of lipids
and lipoproteins by different techniques such as fractionation by
ultracentrifugation, electrophoresis, chemical precipitation and various immuno
assays. The Company's scientists have been extensively involved at the national
level in developing guidelines for lipid measurements and method improvement.
Many of the current standard lipid methods have been developed at the Company,
including the current CDC Designated Comparison Method for HDL cholesterol.

In the emerging field of osteoporosis laboratory assessments, the Company
has developed a complete test menu for bone metabolism, including the serum
markers of bone formation, the urinary markers of bone resorption, and several
related tests involving measurement of hormones and other substances.

The key services that the Company provides to the diagnostics industry are
conducting laboratory analysis including contract research to assist in product
development, providing reference materials to assess quality of products in
research and development and manufacturing stages, providing proficiency testing
and standardization services through the Company's CDC network reference
laboratory, supporting diagnostic clinical trials as a central specialty
laboratory and clinical trial manager, and consulting for regulatory, strategic,
and technical issues related to successful product development.

In both the pharmaceutical and diagnostic market segments, the Company's
central laboratory services are highly regarded for the training and skills of
its scientists and support personnel, the techniques used for laboratory
testing, the quality control measures employed and the Company's ability to
manage complex data efficiently and creatively for its clients.

In addition to expansion of the Company's reference laboratory services,
the Company also expects that its laboratory operations will increase

concurrently with the introduction of the Osteopatch(Trademark) and that its
revenues will increase proportionately with market acceptance of the
Osteopatch(Trademark), since the perspiration collected from the
Osteopatch(Trademark) must be analyzed in a laboratory setting and it is
expected that the Company's laboratory in Seattle, Washington will conduct a
significant portion of the analysis related to the Osteopatch(Trademark)
product. The reputation of the laboratory for quality, the consistency of doing
all testing from a single laboratory and the inherent advantages of this
technology are all expected to contribute to physician acceptance of test
results in this emerging new field. Strategically, since the Company will also
manufacture its own assay to use with the Osteopatch(Trademark), the Company
will have characteristics of both a diagnostic test kit manufacturer and a
clinical laboratory. This will be an unique combination in the osteoporosis
field that will enable the Company to compete effectively against both clinical
laboratories and diagnostic manufacturers since the Company should benefit from
higher profit margins by providing both services.

SALIVASAC(REGISTERED)

Saliva is a potentially useful body fluid for diagnostic purposes but is
difficult to handle in the laboratory because it contains mucopolysaccharides,
particulate matter, blood contamination, enzymes and other large molecules.
These substances tend to complicate the processing of saliva, which must be
frozen or centrifuged, and often interfere with sensitive assays used to measure
analytes of medical interest. The Company has a patented saliva collection and
processing device called the SalivaSac(Registered). The SalivaSac(Registered) is
a small device consisting of a semipermeable outer membrane and containing a
small quantity of a substance such as salt or

28
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sugar that acts as an osmotic driver. When the device is placed in the mouth it
rapidly fills with saliva that is filtered as it passes through the
semipermeable membrane. The resulting fluid is clear, easy to use, and does not
contain interfering substances. Based on preliminary studies conducted by the
Company and others, this product has numerous potential applications including
therapeutic drug monitoring, detection of drugs of abuse, measurement of
hormones and analytes of infectious disease.

The Company is also researching two applications of this technology for
diabetes. One application, supported by an NIH SBIR grant, is the development of
a saliva test for long term diabetic control. The Company is investigating the
measurement of glycated proteins in saliva as a non-invasive test to potentially
replace hemoglobin A1c. A second application, also supported by an NIH SBIR
grant, involves the measurement of saliva glucose as a non-invasive substitute
for blood glucose. While previous attempts by others to correlate saliva glucose
with blood glucose have been unsuccessful, the Company has had encouraging
preliminary results using the SalivaSac(Registered) device as it appears to
exclude substances that interfere with accurate glucose measurements. In
addition to developing applications for the SalivaSac(Registered), the Company
will seek to license the SalivaSac(Registered) to others for applications in
markets that the Company does not intend to serve itself, such as testing for
drugs of abuse. The Company does not believe that any products developed using
SalivaSac(Registered) will be available for regulatory approval or test

marketing prior to 1998.

SPINPRO(REGISTERED)

The Company has licensed a patented technology that simplifies the
preparation of serum samples for tests requiring a separation step prior to
obtaining an analytical result. This technology incorporates the functions of
precise sample measurement, sample separation and reagent dispensing in a
specially designed, multiple chamber sample tube. This low cost, disposable
device enables the accurate and controlled processing of complex tests requiring
a pretreatment step by relatively unskilled laboratory personnel. The Company
has named this new technology 'SPINPRO(Registered)' and has registered the name
as a Company trademark.

The Company has introduced its first SPINPRO(Registered) product to the
market in the form of a device that facilitates the testing of HDL cholesterol.
A test that previously required tedious off-line preparation in most
laboratories is now greatly facilitated by using the Company's
SPINPRO(Registered) technology. This device is distributed by Sigma, a large
distributor of diagnostic reagents and products to laboratories in the U.S. and
several European countries. In order to maintain its exclusive distribution
rights, Sigma must purchase the following minimum quantities in the first three
years of the contract: 1.25 million units, 2.75 million units and 4.00 million
units, respectively. The Company is investigating other applications of
SPINPRO(Registered) technology. The Company was required to make a minimum
royalty payment in June 1996 under the SPINPRO(Registered) license agreement in
order to maintain exclusivity of the technology. The Company elected not to make
such payment and believes that the loss of exclusivity, of which the Company has
not yet been notified, will not have a material adverse effect on the business
or prospects of the Company.

BUSINESS STRATEGY

The Company's strategy is to focus on the development of cost-effective,
convenient diagnostic tests and improved laboratory techniques that support the
objectives of early diagnosis, prevention and therapeutic monitoring. Critical
to this strategy is focusing the development of new products in certain disease
areas. The Company, therefore, will strive to be a leader in testing relating to
common, chronic diseases of an aging population, which ensures a large and
growing population for the next two to three decades. Additionally, the Company
anticipates that it will build on its leadership reputation in laboratory
testing and methods in the fields of coronary heart disease and osteoporosis by
aggressively seeking new clinical trial support business from developers of new
therapeutics and diagnostics in these fields, and continue to maintain
leadership in these areas through the support of methods standardization and
proficiency testing. Over time, if feasible, the Company anticipates that it
will build similar capabilities and expertise in diabetes and arthritis testing
and therapeutic monitoring by seeking a role in clinical trials of new products
and technology developed by others.

The Company's business strategy is to establish the Osteopatch(Trademark)
as the standard collection and diagnostic device for risk assessment and
management of therapy for osteoporosis and to develop applications for the
SalivaSac(Registered) to aid in the treatment of diabetes and other ailments.

This strategy includes educating physicians and other healthcare professionals,
forming strategic marketing and distribution alliances with established market

29
<PAGE>
leaders to establish and then expand market share for the Osteopatch(Trademark),
maintaining a strong proprietary position for its products and technology,
expanding laboratory operations and continued dedicated research of its products
and technologies.

A key factor driving the Company's strategy as it relates to the
Osteopatch(Trademark) is the belief that a small percentage of the population at
risk for osteoporosis-related fracture is currently diagnosed and that an even
smaller percentage is effectively treated. The Company believes that the
historical lack of consistent therapeutic intervention can be traced in part to
the limited availability of timely, cost-effective and accurate methods that
detect and monitor bone loss. The Company believes that the demand for its
products will be driven in part by the physician's need to easily, inexpensively
and accurately (i) identify those persons most at risk before significant bone
loss occurs, (ii) quantify the parameters of each patient's bone remodeling
process, (iii) determine therapeutic dosage and duration of therapy, and (iv)
monitor the effectiveness of, and patient compliance with, prescribed therapies.

MATERIAL CONTRACTS

The Company has the exclusive rights to certain patents, which it believes
substantially covers the Osteopatch(Trademark) technology as it relates to
osteoporosis applications. Pursuant to the terms of the Company's license
agreement with Sudor Partners, the Company is required to pay royalties to Sudor
Partners in the amount of 5 percent of gross sales of patches and 5 percent of
profits derived from after-use diagnostic analysis or evaluative analysis
revenues received through the Company's laboratory. The Company is required to
make minimum royalty payments in the amount of $15,000 each quarter. The license
terminates automatically if the Company should fail to make a royalty payment on
the date due. The license is also terminable in the event (i) of a failure to
perform any conditions of the license agreement, (ii) the Company becomes
insolvent or institutes bankruptcy proceedings, (iii) the Company's assets are
seized or attached, (iv) of a failure to make timely royalty payments and (v) of
termination of the supply agreement discussed below. Upon termination, Sudor
Partners acquires title to any improvements to the patented technology and to
any registrations or approvals of governmental agencies, such as the FDA,
relating to products that incorporate the patented technology. The Company is
currently in compliance with all obligations under the license agreement.

The supply agreement between the Company and Sudormed, an affiliate of
Sudor Partners, provides that such affiliate will manufacture the
Osteopatch(Trademark) for the Company. Sudormed currently subcontracts
manufacture of the patch technology to The 3M Company. In the event certain
specified minimum purchases are not met by the Company, the license agreement
will become non-exclusive. The Company is required to purchase a minimum of
25,000 Osteopatch(Trademark) units prior to March 31, 1997. The required minimum
purchase amount increases each year through March 31, 2001, when 2,000,000 units
must be purchased. Sudor Partners has the right to change the price for units in
the event that its direct costs of manufacturing the units changes.

The Company is aware that the owners of the patents relating to the
Osteopatch(Trademark) technology are in the process of seeking a buyer for such
patents and have engaged Douglas S. Harrington, M.D., a director of the Company,
to facilitate the sale process. Although a conflict of interest may arise with
respect to such director's fiduciary obligations to the Company and his
contractual obligations with respect to the sale of the patents, the Company
believes that the ultimate sale of the patents by the owners thereof will not
have any material impact on the Company and that any potential conflicts of
interest will be resolved in favor of the Company. There can be no assurance,
however, that such patents will not be sold to a competitor of the Company, that
any conflicts of interest which may arise relating to the director who has been
engaged to facilitate the sale of such patents will be resolved in favor of the
Company or that the ultimate buyer of the patents will honor the Company's
license with respect to such patents, in which event the Company may be required
to enforce its rights under the license agreement at a time when it does not
have sufficient resources to do so. See 'Risk Factors--Dependence on Licenses'.

The Company has contracted with Assay Designs, Inc. to develop a Pyd
immunoassay and a Dpd immunoassay and related test kits for the Company for use
with the Osteopatch(Trademark). Such immunoassays are utilized in connection
with biochemical markers which identify the presence of bone collagen fragments
in body fluids, such as perspiration. Pursuant to the development agreement, the
Company must satisfy specified fee arrangements and will be assessed a late
charge for any payment not timely made. The agreement may be terminated upon the
Company's failure to make a required payment. The Company is currently in
compliance with its obligations under this agreement.

30
<PAGE>
Excluding Japan, the Company is the exclusive worldwide licensee of
antibody technology from Metra, which is used in the quantitative measurement of
pyridinium crosslinks in all body fluids. The license will convert to a non-
exclusive license upon the earlier of (i) seven years from the first commercial
sale of products incorporating the licensed technology, or (ii) February 15,
2005. The licensee must pay a royalty per patient report. The license is
terminable (A) upon a material breach of the license agreement, (B) upon
dissolution or liquidation of the Company, or (C) the Company's failure to
invest either (i) $100,000 annually in the research and development of the
licensed technology prior to its submission for FDA approval or (ii) $40,000
annually in the research and development of the licensed technology subsequent
to its submission for FDA approval. Under the license agreement, Metra receives
a royalty-free, non-exclusive license to use improvements made by the Company to
the Metra anti-body technology. The Company is currently in compliance with its
obligations under this agreement.

The Company has contracted with Irvine Scientific to manufacture its
SPINPRO(Registered) HDL product. The Manufacturing Agreement is terminable upon
ninety days written notice by the Company. The Company is obligated under the
Manufacturing Agreement to reimburse Irvine Scientific for certain costs,
approximately $317,000, incurred to produce the product. Irvine Scientific is
entitled to add a surcharge to the cost of the SPINPRO(Registered) product until
such production costs are fully recovered. The Company and certain of the

Company's directors and stockholders have guaranteed the Company's obligations
under the Manufacturing Agreement. The Company has the right to purchase such
molds and additional equipment for a purchase price equal to the unamortized
portion of the cost of such equipment. The Company is currently in compliance
with all obligations under this agreement. Additionally, the Company was
required to make a minimum royalty payment in June 1996 under the
SPINPRO(Registered) license agreement in order to maintain exclusivity of the
technology. The Company elected not to make such payment and believes that the
loss of exclusivity, of which the Company has not yet been notified, will not
have a material adverse effect on the business or prospects of the Company.

The Company has entered into an agreement with Sigma whereby Sigma has the
exclusive right to distribute the SPINPRO(Registered) HDL device in the U.S. and
certain European countries and (except for physician sales and service)
throughout the rest of the world on a non-exclusive basis. The agreement, set to
expire October 26, 1998, is automatically renewable for successive one year
terms unless either party otherwise notifies the other of its intention to
terminate. The agreement is terminable in the event (i) of a failure to observe
any material term of the agreement, (ii) either party becomes insolvent or (iii)
if either party makes an order or resolution to windup or liquidate. The Company
is currently in compliance with all obligations under this Agreement.

LICENSED PATENTS AND PROPRIETARY RIGHTS

The Company's success will depend in part on its ability to obtain patent
protection for its products both in the U.S. and other countries. The Company is
the exclusive licensee of rights under ten issued U.S. patents and four
additional pending U.S. patent applications, seven of such patents and two of
such patent applications relating to the Osteopatch(Trademark) technology. The
patent positions of biotechnology and pharmaceutical firms are generally
uncertain and involve complex legal and factual questions. No consistent policy
has emerged regarding the breadth of claims allowed in biotechnology patents.
While the Company's licensor is currently prosecuting its patent applications,
the Company does not know whether any application will result in the issuance of
a patent or, if any patent is issued, whether claims ultimately allowed
thereunder will provide significant proprietary protection or will be
invalidated.

The commercial success of the Company will also depend in part on not
infringing patents or proprietary rights of others, and not breaching licenses
granted to the Company. The Company may be required to obtain licenses to
third-party technology necessary to conduct the Company's business. Any failure
by the Company to license, at a reasonable cost, any technology required to
commercialize its technologies or products would have an adverse impact on the
Company.

Litigation, that could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company's licensor or to
determine the scope and validity of other parties' proprietary rights. If the
outcome of any such litigation is adverse to the Company, the Company's business
could be adversely affected. To determine the priority of inventions, the
Company may have to participate in interference proceedings declared by the U.S.
Patent Office or similar proceedings in foreign patent offices, which could

result in substantial cost to the Company and may result in an adverse decision
as to the priority of the inventions licensed to the Company. The Company
believes there will continue to be significant litigation in the industry
regarding patent and other intellectual property rights.

31
<PAGE>
The Company also relies upon unpatented trade secrets. Others may
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology. The Company requires its employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreement provides that all confidential
information developed by or made known to an individual during the course of the
employment or consulting relationship generally must be kept confidential. In
the case of employees, the agreement provides that all inventions conceived by
the individual while employed by the Company are the Company's exclusive
property. These agreements may not provide meaningful protection for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information. See 'Risk Factors--Uncertainty of Protection of Patents and
Intellectual Property Rights; Risk of Patent Infringement Liability.'

GOVERNMENT REGULATION

The development, testing, manufacturing and marketing of the Company's
products are regulated in the U.S. by the FDA. The testing for, preparation of,
and subsequent FDA review of required applications is expensive, lengthy and
uncertain. Moreover, regulatory approval, if granted, can include significant
limitations on the indicated uses for which a product may be marketed. Failure
to comply with applicable regulations can result in fines, suspensions of
approvals, product seizures, injunctions, recalls, operating restrictions and
criminal prosecutions. Delays in receipt of or failure to receive clearances or
approvals for the products of the Company would adversely affect the marketing
of such products and the results of future operations.

Distribution of the Company's products outside the U.S. will also be
subject to regulation which varies from country to country. Japan requires the
submission of clinical data in a manner analogous to the requirements of the
FDA. France requires the submission of clinical data with local content. The
regulatory requirements in all countries, however, are subject to change. In
addition, the export by the Company of certain of its products that have not yet
been cleared for domestic, commercial distribution may be subject to export
restrictions imposed by U.S. regulatory agencies.

Diagnostic products marketed in the U.S. are required to obtain FDA
clearance. The Company intends to seek FDA clearance for the
Osteopatch(Trademark) in the form of a 510(k) 'device' premarket notification
procedure to demonstrate 'substantial equivalence' to a legally marketed
product. Clinical test data will be required to substantiate substantial
equivalence. The Company anticipates that its 510(k) notification will be acted
upon favorably and quickly, although there can be no assurance that this will be
the case. The Company is relying on (i) the fact that the FDA has already
cleared the skin patch as a collection device and may be expected to clear the

Osteopatch(Trademark) as a collection device for Pyd and Dpd and (ii) the fact
that the FDA has cleared Metra's 510(k) submissions for its immunoassay test
kits to measure Pyd and Dpd levels in 'first morning void' urine samples. If the
Company is able to demonstrate a correlation between Pyd and/or Dpd levels in
perspiration and measurable physiologic changes in patients, the Company
believes that its osteoporosis product can be shown to be substantially
equivalent to medical devices (i.e., diagnostic kits for measurement of Pyd
and/or Dpd levels in urine) which the FDA has already cleared for marketing and
thus qualifies for the 510(k) notification procedure. Furthermore, there can be
no assurance that the FDA will not request the development of additional data
following the original submission, causing the Company to incur further cost and
delay. Nor can there be any assurance that the FDA will not restrict the
intended use of the product as a condition for clearance. In addition, the
Company's promotional and educational activities regarding its diagnostic
products must comply with evolving FDA policies and regulations regarding
acceptable product promotion practices.

