PACIFIC BIOMETRICS INC, 10QSB, 1998-02-17

PACIFIC BIOMETRICS INC
10QSB, 1998-02-17
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-QSB

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

For the quarterly period ended DECEMBER 31, 1997
----------------------

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT

Commission File Number 0-21537
-------

PACIFIC BIOMETRICS, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer specified in its charter)

Delaware 93-1211114
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

1370 Reynolds Avenue, Suite 119, Irvine, CA 92614
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(Address of principal executive offices)

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

- -------------------------------------------------------------------------------
714-263-9933
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(Issuer's telephone number)

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

As of February 10, 1998, shares of common stock outstanding of the issuer were
3,709,671.

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PACIFIC BIOMETRICS, INC.

INDEX TO FORM 10-QSB

PART I - FINANCIAL INFORMATION

Page
----
<S> <C>
ITEM 1 - FINANCIAL STATEMENTS

Consolidated Balance Sheet................................................ 2

Consolidated Statements of Operations..................................... 3

Condensed Consolidated Statements of Cash Flows........................... 5

Notes to Consolidated Financial Statements................................ 7

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................... 9

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS................................................ 16

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS........................ 16

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.................................. 18

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS................................................. 18

ITEM 5 - OTHER INFORMATION................................................ 18

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................. 19

</TABLE>

<PAGE>

PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997

ASSETS

<TABLE>

<S> <C>
Current assets:
Cash and cash equivalents $ 1,282,474
Investments, net of unamortized discount of $4,024 795,976
Accounts receivable, net of allowance for doubtful
accounts of $31,256 371,274
Inventory 114,844
Prepaid expenses and other 242,617
-----------
Total current assets 2,807,185
-----------
Property and equipment, net 868,570

Other assets:
Technology license 420,312
Prepaid financing costs 53,785
Restricted cash 100,000
Deposit and other 18,309
-----------
Total assets $ 4,268,161
-----------
-----------

</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>

<S> <C>
Current liabilities:
Notes payable to related parties $ 252,413
Accounts payable 264,276
Accrued liabilities 426,856
Advances from customers 191,421
Capital lease obligations 266,746
-----------
Total current liabilities 1,401,712
-----------
Capital lease obligations - long term portion 358,438
-----------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding 0
Common stock, $0.01 par value, 30,000,000 shares
authorized, 3,709,671 shares issued and outstanding 37,055
Additional paid-in capital 15,770,503
Deficit accumulated during the development stage (13,299,547)
-----------
Total stockholders' equity 2,508,011
-----------
Total liabilities and stockholders' equity $ 4,268,161
-----------
-----------
</TABLE>

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

<PAGE>

PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
Three Month Period Ended December 31,
-------------------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues $ 871,290 $ 648,437
--------- ---------
Operating expenses:
Laboratory expense and cost of goods sold 732,635 348,992
Research and product development 565,431 224,645
General and administrative 522,501 341,181
Manufacturing relocation expense 0 100,000
--------- ---------
Total operating expenses 1,820,567 1,014,818
--------- ---------
Operating loss (949,277) (366,381)
--------- ---------
Other income (expense):
Interest expense (15,690) (25,973)
Interest income 18,051 39,262
Grant and other income 5,861 46,657
--------- ---------
8,222 59,946
--------- ---------
Net loss $ (941,055) $ (306,435)
--------- ---------
--------- ---------
Basic and Fully diluted loss per share $ (0.25) $ (0.10)
--------- ---------
--------- ---------
Number of shares used in per-share calculation 3,706,424 3,131,706
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
3

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PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 1997

Six Month For the Period
Period Ended December 31, from Inception
-------------------------- (December 1992) to
1997 1996 December 31, 1997
----------- ----------- -----------------
<S> <C> <C> <C>
Revenues $ 1,509,637 $ 1,225,223 $ 6,522,319
----------- ----------- -----------
Operating expenses:
Laboratory expense and cost of goods sold 1,127,315 758,349 4,702,801
Research and product development 1,043,290 415,635 3,456,818
General and administrative 962,286 783,233 4,936,409
Manufacturing relocation expense 0 100,000 100,000
Purchased in-process research and development 0 0 6,373,884
Amortization of goodwill 0 0 428,368
----------- ----------- -----------