If the FDA concludes that a device is not substantially equivalent to
another legally marketed device, submission of a PMA will be required. If the
FDA indicates that a PMA is required for the products of the Company, the
application will require the results of clinical studies and manufacturing
information, and likely review by a panel of experts outside of the FDA.
Clinical studies would need to be conducted in accordance with FDA requirements.
The failure to comply would result in the FDA's refusal to accept the data or
the imposition of regulatory sanctions. FDA review of a PMA can take
significantly longer than that for a 510(k) notification. Further, if a company
wishes to propose modifications to a product subsequent to FDA approval under a
PMA application, including changes in indications or other significant
modifications to labeling, or modifications to the

32
<PAGE>
manufacturing process, or if a company wishes to change its manufacturing
facility, a PMA supplement must first be submitted to the FDA for its review and
approval.

The FDA also requires the Company to manufacture its products in compliance
with current GMP regulations which govern the procedures, controls and
documentation used in manufacturing the Company's products. The FDA ensures GMP
compliance through periodic facility inspections. Accordingly, the manufacturer
of the components of the Company's products must comply with these requirements.

The Company's laboratory business is subject to federal regulation by the
Department of Health and Human Services ('HHS') and the FDA. Under the Clinical
Laboratory Improvements Amendments of 1988 and regulations promulgated
thereunder, the Company's laboratory must maintain a certificate of compliance
with the regulatory requirements applicable to the types of clinical testing
performed by the laboratory. These regulatory requirements govern the
laboratory's test methods, quality control procedures and proficiency, and may
be enforced through inspections and proficiency testing by HHS or its designee.
Under the FDA's Good Laboratory Practices regulations, the Company's laboratory
must comply with regulations promulgated by the FDA that govern testing
procedures and quality control procedures relating to non-clinical testing

performed in support of applications for research or marketing permits regulated
by the FDA. These regulations may be enforced through inspections by the FDA.
See 'Risk Factors--Government Regulation and Product Approval.'

COMPETITION

The Company expects to experience intense competition from companies
developing biochemical markers with clinical applications for bone resorption.
The Company anticipates that it will face intense competition in attempting to
establish market share. To the Company's knowledge, however, none of these
competitive products are as simple or easy to use as the Osteopatch(Trademark).
There can be no assurance, however, that the competitive positions of these
competitors or of other companies will not be enhanced significantly through
collaborative arrangements with large pharmaceutical companies, other companies
or academic institutions. The Company's competitors may succeed in developing,
obtaining patent protection for, receiving FDA and other regulatory approvals
for, or commercializing products more rapidly than the Company. If the Company
is successful in commercializing its products, it will be required to compete,
with respect to manufacturing efficiency and marketing capabilities, in areas
that it has limited expertise. The Company also competes in acquiring products
or technology from universities. Furthermore, rapid technological development
could result in actual or proposed technologies, products or processes of the
Company becoming obsolete prior to successful commercialization.

Certain diseases and disorders targeted by the Company's products can be
diagnosed and monitored using existing imaging technologies, such as dual-energy
X-ray absorptiometry ('DEXA'). The Company believes that current imaging systems
serve a different function than products that test for biochemical markers,
since the Company's products can identify a patient's rate of bone loss, while
DEXA measures a patient's existing bone mineral density. Two of the leading
companies in this field are Lunar Corporation and Hologic, Inc.

Other companies that measure bone loss through bone markers include Metra
and Ostex, which have allied themselves with larger diagnostic and
pharmaceutical companies. These companies and their strategic alliances have
greater financial and other resources than the Company. The Company's products
will have to compete based on technological superiority, usefulness in
commercial versus clinical environments, ease of patient use, accuracy of
results and price. There can be no assurance that the Company will be able to
effectively compete based on the foregoing factors. See 'Risk Factors--
Competition and Technological Change.'

MAJOR CUSTOMERS

One customer, Parke-Davis, individually accounted for approximately 29.5
percent and 43.9 percent of the Company's total sales in fiscal 1996 and fiscal
1995, respectively. Sales to the Company's five largest customers represented
approximately 63.0 percent and 64.8 percent of total sales in fiscal 1996 and
fiscal 1995, respectively. Except for Parke-Davis, none of these customers were
significant in more than one year. The Company has no long term contracts or
agreements with its customers. Each contract is negotiated separately with the
pharmaceutical manufacturer or research organization and is usually limited to a
specific project with limited duration. The cancellation of any contracts with
existing customers or the failure to replace such contracts

33
<PAGE>
upon expiration or termination could have a material adverse effect on the
Company's laboratory operations. As the Company's laboratory operations grow,
the Company expects that its dependence on any one or group of customers will
diminish. See 'Risk Factors--Dependence on Major Customers.'

EMPLOYEES

As of June 30, 1996, the Company employed twenty-four persons, including
twenty-one full time and three part time, of which four are management
personnel, three are administrative personnel, fourteen are laboratory staff and
three are support staff. The Company's employees are not covered by any
collective bargaining arrangements or unions. The Company considers its
relationship with its employees to be good.

FACILITIES

The Company's executive offices are located at 1370 Reynolds Avenue,
Irvine, California and its laboratory facilities are located at both the Irvine,
California location and in Seattle, Washington. The Company leases approximately
3,570 square feet of office space, which consists of approximately 1,000 square
feet of laboratory space in Irvine, California pursuant to a one year lease, at
an annual rental of $32,130, which expires on September 30, 1997. The Company
also leases approximately 7,500 square feet of office space that includes
approximately 6,000 square feet of laboratory space in Seattle, Washington
pursuant to a five year lease at an annual rental of $121,093, which expires on
September 30, 1997. The Company is currently seeking alternate facilities which
will be adequate for its expected levels of operations after September 1997.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

MANAGEMENT

DIRECTORS AND OFFICERS

The Directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------
<S> <C> <C>
Ellen A. Rudnick............... 45 Chairman
Paul G. Kanan.................. 50 President, CEO and Director
G. Russell Warnick............. 52 Chief Scientific Officer and Founder
Elizabeth Teng Leary, Ph.D..... 48 Vice President and Director of Laboratories
Mary L. Campbell............... 51 Treasurer and Director
Douglas S. Harrington, M.D..... 43 Secretary and Director
Craig M. Goldstone............. 39 Director
Terry M. Giles................. 47 Director
</TABLE>

The following is a brief description of the professional experience and
background of the officers and directors of the Company.

Ellen A. Rudnick: Ms. Rudnick has served as Chairman of the Company since
July 1996, and served from 1993 to 1996 as Chairman of the Board and a director
of BioQuant. Since 1992, she has served as Chairman of CEO Advisors, Inc. ('CEO
Advisors'), a health care consulting company that she and Mr. Kanan founded.
From 1990 through 1992, Ms. Rudnick served as President and CEO of Healthcare
Knowledge Resources, Inc., a health care information company in Ann Arbor,
Michigan and as President of its successor, HCIA. She was employed from 1975 to
1990 by Baxter Healthcare Corporation, most recently as Corporate Vice President
and President of its Management Services Division. She serves on the Boards of
NCCI and Lakeland Health Services. Ms. Rudnick holds a B.A. degree from Vassar
College and an M.B.A. degree from the University of Chicago Graduate School of
Business.

34
<PAGE>
Paul G. Kanan: Mr. Kanan has served since July 1996 as the President,
Chief Executive Officer and a director of the Company, and served from 1993 to
1996 as the President and a director of BioQuant. Mr. Kanan is also an officer
and director of CEO Advisors, a health care consulting firm that he and Ms.
Rudnick founded in 1992. From 1991 to 1992, Mr. Kanan operated his own health
care consulting firm, and during part of such period served as acting CEO and
CEO of SPS, Inc., a healthcare service firm. From 1988 to 1991, he served as
President and CEO of Oncotech, Inc., a medical diagnostic company in Irvine,
California involved in the development and marketing of oncological testing.
From 1976 to 1988, Mr. Kanan was employed by Baxter Healthcare Corporation, most
recently as President of its Chemotherapy Services Division. He received his
B.S.E. degree from the University of Michigan and an M.B.A. degree from Harvard
University Graduate School of Business.

G. Russell Warnick: Mr. Warnick has served as the Company's Chief
Scientific Officer since July 1996. Mr. Warnick was a co-founder of PBI-WA and
has served as its President from 1989 to 1996. From 1976 to 1990, Mr. Warnick
was associated with the University of Washington in a number of roles including
research associate, research scientist and most recently Director of the

Lipoprotein Laboratory at the Northwest Lipid Research Center. As an
internationally recognized expert in cholesterol testing, he has been
extensively involved in developing national guidelines for improving laboratory
performance. He has authored over 150 books, chapters, articles and abstracts,
primarily in areas of lipid/lipoprotein measurement and developed a method for
measurement of HDL cholesterol that has been widely adopted by other clinical
laboratories. Mr. Warnick holds a B.A. in chemistry and an M.S. in biochemistry
from Utah State University and an M.B.A. from City University of Seattle.

Elizabeth Teng Leary, Ph.D., DABCC: Dr. Leary has served as the Company's
Vice President and Director of Laboratories since July 1996. From 1989 to July
1996, she was Vice President and Director of the Laboratory Division of PBI-WA.
Dr. Leary has served in a number of clinical laboratory management positions
prior to co-founding PBI-WA in 1989 with Mr. Warnick. Dr. Leary served as the
Director of Chemistry at Cooperative Medical Laboratories of Providence
Hospital, Everett, Washington from 1978 to 1989; Consultant to the Northwest
Lipid Research Center from 1988 to 1989; and Director of Chemistry at the
General Hospital of Everett from 1978 to 1989. Dr. Leary is a Diplomate of the
American Board of Clinical Chemistry and serves as Chair of the American
Association for Clinical Chemistry Lipid and Lipoproteins Division. She is also
the Director of the CDC Cholesterol Reference Method Laboratory at Pacific
Biometrics Research Foundation. Her focus in recent years has been
standardization and method development in lipids and osteoporosis testing. She
has authored over 25 publications and abstracts. Dr. Leary received her B.A.
from the University of California, Berkeley; her Ph.D. in biochemistry from
Purdue University; and participated in post doctoral training in clinical
chemistry at the University of Washington.

Mary L. Campbell: Ms. Campbell has served as a non-employee officer in the
capacity of Treasurer and a director of the Company since July 1996, and served
as secretary, treasurer and a director of BioQuant from 1993 to 1996. Since
1988, she has served as the treasurer of Enterprise Management, Inc., the
general partner of Enterprise Development Fund, L.P., a venture capital firm and
investor in BioQuant. Since 1995, she has also served as Vice President and
Treasurer of EDM, Inc., the general partner of Enterprise Development Fund II,
Limited Partnership, a venture capital firm formed in 1995. From 1984 to 1987,
she was employed by Michigan Capital and Service, Inc., a venture capital
subsidiary of the National Bank of Detroit, most recently as its president. Ms.
Campbell also serves as a director of Vista Restaurants International and
Synthon, Incorporated, and is an adjunct lecturer at the University of
Michigan's Graduate School of Business. Ms. Campbell holds B.A. and M.B.A.
degrees from the University of Michigan and an M.A. degree from Fairfield
University.

Douglas S. Harrington, M.D.: Dr. Harrington has served as the Secretary
and a director of the Company since July 1996, and from 1993 to 1996 was
Chairman of the BioQuant Scientific Advisory Board and a director since 1995.
From 1992 to early 1995, Dr. Harrington was the President of Nichols Institute
Reference Laboratory in San Juan Capistrano, California, a major reference
laboratory for esoteric testing. Dr. Harrington also serves as an Associate
Clinical Professor of pathology and microbiology at the University of Nebraska
Medical Center, where he has been a member of the faculty since 1986. Dr.
Harrington has 87 publications including papers, book chapters and abstracts. He
received his B.A. from the University of Colorado and his M.D. from the

University of Colorado Health Sciences Center. He is board certified in
anatomical and clinical pathology and hematology.

35
<PAGE>
Dr. Harrington is active in a number of organizations, including a member of the
Dean's Board of the University of California-Irvine Graduate School of
Management, serving on the boards of Sigma, Specialty Laboratories, Inc., White
River Concepts and California Private Equity Fund.

Craig M. Goldstone: Mr. Goldstone, a director of the Company since July
1996, was Chairman of the Board of PBI-WA from 1995 to 1996. He also serves as
Senior Vice President-Investments for PaineWebber's New York office, which he
joined in January, 1995. From May 1991 to January 1995, Mr. Goldstone held Vice
President positions at Lehman Brothers.

Terry M. Giles: Mr. Giles has been a director of the Company since July
1996 and previously a director of PBI-WA from 1995 to 1996. In 1975, Mr. Giles
founded the law firm of Giles and Burkhalter, Orange County, California, of
which he is a member. Mr. Giles has served on the board of Computerland since
1987, and is a member of the Board of Regents of Pepperdine University. He
received his B.A. from the California State University at Fullerton and his J.D.
from Pepperdine University School of Law.

Subsequent to this Offering, the Company intends to hire a full-time Chief
Financial Officer, who will also be appointed Treasurer of the Company,
responsible for the financial affairs of the Company. The Company is currently
interviewing several candidates for this position.

INDEMNIFICATION

Pursuant to the Company's Certificate of Incorporation, as amended, and
Amended and Restated By-laws, officers and directors of the Company will be
indemnified by the Company to the fullest extent allowed under Delaware law for
claims brought against them in their capacities as officers or directors. The
Company is in the process of attempting to obtain directors and officers
liability insurance. Indemnification will not be provided if the officer or
director does not act in good faith and in a manner reasonably believed to be in
the best interests of the Company, or, with respect to any criminal proceedings,
if the officer or director had no reasonable cause to believe his conduct was
lawful. Accordingly, indemnification may be sought for liabilities arising under
the Securities Act. The Underwriting Agreement between the Company and the
Underwriter (the 'Underwriting Agreement') also contains provisions under which
the Company and the Underwriter have agreed to indemnify each other (as well as
the other officers and directors) for certain liabilities, as well as the
other's liabilities under the Securities Act. See 'Underwriting.' Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and may, therefore, be unenforceable.

COMMITTEES OF THE BOARD

The Board of Directors has established a compensation committee (the
'Committee'). The Committee is comprised solely of 'non-employee directors'
within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act and
'outside directors' within the contemplation of section 162(m)(4)(C)(i) of the
Internal Revenue Code of 1986, as amended (the 'Code'). The Compensation
Committee is responsible for establishing salaries, bonuses and other
compensation for the Company's executive officers and for administering the
Company's 1996 Stock Option Plan, including granting options and setting the
terms thereof pursuant to such plan. The members of the Compensation Committee
are Ms. Campbell, Dr. Harrington and Mr. Goldstone.

The Board of Directors has established an Audit Committee. The Audit
Committee is comprised solely of non-employee directors and is charged with
reviewing the Company's annual audit and meeting with the Company's independent
accountants to review the Company's internal controls and financial management
practices. The members of the Audit Committee are Dr. Harrington, and Mr. Giles.

<PAGE>
DIRECTORS' COMPENSATION

The Company's policy is not to pay compensation to directors who are also
employees of the Company for their services as directors. The Company's
compensation policy for non-employee directors is to grant such persons for each
meeting attended in person up to a maximum of six meetings that number of stock
options, based on the fair market value on the date of grant, equal to $1,000.
The Company will also reimburse reasonable out-of-pocket expenses of directors
for attendance at meetings.

SCIENTIFIC ADVISORY BOARD

The Company has organized a scientific advisory board (the 'Scientific
Advisory Board'), of which Dr. Harrington serves as Chairman, currently
consisting of six individuals (the 'Scientific Advisors'), including Dr.
Harrington. The Scientific Advisors have extensive experience in medical
research. At the Company's request, the Scientific Advisors will review and
evaluate the Company's research programs and advise the Company with respect to
technical matters in fields in which the Company is involved. The Scientific
Advisory Board will meet periodically as a group to review and discuss the
Company's progress in research and develop-ment. In addition, certain members
meet or consult by phone in smaller groups or individually with Company
scientists on a more frequent basis.

All of the Scientific Advisors are employed by other entities and some may
have consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company. The Scientific Advisors are
expected to devote only a small portion of their time to the Company and are not
expected to participate actively in the day-to-day affairs of the Company.

The following is a brief description of the professional experience and
background of the Scientific Advisors:

Douglas S. Harrington, M.D.: Dr. Harrington is Chairman of the
Scientific Advisory Board. See 'Management' for biographical data.

Charles E. Becker, M.D.: Dr. Becker recently retired as a professor
of Medicine and a professor of Pharmacy at the University of California,
San Francisco, where he was affiliated since 1969. He is board certified by
the American Board of Internal Medicine, American Board of Toxicology and
American Board of Preventive Medicine/Occupational Medicine. He has
authored over 150 articles, with a particular emphasis on environmental
diseases. Dr. Becker received his M.D. degree from Georgetown University
School of Medicine.

Conrad Johnston Jr., M.D.: Dr. Johnston is a Professor of Medicine
and Director of Endocrinology at the University of Indiana School of
Medicine. He serves as Vice President of the Board of Trustees of the
National Osteoporosis Foundation and as Chairman of its Scientific Advisory
Board. Dr. Johnston has published more than 250 articles, chapters, and
abstracts in the field of bone mineral research and serves as the associate
editor of Bone and Mineral, and is a member of the editorial boards of the
Journal of Bone and Mineral Research and the Journal of Clinical

Endocrinology and Metabolism. In 1993, he was awarded the Sandoz prize for
gerontological research. Dr. Johnston received his B.A. and M.D. degrees
from Duke University.

Michael Kleerekoper, M.B., B.S., F.A.C.P., F.A.C.E.: Dr. Kleerekoper
is Professor of Medicine in the Division of Endocrinology and Metabolism,
and Associate Chairman of the Department of Internal Medicine at Wayne
State University School of Medicine in Detroit, Michigan. From 1976 to
1993, Dr. Kleerekoper was a member of the Bone and Mineral Division at
Henry Ford Hospital in Detroit, and Division Head of that group from 1985.
He also served as Deputy Director of the Bone and Mineral Research
Laboratory and the Director, Center for Osteoporosis Research. He is a
member of the Program and Education Committees of the American Society of
Bone Mineral Research (ASBMR), the Scientific Advisory Board of the
National Osteoporosis Foundation, and the editorial boards of the Journal
of Bone and Mineral Research, BONE, Osteoporosis International, Journal of
Clinical Endocrinology and

37
<PAGE>
Metabolism, and Clinical Chemistry. Dr. Kleerekoper received his B.Sc.,
M.B. and B.S. degrees from The University of Sydney, Australia.

Robert Lindsay, M.B. Ch.B., Ph.D., M.R.C.P.: Dr. Lindsay is Chief of
Internal Medicine at the Helen Hayes Hospital in New York, and Director of
its Clinical Research Center. He also serves as Professor of Clinical
Medicine at New York's Columbia University and an Adjunct Professor at
Rensselaer Polytechnic Institute. Dr. Lindsay is President of the National
Osteoporosis Foundation and a member of the Advisory Committee, NIH, Office
of Research into Women's Health. Dr. Lindsay is a Fellow of the following
organizations: the Royal College of Physicians and Surgeons, the American
College of Nutrition, the Royal Society of Medicine, and the American
College of Endocrinology. Dr. Lindsay received his B.Sc., M.B.Ch.B, Ph.D.,
and M.R.C.P. from the University of Glasgow, Scotland.

Donald Schoendorfer, Ph.D.: Dr. Schoendorfer is the Vice President of
Research and Development for Sudormed, which he co-founded and from which
the Company's skin patch licenses were obtained. Dr. Schoendorfer is the
co-inventor of the skin patch technology licensed by the Company. He holds
thirty-eight issued patents and has over sixteen years experience
developing and commercializing medical products. Dr. Schoendorfer holds a
B.A. degree from Baldwin Wallace College, a B.S. degree from Columbia
University and M.S. and Ph.D. degrees from the Massachusetts Institute of
Technology.

EXECUTIVE COMPENSATION

The following table sets forth the compensation earned by the Company's
Chairman, its Chief Executive Officer and all other executive officers earning
in excess of $100,000 for the year ended June 30, 1996.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ---------------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ellen Rudnick
Chairman............................... 1996 -- -- $117,500(1) --
Paul G. Kanan
President and Chief Executive Officer.. 1996 -- -- $117,500(1) --
</TABLE>
- ------------------
(1) Amounts above reflect payments to such persons through CEO Advisors, a firm
owned by Paul Kanan and Ellen Rudnick, for management services to BioQuant.
Such persons received cash of $24,000 and a promissory note in the amount of
$93,500 in July 1996 in lieu of the remaining cash payment due under the
management contract. The promissory notes mature on July 9, 1997 and bear
interest at the rate of 7 percent per annum. In consideration of receipt of
such notes in lieu of cash, such persons also received stock options to
purchase 27,100 shares of common stock at $3.45 per share.

EMPLOYMENT AGREEMENTS

In October, 1996, the Company entered into two year employment agreements
with each of Paul Kanan, Ellen Rudnick, G. Russell Warnick and Elizabeth Teng
Leary, the Company's key employees. See 'Risk Factors--Dependence on Key
Personnel'. All such employees are entitled to receive customary benefits,
including disability benefits and participation in all Company stock, health and
benefit plans available to other executive officers and employees.

38
<PAGE>

Mr. Kanan's and Ms. Rudnick's employment agreements provide for annual
salaries of $180,000 and $140,000, respectively, and during their employment and
for periods ranging from nine months to two years thereafter depending on the
circumstances of termination, a prohibition from engaging in any business that
competes with that of the Company. In addition, both Mr. Kanan and Ms. Rudnick
are prohibited from recruiting or soliciting any employee or any person that has
a business relationship with the Company for a two year period. If such persons
are terminated for 'cause,' as defined in each employment agreement, such
persons will be entitled to receive their respective salary and bonus up to the
date of termination. In the event such persons are terminated without cause they
shall be entitled to receive immediate payment for all debt owed to them by the
Company, plus their salary, bonus and benefits for a period of nine months
thereafter. Furthermore, upon termination, any stock options held by Mr. Kanan
and Ms. Rudnick received subsequent to July 1, 1996 will accelerate and become
exercisable in full during the ninety day period subsequent to the date of
termination. The Company has agreed to finance the exercise of these options in

exchange for a three-year promissory note with interest payable in either stock
or cash on a quarterly basis at the rate of 7 percent per annum. Any such loan
by the Company will be collateralized by the shares of Common Stock underlying
such options, and the proceeds of the sale of such shares must be used to
satisfy such person's obligations to the Company. Options received prior to July
1, 1996 will be unaffected by such termination of employment.

Mr. Warnick's and Ms. Leary's employment agreements provide for annual base
salaries of $90,000 and $85,000, respectively, and contain similar restrictions
as described above prohibiting engaging in any business that competes with that
of the Company for a period of nine months following termination. In addition,
both Mr. Warnick and Ms. Leary will be entitled to a bonus of $50,000 and
$30,000, respectively, in the event certain product development and laboratory
operation milestones are achieved. Further, such persons are prohibited for a
period of two years after termination of employment from recruiting or
soliciting any employee or any person that has a business relationship with the
Company. If such persons are terminated for 'cause,' as defined in each
employment agreement, such terminated person will be entitled to receive their
salary and bonus up to the date of termination. In the event such persons are
terminated without cause they shall be entitled to receive their salary, bonus
and benefits for a period of nine months thereafter and the Company has agreed
to indemnify such persons against any liabilities or claims with respect to
certain personal guarantees under bank loans and a lease on behalf of the
Company.

1996 STOCK INCENTIVE PLAN

The Company adopted a Stock Incentive Plan (the 'Plan') in July 1996 to
induce certain individuals to remain in the employ or service of the Company and
its subsidiaries and to attract new employees and non-employee directors. The
Plan is administered by the Committee, which will have the exclusive power to
select the officers, directors, consultants, advisors and employees of the
Company who are eligible for option grants or awards, and to determine the terms
and conditions of any options or awards granted, including but not limited to
the option price, method of exercise and the term during which the options may
be exercised. The total number of shares of Common Stock reserved for issuance
under the Plan is 1,000,000 (although only an aggregate of 154,365 may be issued
during the next 120 days by agreement with the Underwriter). Options granted
under the Plan may be non-qualified options, options qualifying as incentive
stock options within the meaning of Section 422(b) of the Code, or stock
appreciation rights. The Committee may also award restricted stock, performance
shares, loans or tax offset payments. The option price of each incentive stock
option ('ISO') granted under the Plan shall be not less than the fair market
value (110 percent of the fair market value if the grant is to an employee
owning more than 10 percent of the outstanding Common Stock) of the Common Stock
subject to the option, as determined in good faith by the Committee. ISO's
granted under the Plan will be exercisable for a period, not to exceed ten
years, as determined by the Committee. The option exercise price and period
within which non-qualified options may be exercised will be determined at the
discretion of the Committee. The Plan will terminate not later than July 9,
2006. 539,840 options to purchase Common Stock have been issued to date in
connection with the Plan.

The initial per share exercise price for an ISO may not be less than the
fair market value thereof on the date of grant, or 110 percent of such fair
market value with respect to a participant who, at such time, owns stock

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<PAGE>

representing more than 10 percent of the total combined voting power of all
classes of stock of the Company. The initial per share exercise price for a
non-qualified stock option may not be less than 85 percent of the fair market
value thereof on the date of grant or 100 percent of such fair market value with
respect to a participant who is, or may reasonably be expected to become, a
'covered employee' within the meaning of section 162(m)(3) of the Code. The
initial per share exercise price for the options granted to non-employee
directors is the fair market value of the Common Stock on the date of grant.

No option granted pursuant to the Plan may be exercised more than ten years
after the date of grant, except that ISOs granted to participants who own more
than 10 percent of the total combined voting power of all classes of stock of
the Company at the time the ISO is granted may not be exercised after five years
after the date of grant. No participant may be granted ISOs that are exercisable
for the first time in any one calendar year with respect to Common Stock having
an aggregate fair market value in excess of $100,000 on the date of grant. No
option granted under the Plan is transferable by the optionee other than by
death.

Generally, an option may be exercised only while the recipient is in the
active employ or service of the Company, or within thirty days after termination
of a participant's employment or service as a director other than by reason of
retirement or death, or within one year after termination of employment or
service by reason of death, or within ninety days after termination of a
participant's termination of employment or service by reason of retirement.

In the event of the death or retirement of an optionee, each option granted
to him shall become immediately exercisable in full.

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of the date hereof with
respect to the beneficial ownership of the outstanding Common Stock of the
Company by each director, all 5 percent stockholders of the Company and all
directors and officers as a group.

<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF
OUTSTANDING COMMON STOCK
------------------------------------------------
NUMBER OF PRIOR TO OFFERING AFTER OFFERING
NAME OF BENEFICIAL OWNER SHARES(1) PERCENT(2) PERCENT(3)
- ------------------------------------- --------- ----------------- --------------
<S> <C> <C> <C>
Ellen A. Rudnick(4).................. 267,674 10.2% 6.2%
Paul G. Kanan(5)..................... 267,674 10.2% 6.2%
G. Russell Warnick(6)................ 121,044 4.6% 2.8%
Elizabeth Teng Leary(7).............. 90,125 3.4% 2.1%
Mary L. Campbell(8).................. 303,910 11.5% 7.0%
Craig M. Goldstone(9)................ 201,421 7.6% 4.6%
Terry M. Giles(10)................... 566,668 21.5% 13.1%
Douglas S. Harrington(11)............ 18,965 * *
All directors and officers as a group
(8 persons)(12).................... 1,837,481 69.8% 42.4%
</TABLE>
- ------------------
* Less than 1 percent.

(1) Includes currently exercisable options and warrants to purchase shares of
Common Stock.

(2) Based on an aggregate of 1,948,389 shares of Common Stock outstanding and
684,904 shares of Common Stock subject to currently exercisable options and
warrants.

(3) Based on an aggregate of 3,648,389 shares of Common Stock to be outstanding
and 684,904 shares of Common Stock subject to options or warrants
exercisable within 60 days of the date of this Prospectus.

40
<PAGE>
(4) Includes 58,991 shares of Common Stock and 208,683 shares of Common Stock
subject to currently exercisable warrants and options. Does not include
80,000 shares of Common Stock subject to options granted in July 1996 which
do not vest within the next 60 days.

(5) Includes 58,991 shares of Common Stock held by the Kanan Living Trust Dated
May 15, 1990, of which Mr. Kanan is a co-trustee with his wife, and 208,683
shares of Common Stock subject to currently exercisable warrants and
options. Does not include 80,000 shares of Common Stock subject to options
granted in July 1996 which do not vest within the next 60 days.

(6) Includes 114,164 shares of Common Stock and 6,880 shares of Common Stock
subject to options granted in July 1996. Does not include 80,000 shares of
Common Stock subject to options granted in July 1996 which do not vest

within the next 60 days.

(7) Includes 86,865 shares of Common Stock and 3,260 shares of Common Stock
subject to options granted in July 1996. Does not include 80,000 shares of
Common Stock subject to options granted in July 1996 which do not vest
within the next 60 days.

(8) Includes 263,016 shares of Common Stock (of which 5,206 shares were issued
in connection with the conversion of certain indebtedness in July 1996) and
40,894 shares of Common Stock subject to currently exercisable options and
warrants all held by Enterprise Development Fund I, L.P. ('EDF'), of which
Enterprise Management, Inc. ('EMI') acts as general partner and in which
Ms. Campbell is an officer and one of three directors. Ms. Campbell
disclaims beneficial ownership as to all of said shares, except for
approximately 21,000 shares (or approximately 7 percent of such shares)
which represents her one-third interest in EMI which, in turn, holds an
approximately 21 percent interest in EDF.

(9) Includes 107,273 shares of Common Stock, 66,792 shares of Common Stock
subject to currently exercisable options and warrants, 12,773 shares of
Common Stock which were issued upon conversion of certain indebtedness in
July 1996 and 14,583 shares subject to currently exercisable warrants
issued in connection with the Bridge Loan. Does not include 80,000 shares
of Common Stock subject to options granted in July 1996 which do not vest
within the next sixty days.

(10) Includes 377,373 shares of Common Stock, of which 351,668 shares are held
by Millennium Partners, L.P., of which Mr. Giles controls approximately 70
percent and is therefore deemed the beneficial owner of such shares, 55,000
shares of Common Stock granted to Mr. Giles in July 1996, 124,295 shares of
Common Stock which were issued upon conversion of certain indebtedness in
July 1996 and 10,000 shares of Common Stock subject to warrants issued in
the June 1996 private placement.

(11) Includes 18,965 shares of Common Stock subject to currently exercisable
options and warrants. Does not include 40,000 shares of Common Stock
subject to options granted in July 1996 which do not vest within the next
sixty days.

(12) Includes 1,258,741 shares of Common Stock and 578,740 shares of Common
Stock subject to currently exercisable options and warrants. Does not
include 440,000 shares of Common Stock subject to options granted to
management in July 1996 which do not vest within the next sixty days. In
the event such options and warrants are fully exercised, management will
hold an aggregate of approximately 2,277,481 shares or approximately 66.8
percent based on a total of 3,408,793 shares outstanding subsequent to such
exercise. Does not include 1,000,000 shares reserved for issuance under the
Company's Stock Incentive Plan (pursuant to an agreement with the
Underwriter, a maximum of 154,365 shares subject to options may be granted
within 120 days following the date of this Prospectus), or Warrants offered
hereby or warrants issued in the June 1996 Financing and August 1996 Bridge
Loan.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the Manufacturing Agreement, Terry Giles, then a
director of PBI-WA and currently a director of the Company, and three former
directors of PBI-WA, guaranteed the obligations of MHS under the Manufacturing
Agreement with respect to certain costs of production of the manufacturer
incurred in connection with the production of the SPINPRO(Registered) product.

41
<PAGE>
In connection with a line of credit established on April 15, 1995 by PBI-WA
from the US Bank of Washington, N.A. (the 'Bank'), Messrs. Giles and Goldstone,
then directors of PBI-WA and currently directors of the Company, and two former
directors of PBI-WA, personally guaranteed all indebtedness of PBI-WA under the
line of credit. In consideration for such guarantees, PBI-WA issued to such
persons an aggregate of 26,066 shares (pre-Merger) of PBI-WA common stock.

Additionally, in connection with the conversion of the line of credit into
a term loan on June 11, 1996, Elizabeth Teng Leary and G. Russell Warnick,
officers of the Company, delivered updated guarantees to the Bank which
continued prior guarantees delivered on October 28, 1992 and April 15, 1995.
Further, G. Russell Warnick personally guaranteed the lease in Seattle,
Washington.

During the period from July 1994 through June 1996, Terry Giles, provided
the Company (and PBI-WA), on eight separate occasions, with loans aggregating
$400,000. These loans bore interest at annual variable rates ranging from 8.25
percent to 10 percent. All of such loans plus interest were converted into
124,295 shares of Common Stock of the Company on July 31, 1996 at the rate of
$3.45 per share. Additionally, Mr. Giles invested $50,000 in the Financing
described below. Mr. Giles received a promissory note in like amount with
interest at 14 percent per annum, which note was repaid with a portion the
proceeds of the Bridge Loan, and an aggregate of 10,000 Warrants to purchase
Common Stock through April 30, 1998 at an exercise price equal to $5.70 per
share.

During the period from July 1994 through June 1996, Craig Goldstone,
provided the Company (and PBI-WA), on four separate occasions, with loans
aggregating $100,879. These loans bore interest at the annual rate of 9.25
percent. $42,500 of such amount plus interest was converted into 12,773 shares
of Common Stock of the Company on July 31, 1996 at the rate of $3.45 per share.
$58,334 of such loan amount was used in connection with the Bridge Loan
described below for which Mr. Goldstone received a promissory note in like
amount with interest at 14 percent per annum, which note will be repaid with a
portion of the proceeds of this Offering, and an aggregate of 14,583 Bridge
Warrants (as defined below) to purchase Common Stock through April 30, 1998 at
an exercise price equal to $5.70 per share. See 'Description of Securities--
Bridge Warrants'.

EDF, an entity in which Mary Campbell, a director of the Company, maintains
a minority ownership interest, converted an aggregate of $17,500 of loans to the
Company plus interest into 5,206 shares of Common Stock of the Company on July
31, 1996 at the rate of $3.45 per share. Ms. Campbell disclaims beneficial

ownership of such shares held by EDF as a result of her minority interest
therein.

In July 1996, the Board of Directors granted Terry Giles, 55,000 shares of
Common Stock for services rendered to the Company in excess of that required by
non-employee directors.

In July 1996, the Board of Directors of the Company granted, pursuant to
the Plan, options to purchase Common Stock at an exercise price of $3.45 per
share to directors and officers as follows: Paul Kanan--80,000; Ellen Rudnick--
80,000; Craig Goldstone--80,000; G. Russell Warnick--80,000; Elizabeth Teng
Leary--80,000; Douglas S. Harrington--40,000.

In July 1996, the Board of Directors of the Company authorized the grant,
contemporaneously with the Company's IPO, of options to purchase 50,000 shares
of Common Stock at an exercise price equal to the IPO price per share (i.e.,
$4.75) to Craig Goldstone in connection with services rendered on behalf of the
Company beyond the normal services expected of a non-employee director.