Total operating expenses 3,132,891 2,057,217 19,998,280
----------- ----------- -----------
Operating loss (1,623,254) (831,994) (13,475,961)
----------- ----------- -----------
Other income (expense):
Interest expense (29,164) (131,110) (241,013)
Interest income 81,457 40,001 234,985
Grant and other income 6,025 91,597 182,442
----------- ----------- -----------
58,318 488 176,414
----------- ----------- -----------
Net loss $ (1,564,936) $ (831,506) $(13,299,547)
----------- ----------- -----------
----------- ----------- -----------
Basic and Fully diluted loss per share $ (0.42) $ (0.30) $ (9.04)
----------- ----------- -----------
----------- ----------- -----------
Number of shares used in per-share calculation 3,705,973 2,818,001 1,470,638
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

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

<PAGE>

PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996

Three Month
Period Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash (used) provided by operations $ (866,638) $ (164,482)

Cash (used) provided by investing activities 603,674 (462,309)

Cash (used) provided by financing activities (68,344) 5,503,845
----------- -----------
Increase (Decrease) in cash and cash equivalents (331,308) 4,877,054

Cash and cash equivalents:

Beginning of period 1,613,782 197,804
----------- -----------
End of period $ 1,282,474 $ 5,074,858
----------- -----------
----------- -----------
</TABLE>

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

<PAGE>

PACIFIC BIOMETRICS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (DECEMBER 1992) TO DECEMBER 31, 1997

Six Month For the Period
Period Ended December 31, from Inception
------------------------- (December 1992) to
1997 1996 December 31, 1997
------------- ----------- -----------------
<S> <C> <C> <C>
Cash (used) provided by operations $ (1,271,416) $ (815,021) $ (5,233,056)

Cash (used) provided by investing activities (237,225) (62,139) (1,433,791)

Cash (used) provided by financing activities (125,580) 5,759,120 7,949,321
------------ ----------- ------------
Increase (Decrease) in cash and cash equivalents (1,634,221) 4,881,960 1,282,474

Cash and cash equivalents:

Beginning of period 2,916,695 192,898 0
------------ ----------- ------------
End of period $ 1,282,474 $ 5,074,858 $ 1,282,474
------------ ----------- ------------
------------ ----------- ------------
</TABLE>

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

<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Pacific Biometrics, Inc. (the "Company") was incorporated in Delaware in
May 1996. PBI-Delaware was formed in connection with the acquisitions 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.

The unaudited financial statements of the Company presented herein, have
been prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-QSB and do not include all of the
information and footnote disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the financial statements and notes thereto for the year ended June 30, 1997
included in the Company's Form 10-KSB.

In the opinion of management, the financial statements include all
adjustments (consisting solely of normal, recurring adjustments) necessary
for a fair presentation of results for these interim periods.

The Company is at an early stage of development. Revenues are primarily
from the laboratory business. The Company's potential products are currently
in research and development, and no material revenues have been generated
from these potential products to date. Consequently, the Company is a
development stage enterprise.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECLASSIFICATIONS

Certain reclassifications, not impacting previously reported net loss,
have been made to the consolidated financial statements for the first and
second quarters of fiscal 1997 and for the period from inception to December
31, 1997 in order to conform to the presentation of the consolidated
financial statements for the first and second quarters of fiscal 1998
contained in the Company's quarterly reports on Form 10-QSB and fiscal year
1997 contained in the Company's report on Form 10-KSB.

<PAGE>

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented,
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. The implementation of SFAS No. 130 is
not expected to have a material effect on the Company's results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131, which is effective
for fiscal years beginning after December 15, 1997 and requires restatements
of earlier periods presented, establishes standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The
implementation of SFAS No. 131 is not expected to have a material effect on
the Company's current reporting.

3. COMMITMENTS AND CONTINGENCIES

The Company is currently evaluating its alternatives for continuing
production of its SPINPRO-REGISTERED TRADEMARK- product. The Company
estimated the total cost of the relocation of manufacturing operations to be
$100,000, which has been charged to the accompanying consolidated statement
of operations for the three month period ending December 31, 1996. As of
December 31, 1997, a liability of approximately $63,000 remains in order to
cover the remaining costs of identifying a manufacturer, placing equipment
and personnel, and resuming production. This amount is included in accrued
liabilities on the accompanying consolidated balance sheet.

The Company is not a party to any material legal proceedings. However,
the former manufacturer of SPINPRO-Registered Trademark- has demanded
arbitration in connection with alleged breaches of the contract relating to
the manufacture of SPINPRO-Registered Trademark-. The Company does not
believe that the claims have any merit and believes that the ultimate outcome
of this proceeding will not have a material impact on the Company. The
Company is vigorously contesting such claims and the Company has asserted
counterclaims against such former manufacturer.