In July 1996, the Board of Directors of the Company granted options to
purchase Common Stock at an exercise price of $3.45 per share in connection with
deferred salaries as follows: G. Russell Warnick--6,880; and Elizabeth Teng
Leary--3,260.

In August 1996, the Board of Directors of the Company granted 9,000 shares
of Common Stock to Craig Goldstone in connection with services rendered on
behalf of the Company.

On September 5, 1996, the Board of Directors adopted resolutions assigning
a certain contract and other obligations of the Company to Messrs. Giles and
Goldstone and three former directors of PBI-WA. Specifically, the Company is
assigning its rights and obligations pursuant to that certain letter agreement
dated June 13, 1995 between PBI-WA and Irvine Scientific, the manufacturer of
the Company's SPINPRO(Registered) product, whereby 13,270 shares of the
Company's Common Stock (as adjusted to give effect to the exchange in connection
with the Mergers) were issued to Irvine Scientific in satisfaction of certain
indebtedness, subject to a put option whereby

42
<PAGE>
the Company would have to repurchase such shares for $140,000 in the event the
Company does not exercise its call option to purchase such shares prior to
January 1, 1999. The Company did not want to risk using its cash resources in
connection with the put option and, accordingly, has given up its rights with
respect to the call option.

Additionally, Messrs. Giles and Goldstone and three former directors of
PBI-WA have agreed to assume the Company's obligations (i) under a severance
arrangement with a former employee whereby the Company would be obligated to pay
such former employee $50,000 upon consummation of an IPO, and (ii) pursuant to
the Agreement of Merger and Plan of Reorganization, dated September 30, 1994, by
and between MHS and Old PBI, whereby the Company would be obligated to issue
certain additional shares of its Common Stock to former PBI-WA stockholders who
have not previously waived their rights to receive such shares as a result of

the inability of the Company to achieve certain minimum revenue targets for its
SPINPRO(Registered) product by June 30, 1996.

Paul Kanan and Ellen Rudnick, are principals of CEO Advisors, a company
that provided management services to BioQuant beginning in 1993. This
arrangement has been terminated effective upon the consummation of the Mergers
on June 28, 1996, except for the provision of an assistant to Ellen Rudnick,
rent and office support on a pro rata basis at the estimated annual rate of
$28,000. During fiscal 1995 and fiscal 1996, BioQuant paid CEO Advisors an
aggregate of $109,000 and $186,000, respectively, for all services rendered.
Amounts outstanding at June 30, 1996 under this arrangement aggregated $187,000,
which is evidenced by two promissory notes in the principal amount of $93,500
and bear interest at 7 percent per annum. The promissory notes were issued to
each of Paul Kanan and Ellen Rudnick along with options to purchase 27,100
shares of Common Stock at an exercise price of $3.45 as an inducement to accept
the notes in lieu of cash.

The Company believes that the transactions between the Company and its
officers and directors described above are on terms no less favorable to the
Company than could have been obtained from unaffiliated parties under similar
circumstances.

BRIDGE FINANCINGS

In June 1996, the Company borrowed $250,000 from private investors payable
with interest at 14 percent per annum (the 'Financing'). This loan was repaid in
full out of the proceeds of the Bridge Loan described below. A total of 50,000
Bridge Warrants were issued in connection with this Loan. See 'Description of
Securities--Bridge Warrants.'

In August 1996, the Company completed the Bridge Loan financing (the
'Bridge Loan') consisting of 14 percent Promissory Notes in the aggregate
principal amount of $1,000,000 payable on the closing of this Offering together
with interest at 14 percent per annum and warrants to purchase an aggregate of
250,000 shares of Common Stock exercisable at $5.70 per share. The Company will
use a portion of the proceeds of this Offering to repay the Bridge Loan,
together with accrued interest thereon. See 'Use of Proceeds.' Additionally, the
Company has granted demand and piggyback registration rights with respect to the
Bridge Warrants issued in connection with the Bridge Loan and the June 1996
Financing and the Common Stock issuable upon exercise thereof.

Messrs. Giles and Goldstone, directors of the Company, invested $50,000 and
$58,334, respectively in the Financing and the Bridge Loan, respectively. Mr.
Giles' note was repaid out of the proceeds of the Bridge Loan. Mr. Goldstone's
note will be repaid with a portion of the proceeds of this Offering. Messrs.
Giles and Goldstone also received Bridge Warrants to purchase 10,000 and 14,583
shares of Common Stock, respectively, through April 30, 1998 at an exercise
price of $5.70 per share in connection with these financing transactions.

In connection with the Bridge Loan, the Company agreed to reimburse legal
expenses and paid a fee of $64,000 to the Underwriter, which acted as the
exclusive placement agent therefor. The net proceeds to the Company from the
issuance and sale of notes and warrants pursuant to the Bridge Loan were
approximately $936,000, of which approximately $250,000 was used to repay a loan

from certain investors as described above.

Management believes that all material ongoing transactions between the
Company and any of its affiliates are on terms no less favorable to the Company
than those that could be obtained from unaffiliated third parties. All future
material affiliated transactions and loans will be made or entered into on terms
that are no less favorable to the Company than those that can be obtained from
unaffiliated third parties and will be approved by

43
<PAGE>
a majority of the independent outside members of the Company's board of
directors who do not have an interest in such transactions.

DESCRIPTION OF SECURITIES

GENERAL

The authorized capital stock of the Company consists of an aggregate of
35,000,000 shares, of which 30,000,000 shares are of Common Stock, par value
$.01 per share and 5,000,000 shares are Preferred Stock, par value $.01 per
share.

UNITS

Each Unit offered hereby consists of (i) one share of Common Stock and (ii)
one Warrant. At any time commencing on the date of issuance through January 31,
1998, each Warrant will be exercisable to purchase one share of Common Stock.
The Common Stock and Warrants will be separately transferable from the Units
immediately upon completion of this Offering.

COMMON STOCK

The Company is authorized to issue 30,000,000 shares of Common Stock, $.01
par value per share, of which 1,948,389 shares are currently outstanding.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters to be voted on by stockholders. There are no preemptive,
subscription, conversion or redemption rights pertaining to the Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available therefor and to
share ratably in the assets of the Company available upon liquidation. The
holders of Common Stock do not have the right to cumulate their votes in the
election of directors and, accordingly, the holders of more than 50 percent of
all the Common Stock outstanding are able to elect all directors. The officers
and directors will continue to control a majority of the votes following
completion of this Offering and, accordingly, they will be able to elect all of
the Company's directors. All of the outstanding shares of Common Stock are, and
the Common Stock offered hereby, upon issuance and when paid for, will be duly
authorized, validly issued, fully paid and non-assessable.

WARRANTS

In connection with this Offering, the Company has authorized the issuance
of up to 2,005,000 Warrants (including 255,000 Warrants that may be issued upon
exercise of the Underwriter's over-allotment option) and has reserved an
equivalent number of shares of Common Stock at a price of $12.00 per share. The
Warrants will be exercisable at any time after the original date of their
issuance (which is the date of this Prospectus) through January 31, 1998, unless
earlier redeemed. The Warrants are redeemable by the Company at $.10 per
Warrant, upon thirty days' notice, at any time commencing April 30, 1997, if the
closing average bid price per share of the Common Stock for twenty consecutive
trading days prior to the date notice of redemption is given equals or exceeds
$16.80 per share. In the event the Company gives notice of its intention to
redeem, a holder would be forced either to exercise his or her Warrant within
thirty days after the date of notice or accept the redemption price.

The exercise price of the Warrants may be reduced at any time from time to
time in the discretion of the board of directors when it appears to be in the
best interests of the Company to do so. Any such reduction would benefit the
holders who do not exercise their Warrants prior to the effective date of the
reduction.

The Warrants will be issued in registered form under a Warrant Agreement
between the Company and American Securities Transfer & Trust, Inc. (the 'Warrant
Agent'). The shares of Common Stock underlying the Warrants, when issued upon
exercise of a Warrant, will be fully paid and nonassessable, and the Company
will pay any transfer tax incurred as a result of the issuance of Common Stock
to the holder upon its exercise.

The Warrants contain provisions that protect the holders against dilution
by adjustment of the exercise price in certain events, such as stock dividends
and distributions, stock splits, recapitalization, mergers or consolidations and
certain issuances below the fair market value of the Common Stock. The Company
is not

44
<PAGE>
required to issue fractional shares upon the exercise of a Warrant. The holder
of a Warrant will not possess any rights as a stockholder of the Company until
such holder exercises the Warrant.

The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement, the form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.

For the Company to redeem or a holder to exercise the Warrants, there must
be a current registration statement in effect with the Commission and
qualification under applicable state securities laws (or applicable exemptions
from state qualification requirements) with respect to the shares or other
securities underlying the Warrants. The Company has agreed to use all reasonable
efforts to cause a registration statement or a post-effective amendment to this
registration statement with respect to such securities under the Securities Act
to be filed and to become and remain effective during the term of the Warrants

and to take such other actions under the laws of various states as may be
required to cause the redemption of the Warrants or the sale of Common Stock
upon exercise of Warrants to be lawful. The Company will not call for redemption
or not be required to honor the exercise of Warrants if, in the opinion of the
Board of Directors upon advice of counsel, such would be unlawful. See 'Risk
Factors--Current Prospectus and State Registration Required to Exercise
Warrants.'

BRIDGE WARRANTS

In connection with the financings completed in June 1996 and August 1996,
respectively, the Company issued an aggregate of 300,000 warrants (the 'Bridge
Warrants') to purchase 300,000 shares of Common Stock at an exercise price, in
the event of an initial public offering of the Company's securities, equal to
120 percent ($5.70) of the public offering price of the Units offered in such
IPO. The Bridge Warrants are exercisable until April 30, 1998. The Company
granted demand and piggy back registration rights with respect to the Bridge
Warrants and the Common Stock issuable upon exercise thereof.

PREFERRED STOCK

Preferred Stock may be issued from time to time in one or more series. The
Board of Directors are authorized to determine the rights, preference,
privileges and restrictions granted to, and imposed upon any such series. The
issuance of Preferred Stock could be used, under certain circumstance, as a
method of preventing a takeover of the Company and could permit the board of
directors, without any action of the holders of the Common Stock to issue
Preferred Stock that could have a detrimental effect on the rights of holders of
the Common Stock, including loss of voting control. Anti-takeover provisions
that could be included in the Preferred Stock when issued may have a depressive
effect on the market price of the Company's securities any may limit a
stockholder's ability to receive a premium on their shares of Common Stock by
discouraging takeover and tender offer bids. There are no shares of Preferred
Stock currently outstanding and the Company does not plan to issue any Preferred
Stock in the foreseeable future.

UNDERWRITER'S PURCHASE WARRANT

The Company has agreed to sell to the Underwriter warrants to purchase from
the Company an aggregate of up to 170,000 shares of Common Stock exercisable at
$5.70 per share. The Underwriter's Purchase Warrant and the shares underlying
such warrant are subject to demand registration on one occasion at the request
of the Underwriter (of which the Company shall bear all expenses) and
'piggyback' registration rights in the event the Company registers any class of
equity securities (other than securities registered on Form S-8, Form S-4 or
other similar registration form) for a period of five years from the date of
this Prospectus. See 'Underwriting.'

<PAGE>
TRANSFER AGENT AND WARRANT AGENT

American Securities Transfer & Trust, Inc. is the transfer agent for the
Common Stock and Warrant Agent with respect to the Warrants.

ANTI-TAKEOVER PROTECTIONS

The Company is a Delaware corporation, and the Delaware General Corporation
Law contains certain provisions applicable to the Company that may have the
effect of preventing a non-negotiated change of control of the Company. These
provisions, among other things, prevent anyone who owns 15 percent or more of
the outstanding voting stock of the Company or who is an affiliate or associate
of the Company and owned 15 percent or more of the out-standing shares of stock
of the Company at any time within the prior three years (in either case, an
'interested stockholder') from engaging in any business combination with the
Company for a period of three years after becoming an interested stockholder,
unless (i) prior to the date the stockholder became an interested stockholder,
the Board of Directors approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) the interested stockholder, while acquiring his or her 15 percent, acquires
at least 85 percent of the outstanding shares, excluding shares held by
directors who are also officers and certain shares held under employee stock
option plans; or (iii) on or subsequent to such date, the business combination
is approved by the Company's Board of Directors and by the affirmative vote of
two-thirds of the shares voting at a stockholders' meeting, excluding shares
held by the interested stockholder.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the consummation of this Offering the Company will have 3,648,389
shares of Common Stock outstanding (3,903,389 shares if the Underwriter's
over-allotment option is exercised in full), excluding shares issuable upon the
exercise of the Warrants, Bridge Warrants, outstanding stock options and
warrants and the Underwriter's Purchase Warrant. Of these outstanding shares,
the 1,700,000 shares offered hereby (1,955,000 if the Underwriter's
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by an 'affiliate' of the Company (in general, a person who has
a control relationship with the Company) which will be subject to the
limitations of Rule 144 adopted under the Securities Act. Of the remaining
shares, 623,236 shares of Common Stock are deemed to be 'restricted securities,'
as that term is defined under Rule 144 promulgated under the Securities Act. Of
the total shares currently outstanding, 1,522,097 shares are subject to the
restrictions contained in certain agreements with the Underwriter and officers,
directors and certain stockholders of the Company restricting the sale or other
disposition of such person's Common Stock for 12 months (180 days with respect
to 263,356 shares) following the date of this Prospectus without the prior
written consent of the Underwriter. Subsequent to such 12 month restrictions,
there will be 427,551 restricted shares eligible for sale under Rule 144 prior
to or during August 1998.

In general, under Rule 144, as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or person whose shares are aggregated), who has owned restricted
Common Stock beneficially for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1
percent (36,484 shares after the Offering) of the total number of outstanding
shares of the same class or, if the Common Stock is quoted on the Nasdaq Stock
Market, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who has not been an affiliate of the Company for at
least the three months immediately preceding the sale and who has beneficially
owned such shares of Common Stock for at least three years is entitled to sell
such shares under Rule 144 without regard to any of the limitations described
above. Accordingly, the 1,258,741 shares held by management will be subject to
the volume limitations described above so long as such persons are deemed
affiliates of the Company.

In addition, the Underwriter has received certain registration rights under
the Securities Act with respect to the Underwriter's Unit Purchase Warrant and
the Units issuable upon exercise of the Underwriter's Unit Purchase Warrant. See
'Underwriting.'

Prior to this Offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that market sales of Common
Stock or the availability of such shares for sale will have on the

46
<PAGE>
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Paradise
Valley Securities, Inc. (the 'Underwriter') has agreed to purchase 1,700,000
Units from the Company.

The Underwriting Agreement provides that the obligations of the Underwriter
is subject to certain conditions precedent. The nature of the Underwriter's
obligations is that it is committed to purchase all Units offered hereby if any
of such Units are purchased.

The Company has been advised by the Underwriter that it proposes initially
to offer the Units directly to the public at the IPO price set forth on the
cover page of this Prospectus and to certain dealers (which may include the
Underwriter) at such public offering price less a concession not to exceed
$.30875 per Unit. The Underwriter may allow, and such dealers may reallow, a
discount not to exceed $____ per Unit in sales to certain other dealers.

After the IPO, the public offering price and concessions and discounts may be
changed by the Underwriter.

The Company has granted to the Underwriter an option, exercisable in whole
or in part not later than 30 business days after the date of this Prospectus, to
purchase an aggregate of 255,000 Units at the IPO price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. To the
extent that the Underwriter exercises such option, the Underwriter will have a
firm commitment to purchase such Units, and the Company will be obligated
pursuant to the option to sell such Units to the Underwriter. The Underwriter
may exercise the option for the purposes of covering over-allotments, if any,
made in connection with the distribution of the Units to the public.

The Underwriter has informed the Company that the Underwriter does not
intend to confirm sales of Units offered hereby to any accounts over which it
exercises discretionary authority.

The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.

All of the Company's directors, executive officers, certain other
management of the Company who will beneficially own an aggregate of 1,837,481
shares of Common Stock upon the completion of this Offering, have agreed not to
sell, offer to sell, contract to sell or otherwise dispose of any shares of
Common Stock or any other security convertible into or exchangeable for, or
options to purchase or acquire, shares of Common Stock without the prior written
consent of the Underwriter for a period of one year after the date of this
Prospectus. Certain other stockholders of the Company have agreed not to sell or
otherwise dispose of a total of 563,356 shares of Common Stock (including
300,000 shares underlying the Bridge Warrants) for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Underwriter. See 'Shares Eligible for Future Sale.' In addition, the Company has
agreed not to sell, issue, contract to sell, offer to sell, or otherwise dispose
of any shares of Common Stock or any other security convertible into or
exchangeable for shares of Common Stock without the prior written consent of the
Underwriter during the same period.

The Company has agreed to sell to the Underwriter, for nominal
consideration, a warrant to purchase up to 170,000 shares of Common Stock on the
closing date of this Offering. The warrant will have an exercise price per share
of $5.70, will be exercisable beginning on the first anniversary of the date of
this Prospectus for a period of four years, and contain certain anti-dilution,
registration rights, net issuance and exercise provisions. Until the first
anniversary date of this Prospectus, the warrant may not be sold, transferred,
assigned, or hypothecated, except to the officers who are also shareholders of
the Underwriter, or partners, subject to certain conditions. During the terms of
such warrant, the holders thereof will have the opportunity to profit from an
increase in the market price of the Company's Common Stock. The existence of
such warrant may adversely affect the terms on which the Company can obtain

<PAGE>
additional financing, and the holders of such warrant can be expected to
exercise such warrant at a time when the Company, in all likelihood, would be
able to obtain additional capital by offering shares of its Common Stock on
terms more favorable to the Company than those provided by the exercise of such
warrant.