4. EARNINGS PER SHARE

The Company has adopted SFAS No. 128 "Earnings Per Share" which requires
the presentation of "basic" and "diluted" earnings per share, as defined, on
the face of the statement of operations for entities whose capital structure
includes convertible securities and options.

For the quarter ended December 31, 1997, no amounts were included in the
weighted average shares calculation for convertible securities or options as
the impact would have been anti-dilutive.

<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 preceding consolidated financial statements and notes in this Form 10-QSB.

OVERVIEW

The Company, through its wholly-owned subsidiaries, develops diagnostic
and laboratory products and provides laboratory services primarily 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 with respect
to certain diseases. The Company plans to (i) finalize development and
commercialize a patented skin patch product that measures bone loss markers
in human perspiration (the "Osteopatch-TM-"); (ii) expand its specialty
reference laboratory business; and (iii) evaluate the feasibility of
non-invasive testing for various applications using SalivaSac-Registered
Trademark-, its patented saliva collection device.

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 Trademark- cholesterol testing device, and
other income from U.S. Government grants awarded to the Company under the
National Institute of Health Small Business Innovative Research ("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, administrative expenses and payment of license
and royalty fees to acquire and maintain the Company's intellectual property
rights.

Through December 31, 1997, the Company had an accumulated deficit of
$13,299,547 which included a one-time charge of $6,373,884 for the value of
purchased research and development expenses relating to the Company's merger
with BioQuant in 1996 and a one-time charge of $428,368 relating to a prior
merger involving PBI in 1995.

<PAGE>

RESULTS OF OPERATIONS:

Comparison of the three and six month periods ending December 31, 1997 and 1996:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Rounded to Nearest Three Six Comments on increase or decrease from
Thousand Dollars Months Months Fiscal 1997 to Fiscal 1998
- --------------------------------------------------------------------------------

<S> <C> <C> <C>
Revenues:
- ------------------------------------
Ending 12/31/97 $871 $1,510 Laboratory revenues increased by $410 and
Ending 12/31/96 $648 $1,225 $743 and non-laboratory revenues decreased
$ variance $223 $284 by $187 and $458 for the three and six month
% variance 34% 23% periods due to the Company's focus on
increasing laboratory services.
- ------------------------------------

Laboratory expenses and cost
of sales:
- ------------------------------------
Ending 12/31/97 $733 $1,127 The increase is related directly to the
Ending 12/31/96 $349 $758 growth in revenues, higher supply
$ variance $384 $369 requirements for a study, increased
% variance 110% 49% depreciation, new laboratory personnel
and relocation into a new facility.
- ------------------------------------

Research and product development:
- ------------------------------------
Ending 12/31/97 $565 $1,043 The increase is due to Osteopatch-TM-
Ending 12/31/96 $225 $416 clinical trials and increased
$ variance $341 $628 SalivaSac-Registered Trademark- research
% variance 152% 151% efforts.
- ------------------------------------

General and administration expenses:
- ------------------------------------
Ending 12/31/97 $523 $962 The increase in expenses results primarily
Ending 12/31/96 $441 $883 from establishing an east coast sales
$ variance $81 $79 office and hiring sales personnel for
% variance 18% 9% laboratory operations.
- ------------------------------------

Total other income (expense):
- ------------------------------------
Ending 12/31/97 $8 $58 The changes are due to timing of interest
Ending 12/31/96 $60 $0 income earned from investment of IPO
$ variance ($52) $58 proceeds.
% variance (86%) N/A
- ------------------------------------

Net loss:
- ------------------------------------
Ending 12/31/97 $(941) $(1,565) The increase in R & D spending accounts for
Ending 12/31/96 $(306) $(832) approximately 54% and 86% of the increased
$ variance $(635) $(733) three and six month loss. Higher laboratory
% variance 207% 88% and selling expenses also increased the loss.
- ------------------------------------

</TABLE>

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES:

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE" HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Except for historical
matters, the matters discussed in this Form 10-QSB are forward-looking
statements that involve risks and uncertainties. The following sections
contain forward-looking statements of management's beliefs based on, among
other things, assumptions made by, and information currently available to
management, including management's own knowledge and assessment of the
Company's industry, competition and current regulatory environment. Such
forward-looking statements involve risk and uncertainties that could cause
actual results to differ materially.

The Registration Statement pertaining to the Company's initial public
offering was declared effective by the Securities and Exchange Commission on
October 29, 1996. Gross proceeds from the public offering were $8,075,000.
The Company used approximately $1.2 million to repay debt. The Company is
using the net proceeds, after such debt repayment and expense of the offering
(approximately $5.1 million), for product development activities relating to
the Osteopatch-TM-, for funding the growth of its central reference
laboratory operations and for working capital.