The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3 percent of the gross proceeds raised pursuant to this
Offering.

Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the IPO price has been determined through negotiations
between the Company and the Underwriter. Among the factors in such negotiations
were prevailing market conditions, certain financial information concerning the
Company, market valuations of publicly traded companies that the Company and the
Underwriter believe to be comparable to the Company, estimates of the business
potential of the Company, the present state of the Company's development and the
markets for its products and services, an assessment of the Company's
management, the economics of the industry in which the Company operates, and the
economy as a whole.

Unless granted an exemption by the Commission from Rule 10b-6, in the event
that the Company engages the Underwriter to assist in soliciting exercise of the
Warrants, the Underwriter will be prohibited from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation of the exercise of warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, the Underwriter
may be unable to continue to make a market in the Company's securities during
certain periods while the Warrants are exercisable.

The Underwriter acted as placement agent in connection with a private
placement of notes and warrants completed August, 1996 and received commissions
and non-accountable expense allowance in the aggregate amount of $64,000. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Certain Relationships and Related Transactions'.

LEGAL MATTERS

The legality of the issue of the securities underlying the Units offered
hereby will be passed upon for the Company by Rosenman & Colin LLP, 575 Madison
Avenue, New York, New York. Certain legal matters will be passed upon for the
Underwriter by Brown & Bain, P.A., 2901 North Central Avenue, Suite 2000,
Phoenix Arizona.

EXPERTS

The consolidated balance sheet as of June 30, 1996 and the consolidated
statements of operations and cash flows for each of the two years in the period
ended June 30, 1996 and for the period from inception, December 1992, to June

30, 1996 and the consolidated statement of stockholders' deficit for the period
from inception, December 1992, to June 30, 1996 of the Company included in this
Prospectus, have been included herein in reliance on the report, which includes
an explanatory paragraph with respect to the entity's ability to continue as a
going concern as described in Note 18 to Consolidated Notes to Financial
Statements, of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.

The balance sheet as of June 30, 1996 and the statements of operations and
cash flows for each of the two years in the period ended June 30, 1996 and for
the period from inception, October 1985, to June 30, 1996 and the statement of
stockholders' deficit for the period from inception, October 1985, to June 30,
1996 of BioQuant included in this Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph with respect to
the entity's ability to continue as a going concern as described in Note 11 to
Financial Statements, of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.

The statements of income for the seven month period from July 1, 1994 to
January 31, 1995 of Old PBI included in this Prospectus, have been included
herein in reliance on the report, which includes an explanatory paragraph with
respect to the entity's ability to continue as a going concern as described in
Note 9 to Financial

<PAGE>
Statements, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
48

ADDITIONAL INFORMATION

The Company is not a reporting company. The Company has filed with the
Commission a registration statement (the 'Registration Statement') under the
Securities Act with respect to the securities offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and this Offering, reference is made to the Registration Statement
including the exhibits filed therewith. The Registration Statement may be
inspected at the Public Reference Section at the Commission's principal office,
450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Northeast Regional Office, Room 1028, 7 World Trade Center, New York, New York
10048 and the Chicago Regional Office, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies may be obtained from the Commission's
principle office upon payment of the fees prescribed by the Commission. The
Commission maintains a World Wide Web site that contains the Company's
Registration Statement and other information filed electronically with the
Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov. Although the Company believes that this Prospectus describes
all material terms of those contracts or documents referenced herein, statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and where the contract or other document
has been filed as an exhibit to the Registration Statement, each such statement
is qualified in all respects by such reference to the applicable document filed
with the Commission.

LIST OF TRADEMARKS

SalivaSac(Registered), SPINPRO(Registered), PBI Plus(Trademark) and
Osteopatch(Trademark) are trademarks of the Company. Fosamax(Registered) is a
registered trademark of Merck & Co.

49
<PAGE>
[This page intentionally left blank]

<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PACIFIC BIOMETRICS, INC. (a Delaware corporation):
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of June 30, 1996.............. F-3
Consolidated Statement of Operations for the years ended
June 30, 1996 and 1995, and for the period from inception
(December 1992) to June 30, 1996.......................... F-4
Consolidated Statement of Cash Flows for the years ended
June 30, 1996 and 1995, and for the period from inception
(December 1992) to June 30, 1996.......................... F-5
Consolidated Statement of Stockholders' Deficit for the
period from inception (December 1992)
to June 30, 1996.......................................... F-6
Notes to Consolidated Financial Statements.................. F-7

BIOQUANT, INC. (a Michigan corporation)
Report of Independent Accountants........................... F-18
Balance Sheet as of June 30, 1996........................... F-19
Statement of Operations for the years ended June 30, 1996
and 1995, and for the period from inception (October 1985)
to June 30, 1996.......................................... F-20
Statement of Cash Flows for the years ended June 30, 1996
and 1995, and for the period from inception (October 1985)
to June 30, 1996.......................................... F-21
Statement of Stockholders' Deficit for the period from
inception (October 1985) to
June 30, 1996............................................. F-22
Notes to Financial Statements............................... F-23

PACIFIC BIOMETRICS, INC. (a Washington corporation)
Report of Independent Accountants........................... F-31
Statement of Operations for the period from July 1, 1994, to
January 31, 1995.......................................... F-32
Notes to Statement of Operations............................ F-33
</TABLE>

F-1

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Pacific
Biometrics, Inc. (a Delaware corporation) (a company in the development stage)
as of June 30, 1996, and the related consolidated statements of operations and
cash flows for the years ended June 30, 1996 and 1995, and for the period from
inception (December 1992) to June 30, 1996, and the consolidated statement of
stockholders' deficit for the period from inception (December 1992) to June 30,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pacific
Biometrics, Inc. as of June 30, 1996, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1996 and 1995, and
for the period from inception (December 1992) to June 30, 1996, in conformity
with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern . As discussed in Note 18 to
the consolidated financial statements, the Company has experienced recurring
losses from operations and cash flow shortages, and has reported deficiencies in
working capital and stockholders' equity. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996

F-2

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

CONSOLIDATED BALANCE SHEET
JUNE 30, 1996

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 192,898
Accounts receivable, net of allowance for doubtful
accounts of $11,630.................................... 252,412
Other receivable.......................................... 31,200
Supplies.................................................. 19,837
Prepaid expenses.......................................... 4,261
------------
Total current assets................................... 500,608
Property and equipment, net................................. 131,823
Other assets:
Technology license........................................ 164,062
Prepaid financing costs................................... 30,000
Lease deposits............................................ 8,620
Organization costs........................................ 5,000
------------
Total assets........................................... $ 840,113
------------
------------

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Notes payable to bank..................................... $ 175,967
Notes payable to related parties.......................... 849,461
Notes payable--First Bridge Loan.......................... 250,000
Accounts payable.......................................... 337,827
Accrued liabilities....................................... 277,876
Advance from Pacific Biometrics Research Foundation....... 5,000
Deferred compensation..................................... 34,996
Advances from customers................................... 288,263
Capital lease obligations................................. 5,160
------------
Total current liabilities.............................. 2,224,550
------------

Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding...........
Common stock, $0.01 par value, 30,000,000 shares
authorized, 1,739,215 shares issued and outstanding.... 17,392
Additional paid-in capital................................ 8,755,553
Deficit accumulated during the development stage.......... (10,157,382)
------------
Total stockholders' deficit............................ (1,384,437)
------------
Total liabilities and stockholders' deficit............ $ 840,113
------------
------------
</TABLE>

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

F-3

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995, AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Laboratory testing revenues and
consulting fees....................... $ 1,657,280 $ 566,832 $ 2,224,112
----------- ----------- ---------------
Operating expenses:
Laboratory............................ 985,818 373,554 1,359,372
Diagnostic research and product
development........................ 604,803 665,747 1,464,661
General and administrative............ 1,281,100 739,149 2,766,434
Purchased in-process research and
product development................ 6,373,884 6,373,884
Amortization of goodwill.............. 428,368 428,368
----------- ----------- ---------------
Total operating expenses........... 9,245,605 2,206,818 12,392,719
----------- ----------- ---------------
Operating loss.......................... (7,588,325) (1,639,986) (10,168,607)
----------- ----------- ---------------
Other income (expense):
Interest expense...................... (39,853) (26,162) (66,015)
Grant and other income................ 67,315 1,958 77,240
----------- ----------- ---------------
27,462 (24,204) 11,225
----------- ----------- ---------------
Net loss................................ $(7,560,863) $(1,664,190) $ (10,157,382)
----------- ----------- ---------------
----------- ----------- ---------------
Net loss per share...................... $ (5.89) $ (1.68) $ (10.16)
----------- ----------- ---------------
----------- ----------- ---------------
Number of shares used in per-share
calculation........................... 1,284,285 988,415 999,479
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>

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

F-4

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995, AND FOR THE PERIOD
FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
1996 1995 TO JUNE 30, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.......... $ 1,686,710 $ 538,453 $ 2,205,087
Cash paid to suppliers and
employees........................... (2,443,706) (1,384,201) (4,371,935)
Grants and other income received...... 67,315 5,929 77,240
Interest paid......................... (39,853) (26,162) (66,015)
----------- ----------- -----------------
Cash used by operations............. (729,534) (865,981) (2,155,623)
----------- ----------- -----------------
Cash flows from investing activities:
Cash acquired in connection with
merger of BioQuant.................. 31,200 31,200
Cash acquired in connection with
merger of Pacific Biometrics, Inc.
(a Washington corporation).......... 190,498 190,498
Purchases of technology licenses...... (100,000)
Advances to BioQuant prior to
acquisition, net.................... (145,000) (145,000)
Capital expenditures.................. (18,592) (28,498) (61,495)
Other receivables..................... 17,675
Organization costs.................... (5,000) (5,000)
Deposits and other.................... 133 (4,702)
----------- ----------- -----------------
Cash used by investing activities... (137,392) 179,808 (94,499)
----------- ----------- -----------------
Cash flows from financing activities:
Common stock sold for cash............ 360,000 553,900 1,463,900
Borrowings from related parties....... 464,461 228,003 859,963
Issuance of notes in connection with
First Bridge Loan................... 250,000 250,000
Repayment of bank borrowings.......... (62,105) (8,544) (70,649)
Prepaid financing costs............... (30,000) (30,000)
Payments on capital lease
obligations......................... (18,534) (11,660) (30,194)
----------- ----------- -----------------
Cash provided by financing
activities........................ 963,822 761,699 2,443,020
----------- ----------- -----------------

Increase in cash and cash equivalents... 96,896 75,526 192,898
Cash and cash equivalents:
Beginning of period................... 96,002 20,476
----------- ----------- -----------------
End of period......................... $ 192,898 $ 96,002 $ 192,898
----------- ----------- -----------------
----------- ----------- -----------------
Reconciliation of Net Loss to Net Cash
Used by Operating Activities:
Net loss.............................. $(7,560,863) $(1,664,190) $ (10,157,382)
Purchased in-process research and
product development expense......... 6,373,884 6,373,884
Amortization of goodwill.............. 428,368 428,368
Common stock issued for services...... 466,026 80,500 546,526
Services provided for subscription
receivable.......................... 16,978 55,556
Depreciation and amortization......... 29,992 27,378 64,642
Amortization of technology license.... 11,111 49,722 100,000
Changes in operating accounts:
Accounts receivable................. 22,789 (117,979) (95,190)
Other receivables................... (9,946) 3,399 6,551
Supplies............................ 15,063 2,345 6,671
Prepaid expenses.................... 14,308 (13,962) (1,534)
Accounts payable and accrued
liabilities....................... (99,781) 218,182 405,124
Deferred compensation............... 22,496 12,500 34,996
Advances from clients............... (14,613) 90,778 76,165
----------- ----------- -----------------
Cash used by operations........... $ (729,534) $ (865,981) $ (2,155,623)
----------- ----------- -----------------
----------- ----------- -----------------
</TABLE>
See Note 16 for noncash transactions.

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

F-5

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO JUNE 30, 1996

<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
AMOUNTS ------------------------- SUBSCRIPTION PAID-IN DEVELOPMENT
PER SHARE SHARES AMOUNT RECEIVABLE CAPITAL STAGE TOTAL
--------- ---------- ---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued
for cash at
inception (December
1992)............... $ 0.98 511,862 $ 5,119 $ (245,000) $ 494,881 $ 255,000
Cash received in
satisfaction of
subscription
receivable.......... 161,000 161,000
Net loss............. $ (199,455) (199,455)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1993.............. 511,862 5,119 (84,000) 494,881 (199,455) 216,545
Common stock issued
in connection with
purchase
of technology
license
and services........ $ 0.89 62,561 569 (55,556) 54,987
Cash received in
satisfaction of
subscription
receivable.......... 84,000 84,000
Cash received in
satisfaction of
subscription
receivable.......... 38,578 38,578
Stockholder loans
converted to
equity.............. 310,000 310,000
Common stock issued
for cash............ $ 10.55 4,739 47 49,953 50,000
Net loss............. (732,874) (732,874)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1994.............. 579,162 5,735 (16,978) 909,821 (932,329) (33,751)

Services provided in
satisfaction of
subscription
receivable.......... 16,978 16,978
Stockholder loans
converted to
equity.............. 324,963 324,963
Common stock issued
for services and
loan guarantees..... $ 1.68 47,867 479 80,021 80,500
Common stock issued
in connection with
acquisition of
Pacific Biometrics,
Inc. (a Washington
corporation)........ $ 0.77 189,061 1,891 143,109 145,000
Common stock issued
for cash............ $ 13.13 42,181 422 553,478 553,900
Conversion from $0.01
par value common
stock to no par
value common stock.. 2,011,392 (2,011,392)
Net loss............. (1,664,190) (1,664,190)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1995.............. 858,271 2,019,919 (2,596,519) (576,600)
Common stock issued
for cash............ $ 7.91 45,500 360,000 360,000
Common stock issued
for services........ $ 3.45 135,080 466,026 466,026
Issuance of $0.01 par
value common stock
in exchange for no
par value common
stock in connection
with acquisitions of
BioQuant and Pacific
Biometrics, Inc. (a
Washington
corporation)........ (2,835,556) 2,835,556
Common stock issued
in connection with
acquisition of
BioQuant............ $ 8.46 700,384 7,003 5,919,997 5,927,000
Net loss............. (7,560,863) (7,560,863)
--------- ---------- ---------- ------------ ----------- ------------ ------------
Balance, June 30,
1996.............. 1,739,215 $ 17,392 $ $8,755,553 $(10,157,382) $ (1,384,437)
--------- ---------- ---------- ------------ ----------- ------------ ------------
--------- ---------- ---------- ------------ ----------- ------------ ------------
</TABLE>

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

F-6

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING

Organization and Basis of Presentation

Pacific Biometrics, Inc. ('PBI-Delaware' or the 'Company') was incorporated
in Delaware in May 1996. PBI-Delaware was formed in connection with the
acquisition of BioQuant, Inc. ('BioQuant'), a Michigan corporation, and Pacific
Biometrics, Inc. ('PBI'), a Washington corporation. On June 28, 1996, the
Company completed the mergers whereby BioQuant and PBI became wholly-owned
subsidiaries of the Company in separate stock-for-stock exchange transactions.
In January 1995, Pacific Biometrics, Inc. ('Old PBI') and Merchant House
Scientific Inc., a California corporation ('Merchant House'), merged with and
into PBI/MHS Consolidation Corporation, a Washington corporation which survived
the merger and subsequently changed its name to Pacific Biometrics, Inc. The
merger of PBI-Delaware, BioQuant and PBI was completed in June 1996, whereby the
majority of the outstanding stock of PBI-Delaware is owned by the former
stockholders of PBI and has been accounted for as a reverse acquisition. The
minority of outstanding stock of PBI Delaware is owned by the former
shareholders of BioQuant. All outstanding shares of stock, options and warrants
of PBI and BioQuant were exchanged for similar securities of PBI-Delaware. The
merger has been accounted for as a purchase transaction with PBI as the
accounting acquirer of BioQuant. Prior to the merger, the operations of
PBI-Delaware consisted of its initial formation and the issuance of one share of
common stock for cash consideration of $4.00.

These financial statements present the consolidated balance sheet of
PBI-Delaware, PBI and BioQuant as of June 30, 1996, as the merger occurred on
June 28, 1996. The consolidated statements of operations, cash flows and
stockholders' deficit include the results of PBI-Delaware and PBI for the
periods presented. The Company is at an early stage of development. Except for
the revenues from the laboratory and from the sale of the Company's cholesterol
diagnostic product, all of the Company's potential products are currently in
research and development, and no revenues have been generated to date.
Consequently, the Company is a development stage enterprise.

All material intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.

BioQuant was incorporated in 1985 and has been engaged in research and
product development activities since inception. BioQuant is currently engaged in
the development of a diagnostic test related to osteoporosis. The BioQuant
product line includes a patented skin patch technology, patented antisera and
proprietary immunoassays for the measurement of human perspiration. BioQuant
also owns a patented saliva collection device which is currently being developed
for non-invasive diabetes tests.

PBI was incorporated in 1989 and has been engaged in providing laboratory
and clinical research support services to the pharmaceutical and diagnostic
industries. PBI provides services on normal credit terms to commercial and
research organizations throughout the United States.

The January 1995, merger of Old PBI and Merchant House involved certain
shares of stock that were issued on a contingent basis. Rights to substantially
all of the contingent shares were subsequently waived. Consequently, this
transaction was treated as a purchase in accordance with generally accepted
accounting principles with Merchant House as the acquiring entity because the
majority of the shares of the surviving entity were held by the former
shareholders of Merchant House.

F-7
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC
OFFERING--(CONTINUED)

A summary of the allocation of purchase price based on an independent
appraisal is as follows:

Assets acquired:
Cash............................................ $ 190,498
Accounts receivable............................. 156,944
Accounts receivable from related parties........ 37,751
Supplies........................................ 15,892
Property and equipment.......................... 116,773
Other assets.................................... 3,641
Goodwill........................................ 428,368
---------
Total assets acquired............................. 949,867
Liabilities assumed............................... 804,867
---------
$ 145,000
---------
---------

Goodwill recorded in the acquisition of PBI was written off in 1995 due to
the recurring net operating losses of PBI and the expectation that losses would
continue for the foreseeable future.

On June 28, 1996, PBI-Delaware acquired BioQuant. This acquisition was
accomplished through the issuance of three classes of common stock. All classes
of common stock held equal voting rights; however, two classes of common stock
were restricted as to their trading rights (the 'restricted stock'). The right
to trade the restricted stock was dependent on the Company's ability to achieve
certain performance milestones. In July 1996, a majority of the Company's

stockholders voted to convert all of the outstanding classes of common stock to
a single class of common stock thereby eliminating any trading restrictions on
the stock. The accompanying consolidated financial statements reflect all the
outstanding common stock as a single class of stock as if the conversion had
occurred as of the earliest period presented.

A summary of the allocation of purchase price based on an independent
appraisal is as follows:

Assets acquired:
Cash............................................ $ 31,200
Supplies........................................ 10,616
Property and equipment.......................... 18,197
Technology license.............................. 164,062
Other assets.................................... 3,282
Purchased in-process research and product
development.................................. 6,373,884
-----------
Total assets acquired............................. 6,601,241
Liabilities assumed............................... 674,241
-----------
$ 5,927,000
-----------
-----------

The purchased in-process research and product development had met several
technical milestones during the development process, but at the date of
acquisition clinical trials had not yet commenced. Consequently, the purchased
in-process research and development had not yet reached technological
feasibility, as defined by generally accepted accounting principles. In
management's opinion, this technology had no alternative future use. Therefore,
the amount was charged to expense in accordance with generally accepted
accounting principles.

In connection with the BioQuant merger, options and warrants to purchase
BioQuant shares were converted to options and warrants to purchase 570,564
shares of common stock of the Company at prices ranging from $.13 to $4.22 per
share.

F-8

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. ORGANIZATION, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC
OFFERING--(CONTINUED)

The following presents the results of operations of the Company on a
proforma basis for the years ended June 30, 1996 and 1995, as if the
acquisitions of PBI by Merchant House and BioQuant by PBI (formerly Merchant
House) had occurred on July 1, 1994:

1996 1995
------------ ------------
Laboratory testing revenues and
consulting fees....................... $ 1,662,118 $ 1,054,008
Purchased in-process research and
product development................... -- $ 6,373,884
Goodwill amortization................... -- $ 428,368
Net loss................................ $ (1,936,720) $ (9,117,629)
Net loss per share...................... $ (1.51) $ (9.22)

Initial Public Offering

The Company is currently in the process of raising approximately $8 million
through an initial public offering of its common stock. The Company has engaged
an underwriter and retained legal counsel to pursue this financing plan and,
although the success of the offering cannot be predicted with certainty, the
Company plans to complete the offering later in 1996. The Company intends to use
the proceeds of this financing to repay certain debt and support the financial
requirements associated with implementing its business plan. (See Note 18.)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents consist of a money market fund which is
maintained at a bank. The Company considers all investments with an initial
maturity of three months or less at the time of purchase to be cash equivalents.

Supplies

Supplies consist of items used to calibrate test equipment or verify
testing methods related to lipids and saliva collection devices. These items are
recorded at the lower of estimated cost (weighted-average) or market.

Property and Equipment

the respective leases. The cost and related accumulated depreciation of property
or equipment sold or otherwise disposed of are removed from the accounts and the
resulting gains or losses are included in the statement of operations.

Licensing Fees

Licensing Agreements represent amounts paid by BioQuant and PBI for rights
to certain technologies. The amount paid by PBI in connection with the license
of the SpinPro device was under agreement without a specified term and had been
fully amortized as of June 30, 1996. The other licensing agreement provides
BioQuant an exclusive worldwide (except Japan) license of certain technology
related to the Osteopatch device. The BioQuant licensing agreement converts to a
non-exclusive arrangement upon the earlier of (i) seven years from the first
commercial sale of products incorporating the licensed technology, or (ii)
February 15, 2005.

Related licensing fees have been recorded at cost and are being amortized
over the estimated useful lives of the agreements of three to four years. The
amount charged to expense in connection with amortizing these licensing fees was
$11,111 and $49,722 for the years ended June 30, 1996 and 1995, and $100,000 for
the period from inception to June 30, 1996.

F-9
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Customer Advances

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

Income Taxes

Deferred tax assets and liabilities are recorded for differences between
the financial statement and tax bases of the assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is recorded for the amount of income tax payable or refundable for the
period increased or decreased by the change in deferred tax assets and
liabilities during the period.

Financial Instruments

The carrying amounts of cash and cash equivalents approximate fair value
due to the short-term maturities of these instruments. The carrying value of the

Company's debt approximates their estimated fair values because the rates of
interest on the debt approximates current interest rates for similar obligations
with like maturities.

Recent Pronouncements

During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of' (SFAS No. 121), which requires the Company
to review for impairment its long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS No. 121 will become effective for the Company's 1997 fiscal
year.

During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, 'Accounting for Stock-Based Compensation' (SFAS No. 123)
which establishes a fair value method of accounting for stock-based compensation
plans, and requires additional disclosures for those companies which elect not
to adopt the new method of accounting. SFAS No. 123 will be effective for the
Company's 1997 fiscal year. The Company does not intend to adopt the fair value
method of accounting for stock-based compensation, and will provide the required
additional disclosures beginning in its fiscal year ending June 30, 1997.

Net Loss Per Share

Net loss per share is computed using the weighted-average number of common
stock and common stock equivalent shares outstanding during the periods. Common
equivalent shares from stock options and warrants are excluded from the
computation if their effect is antidilutive, except that pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common equivalent shares relating to stock, options and warrants (using
the treasury stock method and the anticipated offering price) issued subsequent
to September 5, 1995, have been included in the computation for all periods
presented.

Use of Estimates

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.

F-10

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Risks and Uncertainties

The Company's products require approvals from the Food and Drug
Administration (FDA) and international regulatory agencies prior to
commercialized sales. There can be no assurance that the Company's products will
receive any of the required approvals. If the Company is denied such approvals
or if such approvals are delayed, it would have a material adverse effect on the
Company.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 1996:

Laboratory equipment.............................. $104,838
Computer equipment................................ 39,619
Office furniture and equipment.................... 10,644
Leasehold improvements............................ 13,358
Equipment held under capital leases............... 28,006
--------
196,465
Less accumulated depreciation and amortization.... (64,642)
--------
$131,823
--------
--------

At June 30, 1996, the Company had equipment under capital leases with a
book value of $20,071, net of accumulated amortization of $7,935.

4. FINANCING

First Bridge Loan

In June 1996, the Company completed its First Bridge Loan financing of
$250,000. These loans bear interest at the rate of 14% and were due on
completion of the Company's Second Bridge Loan financing (see Note 16). The
Company issued 50,000 warrants in connection with this financing. Each warrant
entitles the holder to purchase a share of the Company's common stock at a price
equal to 120% of the price realized in the Company's proposed initial public
financing (see Note 1). A discount was not recorded for the value of the
warrants because the amount is not material.

Bank Financing

The Company had a $200,000 line of credit with a bank which was converted
to a term loan in June 1996. The balance at the date of conversion was $159,445.
This loan bears interest at the bank's index rate plus 2.5% (10.75% at June 30,
1996), and is due on demand; however, if no demand is made the Company must make
monthly payments of $14,127, including interest. The loan is due in June 1997.

The Company has a loan from a bank with a balance outstanding of $16,522 at
June 30, 1996. This loan bears interest at the prime rate plus 1.4% (9.9% at
June 30, 1996). The loan is due on demand; however, if no demand is made the
Company must make monthly payments of $2,085, including interest. The loan is
due in January 1997.

The above loans are collateralized by the Company's accounts receivable and
equipment, and by personal guarantees from certain stockholders. The loans
require, among other matters, that the Company maintain a minimum tangible net
worth of $200,000. The Company is not in compliance with this covenant at June
30, 1996. The bank has waived the violation of this covenant and subsequent to
June 30, 1996, the loan agreement was modified to remove the covenant.

F-11
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. FINANCING--(CONTINUED)

Stockholder Loans

At June 30, 1996, the Company had borrowed $660,000 from certain
stockholders. These borrowings are uncollateralized and bear interest at an
index rate plus 1% (approximately 9.5% at June 30, 1996). These borrowings
require monthly payments of interest only until due. Certain of these loans
matured in May 1995; however, no demand for repayment has been asserted.
Subsequent to year end, the Company issued 142,274 shares at a price of $3.45
per share in satisfaction of loans amounting to $460,000 plus accrued interest
of $30,845. The remaining balance owing to stockholders of $200,000 was
refinanced in connection with the Second Bridge Loan (see Note 17).

Interest paid to these stockholders during the years ended June 30, 1996
and 1995, was $2,469 and $8,832, respectively, and $11,301 for the period from
inception to June 30, 1996.

5. DEFERRED COMPENSATION

The Company has entered into deferred compensation agreements with two of
its senior executives. The agreements provide that a specified portion of their
salaries be deferred until they elect to receive the deferred amount. At June
30, 1996, the Company's deferred compensation obligation was $34,996 which is

reflected as a liability on the accompanying consolidated balance sheet.
Compensation expense in connection with these agreements was $22,496 and $12,500
for the years ended June 30, 1996 and 1995, respectively, and $34,996 for the
period from inception to June 30, 1996.

6. EMPLOYMENT AND NONCOMPETITION AGREEMENTS

The Company has finalized negotiations for and will enter into employment
and noncompetition agreements with certain executives. These agreements will
specify that the executives may not engage in any competitive activity for
periods ranging from 9 months to 2 years following termination. The agreements
will provide for compensation of 9 months salary, bonuses and benefits in the
event of termination without cause.

7. ROYALTY OBLIGATION

In 1992, the Company entered into an exclusive licensing agreement for
diagnostic technology related to cholesterol testing. The Company paid a
licensing fee of $100,000 (see Note 2). The agreement indicates that the Company
must make royalty payments of 5% of sales (subject to certain minimum amounts)
to retain the exclusive right to the technology. The Company did not make the
prescribed minimum payment due on June 30, 1996. Management is currently
negotiating with the other parties for modification of the terms of the
agreement.

8. RELATED PARTY TRANSACTIONS

The Company paid $27,661 and $27,754 to related parties for consulting
services provided during the years ended June 30, 1996 and 1995, respectively,
and $55,415 for the period from inception to June 30, 1996.

In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $186,000 and $108,726 for management and
consulting services provided during the years ended June 30, 1996 and 1995,
respectively, and $300,098 for the period from inception to June 30, 1996. The
liability for management consulting services under this contract at June 30,
1996, of $187,000 was converted to a promissory note bearing annual interest at
7% with no specific due date. This obligation is included with notes payable to
related parties on the accompanying balance sheet. The management contract was
terminated effective June 28, 1996.

9. INCOME TAXES

At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $5.5 million which expire
through 2011. As a result of the merger with Merchant House, the

F-12

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9. INCOME TAXES--(CONTINUED)

availability of these net operating losses will be limited to a prescribed
amount each year as specified in the Internal Revenue Code. Losses accumulated
through the date BioQuant and PBI were acquired of approximately $2.8 million
and $2.7 million, respectively, will be limited to use by the respective company
which generated the net operating losses.

The following is a reconciliation of income tax benefit to the amount based
on the U.S. statutory rate of 34%:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
YEARS ENDED JUNE 30, (DECEMBER 1992)
-------------------------- TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Income tax benefit based on U.S.
statutory rate................... $(2,570,693) $ (565,825) $(3,453,510)
Write-off of purchased research and
development...................... 2,167,121 -- 2,167,121
Amortization of goodwill........... -- 145,645 145,645
Losses which provide no current tax
benefit.......................... 403,572 420,180 1,140,744
----------- ----------- ---------------
Income tax benefit............... $ 0 $ 0 $ 0
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>

Significant components of the Company's deferred tax assets and liabilities are
as follows at June 30, 1996:

Deferred tax assets:
Start-up costs................................. $ 292,684
Deferred compensation.......................... 75,479
Depreciation................................... 35,150
Technology license fees and other.............. 25,621
Tax loss carryforwards......................... 1,879,210
-----------
Total deferred tax assets........................ 2,308,144
Valuation allowance.............................. (2,308,144)
-----------
Net deferred tax assets........................ $ 0
-----------
-----------

The provision for income taxes was as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(DECEMBER 1992)
TO JUNE 30,
1996 1995 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Current provision.................. $ -- $ -- $ --
Deferred provision................. (403,572) (475,988) (1,367,479)
Change in valuation allowance...... 403,572 475,988 1,367,479
----------- ----------- ---------------
Provision for income taxes....... $ 0 $ 0 $ 0
----------- ----------- ---------------
----------- ----------- ---------------
</TABLE>
F-13

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. CONTINGENT OBLIGATION TO SUPPLIER

The Company has entered into a manufacturing agreement with a supplier to
produce one of the Company's products for distribution. The agreement requires
the supplier to incur certain costs to produce the product, and entitles the
supplier to a surcharge on units purchased until those costs have been fully
recovered. At June 30, 1996, the Company is obligated to the supplier for
amounts ranging from $16,000 to $50,000 in connection with purchases of product
under this agreement. The accompanying consolidated financial statements include
an accrual of $16,000 relating to these obligations. The Company is also
contingently obligated to the supplier for approximately $317,000 at June 30,
1996, in connection with the supplier's purchase of manufacturing equipment used
to produce the Company's product.

11. COMMITMENTS

Technology and Manufacturing Agreements

The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to the
licensors of 5% of gross sales as defined in the agreement, with minimum royalty
payments of $15,000 each quarter.

The Company has also entered into a manufacturing agreement with an
affiliate of the owners of the technology which requires certain minimum
purchases to retain the exclusive use of the licensed technology. This agreement
requires that the Company purchase a minimum of 25,000 units prior to March 31,
1997.

Commitment to Repurchase Common Stock

During the year ended June 30, 1995, the Company issued 13,270 shares of
common stock to a supplier in satisfaction of a $70,000 obligation.
Concurrently, the Company obtained the right to reacquire these shares at
specified prices through December 31, 1998. If the stock is not reacquired by
December 31, 1998, the supplier has the right to require repurchase by the
Company for $140,000. The obligation to repurchase these shares was assumed by
certain stockholders and directors of the Company effective September 5, 1996.

12. SEVERANCE AGREEMENTS

In September 1994 the Company terminated an employment contract with one of
its employees. Concurrently, the Company entered into a consulting agreement
with the executive which provided for monthly payments of $5,000 beginning
November 1, 1994, and ending October 1, 1995. All amounts owed under this
agreement were paid. The agreement also provides for a lump-sum payment of
$50,000 in the event the Company completes an initial public offering. This

obligation has been assumed by certain stockholders and directors of the Company
effective September 5, 1996.

In September 1995 the Company entered into a severance agreement with one
of its executives which provided for fifteen monthly payments of $10,000
beginning in September 1995. The Company is current on its payment obligations
on this agreement. The Company also agreed to issue 4,739 warrants for the
purchase of common stock which are exercisable at $10.55 per share.

In September 1995 the Company terminated its consulting contract with a
stockholder. Under the termination agreement, the Company agreed to pay a fee to
the consultant based on the proceeds of capital raised through December 31,
1995, arising through the efforts of the consultant. The amount due under this
arrangement was $14,000 which was paid through the issuance of 2,836 shares of
the Company's common stock.

F-14
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. SEVERANCE AGREEMENTS--(CONTINUED)

In November 1995 the Company entered into a severance agreement with one of
its executives whereby the executive received 4,068 shares of the Company's
common stock valued at $20,000, and salary continuation through January 1996.

13. STOCK OPTION PLANS AND STOCK PURCHASE WARRANTS

In prior years, PBI had adopted an Incentive Stock Option Plan ('ISO Plan')
and a Nonstatutory Stock Option Plan ('NSO Plan'). The ISO Plan provided that
any options granted would be exercisable at no less than the fair value of the
underlying common stock, and were to expire five years from the date of grant.
The options granted, if any, were intended to conform to all requirements of
Section 422A of the Internal Revenue Code, as amended. No options were issued
under the ISO Plan.

Options were granted under the NSO Plan at exercise prices to be determined
by the Board of Directors. Any options granted vested 20% on December 31 of the
year granted, and 20% on the same date of each year until fully vested. Any
options granted were to expire ten years from the date of grant. To date, all
options under the NSO Plan were granted with an exercise price equal to the
estimated fair value of the underlying common stock at the time of grant.

The following is a summary of the activity in the NSO Plan for the period
from inception:

EXERCISE PRICE OPTIONS
------------------ -------
Granted............................ $0.79 1,422
Canceled........................... $0.79 (948)
-------
Balance, June 30, 1990........... 474
Granted............................ $0.79 4,739
Canceled........................... $0.79 (1,896)
-------
Balance, June 30, 1991........... 3,317
Granted............................ $0.79 21,517
-------
Balance, June 30, 1992........... 24,834
Granted............................ $0.79-$5.27 3,886
Canceled........................... $1.58 (190)
-------
Balance, June 30, 1993........... 28,530
Granted............................ $0.37-$5.27 48,081
Canceled........................... $5.27 (1,896)
-------
Balance, June 30, 1994........... 74,715
Canceled........................... $0.37-$5.27 (74,715)
-------
Balance, June 30, 1995 and
1996..........................
-------
-------

All outstanding options were fully vested and exercised in connection with
the merger between PBI and Merchant House, at which time both stock option plans
were terminated.