The Company believes that successful future operations depend primarily
upon the Company's ability to complete development of the
Osteopatch-TM- product, obtain FDA clearance, and achieve successful product
commercialization. Although the number of people at risk of osteoporosis is
large in both the United States and worldwide, there can be no assurance that
the Company will be able to meet its objective to develop and commercialize a
cost effective osteoporosis related diagnostic product. The risks facing the
Company include the ability to obtain regulatory approval which is dependent
upon such factors as the results of clinical trials, the discretion of
regulatory officials, and potential changes in regulations, all of which may
be beyond the control of the Company. In addition, successful
commercialization of any product will be dependent upon market acceptance,
competition, technological change, dependence on collaborators for research,
development and marketing assistance, and continued access to capital.

The Company believes that future operations also depend on its ability
to grow a profitable reference laboratory operation. Although the Company
has increased laboratory revenues, operated the laboratory at positive gross
margin and has established cardiovascular and osteoporosis expertise, there
can be no assurances that the Company will be able to continue such revenue
growth or maintain profitability. In addition, contracts for lab services
are entered into for a specified period (usually less than a year) but can be
canceled at any time. Accordingly, the laboratory operation is dependent on
a few large contracts and

<PAGE>

on the Company's ability to replace such contracts upon expiration or
termination, of which there can be no assurance.

During fiscal 1997, the Company received a commitment of $1.5 million
from Transamerica Business Credit for the purchase of equipment. The Company
has drawn down $552,000 on the credit line and is currently authorized to
draw down an additional $150,000 for the three month period ending March 31,
1998. Payments on funds advanced are made at approximately a 9% annual rate
plus the fair market value of the buy out of equipment, at the Company's
option, at the end of the lease term.

During fiscal 1997, the Company received notification of the termination
of its manufacturing agreement relating to the manufacture of the
SPINPRO-Registered Trademark- product. As a result of this termination, the
Company has reimbursed the manufacturer for the value of molds and production
equipment. As of December 31, 1997, the remaining inventory, molds and
production equipment, had been relocated to a storage facility.

The Company is currently evaluating its alternatives for continuing
production of the SPINPRO-Registered Trademark- product. The Company
estimated the total cost of the relocation to be $100,000, which has been
charged to the accompanying consolidated statement of operations. As of
December 31, 1997, a liability of approximately $63,000 remains in order to
cover the remaining costs of identifying a manufacturer, placing equipment
and personnel, and resuming production. This amount is included in accrued
liabilities on the accompanying consolidated balance sheet.

On September 26, 1997 the Company received from the former manufacturer
of SPINPRO-Registered Trademark- a demand for arbitration in connection with
alleged breaches of the contract relating to the manufacture of
SPINPRO-Registered Trademark-. The Company does not believe that the claims
have any merit and believes that the ultimate outcome of this proceeding will
not have a material impact on the Company. The Company is vigorously
contesting such claims and has filed counterclaims against the former
manufacturer. The Company has also filed for arbitration against a former
vendor relating to SPINPRO-Registered Trademark-, seeking damages for alleged
breach of contract with respect to the manufacture of molds for
SPINPRO-Registered Trademark-parts.

In August 1997, the Company announced an agreement with Segix Italia,
S.p.A. ("Segix") for a market and technical evaluation of the Company's
Osteopatch diagnostic system for the Italian market. At the end of the
evaluation period (May 1998), Segix has the option to exercise an exclusive
long term supply and distribution agreement with the Company for the Italian
market. Exercise of Segix's option to execute the supply and distribution
agreement will give the Company access to the Italian market through Segix's
70 person direct sales force.

<PAGE>

In December 1997, the Company executed a definitive agreement with
Sudormed, Inc., which provides the Company an exclusive worldwide license to
all medical diagnostic applications of Sudormed's skin patch technology. In
addition, the license allows for the development of all other potential
applications, except for those relating to alcohol and drugs of abuse.
Sudormed, Inc. is the licensor of the skin patch technology for the
application of measuring bone loss markers in sweat which is the basis for
the Company's Osteopatch-TM- system currently in clinical trials.

In exchange for the rights described above, the Company will pay
Sudormed approximately $3 million over a fifteen month period plus an ongoing
royalty payment based on the amount of sales of products developed under this
license. The monthly payments include a lump-sum payment of $1.6 million in
December 1998. The Company believes that it will be able to expand the use
of the patch technology, thereby broadening its platform technology, building
on its research expertise from the Osteopatch-TM- development, and
strengthening its position in the non-invasive testing marketplace.