1996 Stock Incentive Plan

In July 1996, the Company adopted a Stock Incentive Plan (the 'Plan') with
1,000,000 shares of common stock reserved for issuance under this Plan. Options
granted under this plan may be either incentive stock options within the meaning
of Section 422(b) of the Internal Revenue Code, or nonqualified options. The
Company may also award stock appreciation rights, restricted stock, performance
shares, loans or tax offset payments. The option price of each incentive stock
option granted shall not be less than the fair value of the underlying common

F-15
<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. STOCK OPTION PLANS AND STOCK PURCHASE WARRANTS--(CONTINUED)

stock, and will expire no later than ten years following the date of grant. With
respect to nonqualified options, the exercise price and term will be determined

at the discretion of the Board. However, the exercise price will not be less
than 85% of the fair value of the underlying stock, and the term will not exceed
a period of ten years. There were no options or warrants outstanding under this
Plan at June 30, 1996.

14. LEASES

The Company has entered into noncancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense on these lease agreements was $205,128 and $93,433 for the years ended
June 30, 1996, and 1995, respectively, and and $338,421 for the period from
inception to June 30, 1996.

Future minimum lease payments are as follows:

YEAR ENDED
JUNE 30,
----------
1997...... $156,120
1998...... 15,061
--------
$171,181
--------
--------

15. MAJOR CUSTOMERS

The Company's sales to its largest customer represented approximately 29.5%
and 43.9% of its total sales in 1996 and 1995, respectively, and sales to its
five largest customers represented approximately 63.0% and 64.8% of total sales
in 1996 and 1995, respectively.

16. SUPPLEMENTARY INFORMATION ON NONCASH TRANSACTIONS

Stockholder Loans Converted to Equity

In 1994 and 1995, certain of the Company's stockholders converted their
loans to the Company to equity. The amount converted was $324,963 and $310,000
during the years ended June 30, 1995 and 1994, respectively, and $634,963 for
the period from inception to June 30, 1996.

Common Stock Issued for Technology Licenses, Services and Loan Guarantees

The Company has issued common stock for technology licenses, services and
loan guarantees as follows:

NUMBER OF ESTIMATED
YEAR ISSUED SHARES FAIR VALUE
---------------------------------------- --------- ----------
1994.................................... 62,561 $ 55,556
1995.................................... 47,867 $ 80,500
1996.................................... 135,080 $ 466,026
For the period from inception to June
30, 1996.............................. 245,508 $ 602,082

Common Stock Issued in Connection with Acquisitions

In connection with the 1995 merger of Old PBI and Merchant House, as
described in Note 1, the Company issued 189,061 shares of common stock to the
stockholders of Old PBI.

In 1996, the Company acquired BioQuant through an exchange of common stock
as described in Note 1. The Company issued 700,364 shares of common stock to the
stockholders of BioQuant in connection with this acquisition.

F-16

<PAGE>
PACIFIC BIOMETRICS, INC.
(A DELAWARE CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

17. SUBSEQUENT EVENTS

Second Bridge Loan

Subsequent to year end, the Company arranged additional financing in the
form of a Second Bridge Loan of $1,000,000. This loan bears interest at 14% and
is due on completion of the Company's proposed initial public offering (see Note
1). The Company issued 250,000 warrants in connection with this financing. Each
warrant entitles the holder to purchase a share of the Company's common stock at
a price equal to 120% of the price realized in the Company's proposed initial
public offering (see Note 1). The proceeds of this financing were used, in part,
to repay the notes issued in the First Bridge Loan (see Note 4). The balance
will be used for working capital and to support the Company's product
development activities.

Common Stock Issued for Services

Subsequent to year end, the Company issued 64,000 shares of common stock to
Directors in exchange for services.

Stock Options Granted for Services

Subsequent to year end, the Company granted to employees and Directors
539,840 options to purchase its common stock. The Company also granted 50,000
options to a Director to purchase its common stock subject to the completion of
its proposed initial public offering. These options have an exercise prices,
ranging from $3.45 to $4.75 per share, and vest in varying periods ranging up to
four years.

Common Stock Sold for Cash

Subsequent to year end, the Company sold 2,900 shares of common stock for
cash consideration of $10,005.

18. GOING CONCERN

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has sustained
recurring losses from operations and cash flow shortages, and is reporting
deficits in working capital and stockholders' equity at June 30, 1996. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.

The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its financial
requirements and, ultimately, upon achieving profitable operations. As discussed
in Note 1, the Company is currently in the process of raising approximately $8

million through an initial public offering of its common stock and, although the
success of the offering cannot be predicted, the Company plans to complete this
financing later in 1996. The outcome of the Company's efforts to complete the
initial public offering is not determinable at this time. However, the
underwriting agreement provides that the offering is a firm commitment. In
addition, although management believes that the planned proceeds of the offering
will be sufficient to fund the Company's operations for approximately 18 months,
there can be no assurance that such funds will, in fact, be sufficient or that
the Company will be able to meet all of its obligations as they come due. As
discussed in Note 17, the Company raised $1,000,000 in bridge loan financing
subsequent to year end which was used to repay certain outstanding obligations
and support the Company's current working capital requirements.

The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

F-17

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
BioQuant, Inc.
Irvine, California

We have audited the accompanying balance sheet of BioQuant, Inc. (a
Michigan corporation) (a company in the development stage) as of June 30, 1996,
and the related statements of operations and cash flows for the years ended June
30, 1996 and 1995, and for the period from inception (October 1985) to June 30,
1996, and the statement of stockholders' deficit for the period from inception
(October 1985) to June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioQuant, Inc. as of June
30, 1996, and the results of its operations and its cash flows for the years
ended June 30, 1996 and 1995, and for the period from inception (October 1985)
to June 30, 1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has sustained recurring losses from operations
and cash flow shortages, and is reporting deficiencies in working capital and
stockholders' equity. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 11. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996

F-18

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 31,200
Accounts receivable................... 278
Advance to PBI........................ 100,000
Supplies.............................. 10,616
Prepaid expenses...................... 2,727
-------------
Total current assets............... 144,821
Property and equipment, net............. 18,197
Other assets:
Technology license, net of accumulated
amortization of $85,938............ 164,062
Lease deposits........................ 277
-------------
Total assets....................... $ 327,357
-------------
-------------

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Notes payable to related parties...... $ 429,461
Notes payable to affiliate............ 90,000
Advances from PBI--Delaware........... 155,000
Accounts payable...................... 34,364
Accrued liabilities................... 65,416
-------------
Total liabilities.................. 774,241
-------------

Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, 1,000
shares authorized, one share issued
and outstanding.................... 2,340,381
Accumulated deficit................... (2,787,265)
-------------
Total stockholders' deficit........ (446,884)
-------------
Total liabilities and stockholders'
deficit........................... $ 327,357
-------------
-------------
</TABLE>

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

F-19

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985) TO
1996 1995 JUNE 30, 1996
--------- --------- ------------------
<S> <C> <C> <C>
Revenues........................... $ 4,838 $ 16,270 $ 24,846
--------- --------- ------------------
Operating expenses:
Research and product
development................... 509,183 308,103 3,171,232
General and administration....... 336,129 338,593 2,189,098
--------- --------- ------------------
Total operating expenses...... 845,312 646,696 5,360,330
--------- --------- ------------------
Operating loss..................... (840,474) (630,426) (5,335,484)
--------- --------- ------------------
Other income (expense):
Interest expense................. (19,673) (2,040) (83,193)
Grant income..................... 101,714 32,420 2,576,914
Interest and other income........ 8,692 10,687 54,498
--------- --------- ------------------
Other income (expense), net... 90,733 41,067 2,548,219
--------- --------- ------------------
Net loss........................... $(749,741) $(589,359) $ (2,787,265)
--------- --------- ------------------
--------- --------- ------------------
</TABLE>

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

F-20

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985) TO
1996 1995 JUNE 30, 1996
--------- --------- -----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Cash received from customers..... $ 6,070 $ 17,669 $ 24,568
Cash paid to suppliers and
employees..................... (857,349) (617,068) (5,109,502)
Grants and interest received..... 110,406 42,116 2,631,412
Interest paid.................... (19,673) (2,040) (83,193)
--------- --------- -----------------
Cash used by operations....... (760,546) (559,323) (2,536,715)
--------- --------- -----------------
Cash flows from investing
activities:
Purchase of equipment............ (3,518) (8,167) (168,347)
Loan to affiliate................ (100,000) (100,000)
Purchase of technology license... (50,000) (20,000) (70,000)
Deposits......................... 20 (252) (277)
--------- --------- -----------------
Cash used by investing
activities.................. (153,498) (28,419) (338,624)
--------- --------- -----------------

Cash flows from financing
activities:
Preferred stock sold for cash.... 298,000 613,743 2,267,771
Financing costs incurred in
connection with issuance of
preferred stock............... (26,725) (26,725)
Common stock sold for cash....... 10,000 54,200
Repurchase of common stock....... (67,086)
Borrowings from related parties.. 456,961 456,961
Borrowings from affiliates....... 137,500 170,000
Issuance of convertible
subordinated notes............ 51,418
--------- --------- -----------------
Cash provided by financing
activities.................. 892,461 597,018 2,906,539
--------- --------- -----------------
(Decrease) increase in cash and
cash equivalents.................. (21,583) 9,276 31,200
Cash and cash equivalents:
Beginning balance................ 52,783 43,507
--------- --------- -----------------
Ending balance................... $ 31,200 $ 52,783 $ 31,200
--------- --------- -----------------
--------- --------- -----------------
Reconciliation of Net Loss to Cash
Used by Operations:
Net loss......................... $(749,741) $(589,359) $(2,787,265)
Adjustments to reconcile net loss
to cash used by operations:
Depreciation and amortization 76,024 44,369 236,088
Common stock issued for
services and subordinated
convertible notes........... 35,803
Reduction in notes payable to
affiliate in lieu of payment
of management fees.......... (47,500) (47,500)
Changes in operating accounts:
Accounts receivable......... 1,232 1,399 (278)
Supplies.................... (5,021) 5,530 (10,616)
Prepaid expenses............ 3,128 (3,436) (2,727)
Accounts payable and accrued
liabilities.............. (38,668) (17,826) 39,780
--------- --------- -----------------
Cash used by operations............ $(760,546) $(559,323) $(2,536,715)
--------- --------- -----------------
--------- --------- -----------------
</TABLE>
See Note 9 for noncash transactions.

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

F-21

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 1985) TO JUNE 30, 1996

<TABLE>
<CAPTION>
CLASS A CLASS A DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
AMOUNTS PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
PER ------------------ ------------------- ---------------------- PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL
------- -------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock issued for
cash between
October 1985 and
January 1991: $0.88 (710,715) $ 71,072 -- -- -- -- $ 553,928 -- $ 625,000
Preferred stock,
Class A........ $2.00 -- -- 125,000 $ 250,000 -- -- -- -- 250,000
Preferred stock,
Class B........ $0.13 -- -- -- -- 428,700 $ 46,650 7,550 -- 54,200
Common stock..... -- -- -- -- -- -- -- -- -- --
Stock repurchased
and canceled
between December
1986 and November
1990.............. $0.58 -- -- -- -- (116,100) (12,060) (55,026) -- (67,086)
Stock issued for
services between
December 1987 and
March 1991........ $0.37 -- -- -- -- 35,750 8,345 4,835 -- 13,180
Conversion of $1.00
par value common
stock to $0.10 par
value common stock
in March 1988..... -- -- -- -- -- -- (8,100) 8,100 -- --
Preferred stock
issued for
subordinated
convertible notes
in March 1992..... $2.00 -- -- 142,800 285,600 -- -- -- -- 285,600
Preferred stock
converted to
common stock in
July 1993......... -- (710,715) (71,072) (267,800) (535,600) 978,515 606,672 -- -- --

Common stock issued
for subordinated
convertible notes
in October 1993... $1.03 -- -- -- -- 49,743 51,418 -- -- 51,418
Effect of 1-for-4
reverse stock
split in October
1993.............. -- -- -- -- -- (1,032,456) -- -- -- --
Preferred stock
issued for cash in
October 1993...... $0.52 403,979 210,073 -- -- -- -- -- -- 210,073
Common stock issued
for license
agreement in
October 1993...... $0.06 -- -- -- -- 210,375 12,623 -- -- 12,623
Conversion of $0.10
par value common
stock to no par
value common stock
in 1993........... -- -- -- -- -- -- 519,387 (519,387) -- --
Net loss for the
period from
inception (October
1985) to June 30,
1994.............. -- -- -- -- -- -- -- -- $(1,448,165) (1,448,165)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1994........... -- 403,979 210,073 -- -- 554,527 1,224,935 -- (1,448,165) (13,157)
Issuance of Class B
convertible
preferred stock... $1.74 -- -- 363,840 634,098 -- -- -- -- 634,098
Financing costs
paid in connection
with issuance of
convertible
preferred
stock Class B..... -- -- -- -- (26,725) -- -- -- -- (26,725)
Common stock issued
as financing costs
associated with
the Class B
convertible
preferred stock... -- -- -- -- (10,000) 5,715 10,000 -- -- --
Net loss........... -- -- -- -- -- -- -- -- (589,359) (589,359)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1995........... -- 403,979 210,073 363,840 597,373 560,242 1,234,935 -- (2,037,524) 4,857

Issuance of Class B
convertible
preferred stock... $2.00 -- -- 149,000 298,000 -- -- -- -- 298,000
Redemption of
shares in
connection with
acquisition by
PBI-Delaware...... -- (403,979) (210,073) (512,840) (895,373) (560,241) 1,105,446 -- -- --
Net loss........... -- -- -- -- -- -- -- -- (749,741) (749,741)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
Balance, June 30,
1996........... -- -- $ -- -- $ -- 1 $2,340,381 $ -- $(2,787,265) $ (446,884)
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
-------- -------- -------- --------- ---------- ---------- ----------- ----------- -----------
</TABLE>

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

F-22

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

BioQuant, Inc. (the 'Company') was incorporated in 1985 and has been
engaged in research and product development activities since inception. The
Company is currently engaged in the development of a diagnostic product test
related to osteoporosis. The Company's product line includes a patented skin
patch technology, patented antisera and proprietary immunoassays for the
measurement of human perspiration. The Company also owns a patented saliva
collection device which is currently being developed for non-invasive diabetes
tests. The Company has financed its operations principally through sales of
preferred and common stock, research grants and loans from certain stockholders.

In June 1996 the Company was acquired by Pacific Biometrics, Inc.
('PBI-Delaware'), a Delaware corporation, through an exchange of common stock.
The Company now operates as a wholly-owned subsidiary of PBI-Delaware. The
Company is an affiliate of Pacific Biometrics, Inc. ('PBI'), a Washington
corporation, through a common parent corporation.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Supplies

Supplies consist of devices related to the Company's saliva collection
technology and other items related to the Company's patented skin patch
technology. These items are recorded at the lower of estimated cost
(weighted-average) or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line and accelerated methods over the useful
lives of the related assets. Leasehold improvements relating to the Company's
office facilities are being amortized over the term of the lease. The cost and
related accumulated depreciation or amortization of property or equipment sold
of otherwise disposed of are removed from the accounts and the resulting gains
or losses are included in the statement of operations.

Licensing Fees

In 1995, the Company licensed certain diagnostic technology related to
osteoporosis testing for $250,000. The Company paid $50,000 and $20,000 during
the years ended June 30, 1996 and 1995, respectively, and the balance of
$180,000 in July 1996. The total licensing fee of $250,000 is being amortized
using the straight-line method over a period of four years. The amount charged
to expense in connection with amortizing these licensing fees was $62,500 and
$23,438 for the years ended June 30, 1996 and 1995, and $85,938 for the period
from inception (October 1985) to June 30, 1996.

The licensing agreement provides the Company an exclusive worldwide (except
Japan) license of the technology. The licensing agreement converts to a
non-exclusive arrangement upon the earlier of (i) seven years from the first
commercial sale of products incorporating the licensed technology, or (ii)
February 15, 2005.

F-23
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Grant Income

The Company has received several government grants to support its research
activities. Grant revenue is recognized as the related expenses are incurred to
fulfill the specific grant requirements.

Income Taxes

Financial Instruments

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

Recent Pronouncements

During March 1995, the Financial Accounting Standards Board issued

Statement No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of' (SFAS No. 121), which requires the Company
to review for impairment its long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS No. 121 will become effective for the Company's 1997 fiscal
year. Management does not expect this Statement to have a material impact on the
Company's financial condition or results of operations.

Use of Estimates

Risks and Uncertainties

F-24

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

2. ADVANCE TO PBI

During the year ended June 30, 1996, the Company loaned $100,000 to PBI.
This loan is uncollateralized and bears interest at 9.25%. The loan is due March
1, 1997.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at June 30, 1996:

Laboratory equipment.................... $112,959
Computer equipment...................... 40,095
Office furniture and equipment.......... 13,808
Leasehold improvements.................. 1,485
--------
168,347
Less accumulated depreciation and
amortization.......................... (150,150)
--------
$ 18,197
--------
--------

Depreciation expense for the years ended June 30, 1996 and 1995, was
$13,522 and $18,673, respectively, and $150,150 for the period from inception
(October 1985) to June 30, 1996.

4. FINANCING

Notes Payable to Related Parties

At June 30, 1996, the Company had received loans from certain stockholders
amounting to $222,500. These loans were uncollateralized and bear interest at
the prime rate plus 1% (9.25% at June 30, 1996). These loans were scheduled to
mature at various dates from September 1996 to October 1996. Subsequent to year
end, loans amounting to $200,000 were refinanced in connection with a bridge
loan completed by PBI-Delaware. The remaining $22,500 in stockholder loans was
converted to equity in PBI-Delaware. Interest paid in connection with these
loans was $15,647 for the year ended June 30, 1996, for the period from
inception (October 1985) to June 30, 1996. There was no interest paid in 1995.

At June 30, 1996, the Company had received loans from an affiliate
amounting to $90,000. These loans are uncollateralized and bear interest at the
prime rate plus 1% (9.25% at June 30, 1996). These loans mature at various dates
ranging from October 1996 through December 1996.

At June 30, 1996, the Company had demand loans outstanding to an affiliate

amounting to $17,500. These loans carried interest at 8% and were collateralized
by substantially all the Company's assets. These loans were converted to equity
in PBI-Delaware subsequent to year end.

Advances from PBI-Delaware

During the year ended June 30, 1996, the Company received advances from
PBI-Delaware amounting to $155,000. These advances are uncollateralized with no
specified interest rate or repayment terms.

5. RELATED PARTY TRANSACTIONS

In September 1993, the Company entered into a contract for management and
consulting services with a company owned by certain of the Company's
stockholders. The Company incurred $138,500 and $108,726 for management and
consulting services provided during the years ended June 30, 1996 and 1995,
respectively, and $300,098 for the period from inception (October 1985) to June
30, 1996. The expense reported for the year ended June 30, 1996, is net of
amounts reimbursed by PBI of $47,500 for shared management and consulting
services. This amount was reimbursed through a reduction in amounts owed to the
affiliate. The accrued liability for management and consulting services at June
30, 1996, of $189,461 was converted to a promissory note bearing

F-25
<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. RELATED PARTY TRANSACTIONS--(CONTINUED)

annual interest at 7% with no specific due date. This note is included in notes
payable to related parties on the accompanying balance sheet.

6. LEASES

In September 1995, the Company agreed to sublease its office facilities
from PBI. Under this agreement, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense under this agreement and other rental agreements was $5,707 and $25,897
for the years ended June 30, 1996 and 1995, respectively, and approximately
$264,000 for the period from inception (October 1985) to June 30, 1996. The
agreement with the affiliate was scheduled to expire in October 1996. The
Company has entered into a new lease for the facilities which extends to
September 1997. Under this lease, the Company is responsible for its
proportionate share of real estate taxes, insurance and common area costs.
Future minimum payments on this lease are $31,662 and $8,033 for the years ended
June 30, 1997 and 1998, respectively.

7. STOCKHOLDERS' DEFICIT

Preferred Stock

In 1988, the Company sold 357,145 shares of Preferred Stock, Class A, for
$300,000. In 1989, the Company sold an additional 178,570 shares of Preferred
Stock, Class A, for $150,000. In 1989 and 1990, the Company sold 125,000 shares
of Preferred Stock, Class B, for $250,000. In March 1992, the Company issued
142,800 shares of Preferred Stock, Class B, in exchange for $285,600 in
subordinated convertible promissory notes. In July 1993, all of the Company's
outstanding shares of Preferred Stock, Class A, and Preferred Stock, Class B,
were exchanged for 978,515 shares of the Company's common stock.

In October 1993, the Company issued 403,979 shares of Preferred Stock,
Class A, for $210,073. In 1994, the Company issued 362,292 shares of Preferred
Stock, Class B, for $610,082, and in 1995, the Company issued 149,000 shares of
Preferred Stock, Class B, for $298,000. In June 1996, all of the Company's
outstanding shares of Preferred Stock, Class A, and Preferred Stock, Class B,
were redeemed in connection with the acquisition by PBI-Delaware in exchange for
common stock in PBI-Delaware.

Common Stock

In 1985 and 1986, the Company issued 426,700 shares of common stock for
$54,200. The Company redeemed 116,100 of these shares for $67,086 during the
period from 1986 through 1990.

In 1988, the Company converted its $1.00 par value common stock to $0.10
par value common stock. In 1993, the Company converted its $0.10 par value
common stock to no par value common stock, and effected a 1-for-4 reverse stock
split.

In December 1993, the Company issued 210,375 shares of common stock valued
at $12,623 in connection with the assignment of a license and supply agreement
covering certain medical technology.

In June 1996, the Company was acquired by PBI-Delaware in a stock-for-stock
exchange resulting in the redemption of all except one of the Company's shares
of common stock.

Stock Options

The Company has adopted an Incentive Stock Option plan ('ISO Plan') and a
Nonqualified Stock Option plan ('NSO Plan') under which the Board of Directors
is authorized to grant options to purchase the Company's common stock. Options
granted under the ISO Plan were granted at no less than the fair value of the
underlying common stock, and generally expired ten years from the date of grant.
The ISO Plan is designed to conform to the requirements of Section 422A of the
Internal Revenue Code, as amended. Options were granted under the

F-26

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. STOCKHOLDERS' DEFICIT--(CONTINUED)

NSO Plan at exercise prices to be determined by the Board of Directors.
Generally, options vested over a four year period, and expired five years from
the date of grant.

The following is a summary of the activity in the Company's stock option
plans for the period from inception (October 1985) to June 30, 1996:

<TABLE>
<CAPTION>
ISO PLAN NSO PLAN
------------------------ ------------------------
EXERCISE NUMBER OF EXERCISE NUMBER OF
PRICE OPTIONS PRICE OPTIONS
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Granted....................... $ 2.00 13,313 $ 0.50 4,375
Canceled...................... $ 2.00 (500)
--------- ---------
Balance, June 30, 1989... 12,813 4,375
Granted....................... $ 2-$3.00 32,625 $ 3.00 12,125
Canceled...................... $ 2.00 (2,500)
--------- ---------
Balance, June 30, 1990... 42,938 16,500
Granted....................... $ 3.00 12,563 $ 3.00 3,488
Canceled...................... $ 2-$3.00 (5,563) $ 3.00 (2,500)
--------- ---------
Balance, June 30, 1991... 49,938 17,488
Granted....................... $ 2.96 750 $ 3.00 4,500
--------- ---------
Balance, June 30, 1992... 50,688 21,988
Granted....................... $ 1.00 6,438
Canceled...................... $ 2.00 (500)
--------- ---------
Balance, June 30, 1993... 56,626 21,988
Granted....................... $ 0.06 42,000 $ 0.06 676,000
Canceled...................... $ 2.00 (6,750) $ 0.50 (4,375)
--------- ---------
Balance, June 30, 1994... 91,876 693,613

Granted....................... $ 0.20 52,000 $ 0.20 86,918
Canceled...................... $ 3.00 (38,875) $ 3.00 (4,625)
--------- ---------
Balance, June 30, 1995... 105,001 775,906
Granted....................... 5,500 $ 0.30 150,000
Exchanged..................... $0.06-$3.00 (110,501) $0.06-$3.00 (925,906)
--------- ---------
Balance, June 30, 1996...
--------- ---------
--------- ---------
</TABLE>
F-27

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

7. STOCKHOLDERS' DEFICIT--(CONTINUED)

Stock Purchase Warrants

The following is a summary of the activity relating to stock purchase
warrants granted from the Company's inception (October 1985) to June 30, 1996:

<TABLE>
<CAPTION>
PREFERRED PREFERRED
COMMON STOCK, STOCK,
STOCK CLASS A, CLASS B,
EXERCISE PURCHASE PURCHASE PURCHASE
PRICE WARRANTS WARRANTS WARRANTS
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Granted....................... $ 1.00 175,000
-----------
Balance, June 30, 1990... 175,000
Granted....................... $ 4.00 18,438
Exercised..................... $ 1.00 (175,000)
--------
Balance, June 30, 1991,
1992 and 1993.......... 18,438
Granted....................... $0.20-$0.25 21,250
Canceled...................... $ 4.00 (6,250)
--------
Balance, June 30, 1994... 33,438
Granted....................... $ 0.20 15,000
--------
Balance, June 30, 1995... 48,438
Granted....................... $ 2.00 175,000
Exchanged..................... $0.20-$4.00 (48,438) (175,000)
-------- ----------- ---------
Balance, June 30, 1996...
-------- ----------- ---------
-------- ----------- ---------
</TABLE>

All outstanding options and warrants became fully vested and were exchanged
for similar options and warrants in PBI-Delaware in accordance with the terms of
the options and warrant agreements.

8. COMMITMENTS

The Company has entered into a license agreement with respect to its
osteoporosis technology. This agreement provides for royalty payments to the

licensors of 5% of gross sales as defined in the agreement, with minimum royalty
payments of $15,000 each quarter.

F-28

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

9. SUMMARY OF NONCASH TRANSACTIONS

The Company entered into the following noncash transactions during the
period from inception (October 1985) to June 30, 1996:

Common stock issued for services in
1987, 1988 and 1991................... $ 35,803
----------
----------
Issuance of preferred stock in
connection with exercise of warrants
in 1990 and 1991...................... $ 175,000
----------
----------
Preferred stock issued in exchange for
convertible subordinated notes in
March 1992............................ $ 285,600
----------
----------
Common stock issued in exchange for
preferred stock, Class A and Class B
in July 1993.......................... $ 606,672
----------
----------
Common stock issued for convertible
subordinated debt in October 1993..... $ 51,418
----------
----------
Common stock issued for license
agreement in December 1993............ $ 12,623
----------
----------
Preferred stock issued in exchange for
loan from affiliate in 1995........... $ 25,000
----------
----------
Reduction in notes payable in lieu of
payment of management fees in 1996.... $ 47,500
----------
----------
Redemption of preferred stock and common
stock in connection with the Company's
acquisition by PBI-Delaware in June
1996.................................. $1,105,446
----------
----------

10. INCOME TAXES

At June 30, 1996, the Company had accumulated net operating loss
carryforwards for tax purposes of approximately $2.7 million which expire
through 2011. As a result of previous financing transactions, the availability
of these net operating losses will be limited each year as specified in the
Internal Revenue Code. The availability of these net operating losses will be
limited to use by the Company.

The following is a reconciliation of income tax benefit to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1996 and 1995,
and for the period from inception (October 1985) to June 30, 1996:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985)
1996 1995 TO JUNE 30, 1996
--------- --------- ----------------
<S> <C> <C> <C>
Income tax benefit based on U.S.
statutory rate................... $(254,912) $(200,382) $ (947,670)
Other.............................. 7,192
Losses which provide no current tax
benefit.......................... 254,912 200,382 940,478
--------- --------- ----------------
Income tax benefit............ $ 0 $ 0 $ 0
--------- --------- ----------------
--------- --------- ----------------
</TABLE>
F-29

<PAGE>
BIOQUANT, INC.
(A MICHIGAN CORPORATION)
(A COMPANY IN THE DEVELOPMENT STAGE)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

10. INCOME TAXES--(CONTINUED)

Significant components of the Company's deferred tax assets and liabilities
are as follows at June 30, 1996:

Deferred tax assets:
Depreciation.................................... $ 590
Technology license fees and other............... 21,191
Tax loss carryforwards.......................... 918,697
---------
Total deferred tax assets......................... 940,478
Valuation allowance............................... (940,478)
---------
Net deferred tax assets......................... $ 0
---------
---------

The provision for income taxes was as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(OCTOBER 1985)
1996 1995 TO JUNE 30, 1996
--------- --------- ----------------
<S> <C> <C> <C>
Current provision.................. $ $ $
Deferred provision................. 254,912 279,043 940,478
Change in valuation allowance...... (254,912) (279,043) (940,478)
--------- --------- ----------------
Provision for income taxes....... $ 0 $ 0 $ 0
--------- --------- ----------------
--------- --------- ----------------
</TABLE>

11. GOING CONCERN

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has sustained recurring
losses from operations and cash flow shortages, and is reporting deficits in
working capital and stockholders' equity. These matters raise substantial doubt
about the Company's ability to continue as a going concern.

The ability of the Company to sustain itself as a going concern is
dependent on its ability to generate sufficient cash to meet its financial

requirements and, ultimately, upon achieving profitable operations. As discussed
in Note 1, PBI-Delaware is currently in the process of raising approximately $8
million through an initial public offering of its common stock and, although the
outcome of the public offering cannot be predicted with certainty, PBI-Delaware
plans to complete this financing later in 1996. The outcome of PBI-Delaware's
efforts to complete its initial public offering is not determinable at this
time. However, the underwriting agreement provides that the offering is a firm
commitment. In addition, although management believes that the planned proceeds
of the offering will be sufficient to fund the Company's operations for
approximately 18 months, there can be no assurance that such funds will, in
fact, be sufficient or that the Company will be able to meet all of its
obligations as they come due. Subsequent to June 30, 1996, PBI-Delaware raised
$1,000,000 in bridge loan financing which was used to repay certain outstanding
obligations and support the Company's current working capital requirements.

The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

F-30

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying statement of operations of Pacific Biometrics,
Inc. (a Washington corporation) for the seven month period from July 1, 1994, to
January 31, 1995. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.

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

In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations of Pacific Biometrics, Inc. for
the seven month period from July 1, 1994, to January 31, 1995, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.
Seattle, Washington
September 5, 1996

F-31

<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)

STATEMENT OF OPERATIONS
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995

Laboratory testing revenues and
consulting fees....................... $ 470,906
-----------
Operating expenses:
Laboratory............................ 496,787
General and administrative............ 452,652
-----------
Total operating expenses........... 949,439
-----------
Operating loss........................
(478,533)
-----------
Other income (expense):
Interest expense...................... (16,190)
Interest and other income............. 4,527
-----------
(11,663)
-----------
Net loss................................ $ (490,196)
-----------
-----------

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

F-32

<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)

NOTES TO STATEMENT OF OPERATIONS
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995

1. THE COMPANY, BASIS OF PRESENTATION AND PROPOSED INITIAL PUBLIC OFFERING

Organization and Basis of Presentation

Pacific Biometrics, Inc. ('PBI' or the 'Company') was incorporated in
Washington in 1989, and has been engaged in providing laboratory and clinical
research support services to the pharmaceutical and diagnostic industries. PBI
provides services on normal credit terms to commercial and research
organizations throughout the United States.

In January 1995, PBI and Merchant House Scientific, Inc., a California
corporation ('Merchant House'), were merged with and into PBI/MHS Consolidation
Corporation, a Washington corporation which survived the merger and changed its
name to Pacific Biometrics, Inc. In June 1996, Pacific Biometrics, Inc. was
acquired by a holding company (Pacific Biometrics, Inc., a Delaware corporation,
'PBI-Delaware'), which was formed in May 1996 for the purpose of acquiring
Pacific Biometrics, Inc. and an affiliated company (BioQuant, Inc., a Michigan
corporation, 'BioQuant').

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Depreciation

Property and equipment are recorded at cost. Depreciation and amortization
are provided using straight-line and accelerated methods over the useful lives
of the related assets. Leasehold improvements are amortized over the term of the
lease. The cost and accumulated depreciation of property or equipment sold or
otherwise disposed of are removed from the accounts and the resulting gains or
losses are included in the statement of operations.

Income Taxes

Use of Estimates

disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates
and assumptions.

3. EMPLOYMENT AND NONCOMPETITION AGREEMENTS

The Company has entered into employment and noncompetition agreements with
certain executives. These agreements specify that the executives may not engage
in any competitive activity for a one-year period following termination.

F-33
<PAGE>
PACIFIC BIOMETRICS, INC.
(A WASHINGTON CORPORATION)

NOTES TO STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE SEVEN MONTH PERIOD FROM JULY 1, 1994, TO JANUARY 31, 1995

4. INCOME TAXES

As a result of the merger with Merchant House, the availability of the
Company's net operating losses will be limited to a prescribed amount each year
as specified in the Internal Revenue Code, and will be limited to use by the
Company following its acquisition by PBI-Delaware in 1996.

The following is a reconciliation of income tax expense (credit) to the
amount based on the U.S. statutory rate of 34% for the period from July 1, 1994,
to January 31, 1995:

Income tax benefit based on U.S.
statutory rate........................ $ (166,667)
Stock options exercised................. (13,881)
Other................................... 432
Losses which provide no current tax
benefit............................... 180,116
-----------
Income tax benefit.................... $ 0
-----------
-----------

The provision for income taxes was as follows for the period from July 1,
1994, to January 31, 1995:

Current provision....................... $
Deferred provision...................... 180,116
Change in valuation allowance........... (180,116)
-----------
Provision for income taxes............ $ 0
-----------
-----------

5. SEVERANCE AGREEMENT

6. LEASES

The Company has entered into noncancelable operating leases for office
facilities. Under these leases, the Company is responsible for its proportionate
share of real estate taxes, insurance and common area maintenance costs. Rent
expense on these lease agreements was $82,764 for the seven month period from
July 1, 1994, to January 31, 1995.

7. MAJOR CUSTOMERS

The Company's sales to its largest customer represented approximately 14.3%
of its total sales for the seven months ended January 31, 1995. Sales to its
largest five customers represented approximately 52.8% of its total sales for
the seven months ended January 31, 1995.

F-34
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<PAGE>
[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

[PHOTOGRAPH]

[DESCRIPTION TO BE SUPPLIED]

PBI REFERENCE LABORATORY -- SEATTLE, WASHINGTON

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY
THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.

------------------------------------

TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................. 3
Summary Combined Financial Information......... 6
Risk Factors................................... 9
Use of Proceeds................................ 19
Capitalization................................. 19
Dilution....................................... 20
Dividend Policy................................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 24
Management..................................... 34
Principal Stockholders......................... 40
Certain Relationships and Transactions......... 41
Description of Securities...................... 44
Shares Eligible for Future Sale................ 46
Underwriting................................... 47
Legal Matters.................................. 48
Experts........................................ 48
Additional Information......................... 49
Index to Combined Financial Statements......... F-1

------------------------------------

UNTIL NOVEMBER 24, 1996 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

[LOGO]

PACIFIC BIOMETRICS, INC.

1,700,000 UNITS
CONSISTING OF
1,700,000 SHARES OF COMMON STOCK
1,700,000 REDEEMABLE WARRANTS

------------------------
PROSPECTUS
------------------------

PARADISE VALLEY
SECURITIES, INC.

October 30, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------