In December 1997, the Company entered into a Technical Development and
License Agreement with ActiMed Laboratories, Inc. in Burlington, NJ. This
agreement provides the Company with exclusive worldwide rights to ActiMed's
patented analyte detection technology in the field of saliva glucose testing.
This technology will be combined with the Company's patented
SalivaSac-Registered Trademark- technology to develop a saliva glucose testing
system, with applications in screening for and monitoring of diabetes.

In addition to, and in consideration of, receiving exclusive rights to
ActiMed's proprietary technology for non-invasive saliva glucose testing, the
Company has entered into a development program with ActiMed for the purpose
of developing two potential products. The Company will fund the development
based on a mutually agreed budget by Actimed and the Company. One potential
product, a screening product, is intended to detect diabetes in the general
population using a saliva sample in a singe use, disposable, non-instrumented
device which incorporates the Company's SalivaSac-Registered Trademark-
technology and ActiMed's thin film and dye technology. A second potential
product, incorporating the same technologies plus a hand held meter, is
intended to produce detailed quantitative measurements of glucose levels to
enable diabetics to monitor glucose levels throughout the day. This
collaboration will start in the third quarter of fiscal year 1998. The
Company will pay Actimed a royalty based on future sales of products
developed under this arrangement.

There can be no assurance, however, that either of these products will be
successfully developed, or if developed, will be approved for use by the U.S.
Food and Drug Administration ("FDA"), achieve market acceptance or contribute
significantly to the Company's revenues and profits.

In December 1997, the Board of Directors extended the expiration date of
the 1,700,000 warrants issued in conjunction with the Company's initial
public offering of its securities until June 30, 1998. All other terms of
such warrants remains unchanged.

<PAGE>

In February 1998, the Company announced that it had submitted to the
United States Food and Drug Administration (FDA) a 510(k) pre-market
notification filing for a test to measure an indicator of bone resorption
using the Company's proprietary SweatPatch system. Recent studies have
indicated that high bone resorption is a risk factor for osteoporosis. The
Osteopatch-TM- is the first application of Pacific Biometrics' SweatPatch
system. The Osteopatch-TM- system consists of a patented transdermal sweat
collection device, proprietary assays for the detection of biochemical
markers of bone loss in sweat, and a proprietary method for laboratory
analysis. A combined total of over 200 patients at 14 facilities were
evaluated in the Clinical Utility Study used to support the Company's 510(k)
filing.

According to the FDA's office of Device Evaluation Annual Report, during
1995, the average 510(k) review time was approximately six months. The
preceding statements regarding FDA submission involves risks and
uncertainties. There can be no assurance that the Company's 510(k)
notifications will be accepted or that the review process will be completed
in a timely manner, either of which events could have a material adverse
effect on the Company.

Osteoporosis is one of the fastest growing and debilitating diseases
affecting the aging population today and new ways of preventing, diagnosing
and managing the disease are urgently needed. The disease is characterized
by low bone mass and deterioration of bone structure that can lead to bone
fracture. According to the National Osteoporosis Foundation (NOF), 28 million
people in the U.S. are at risk of osteoporosis and that number is projected
to grow to 41 million by the year 2015. Additionally, the NOF estimates that
the U.S. spends approximately $14 billion annually on osteoporosis related
fractures.

The Company expects to continue to incur significant and increasing
operating losses for at least two years due to anticipated increases in
research and development activities associated with the Osteopatch-TM-
product, increased research and development activities related to
SalivaSac-Registered Trademark-, establishment of a marketing program for the
Osteopatch product and the reference laboratory and general and
administrative expenses.

Based upon its current plans, the Company believes that its anticipated
cash flows from operations, together with the remaining proceeds received
from the Company's initial public offering (IPO) completed in November 1996
and existing and anticipated debt and equity arrangements, will be sufficient
to meet the Company's operating expenses and capital requirements for
approximately twelve months. The previous sentence is considered a
forward-looking statement for purposes of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 that involves risks and
uncertainties that could

<PAGE>

cause actual results to differ materially. Such statement is based on, among
other things, assumptions made by, and information currently available to
management, including management's own knowledge and assessment of the
Company's industry, competition and current regulatory environment.
Additionally, the adequacy of the Company's available cash equivalents and
revenue from operations to sustain current and anticipated levels of
operations are subject to a number of variables including maintaining and
increasing existing laboratory revenues and profitability, performance of
products in clinical trials, the level and timing of research and development
costs necessary to obtain FDA clearance of products under development, the
costs and timing associated with commercial production and marketing of such
products, the execution of definitive agreements with key partners,
intensified competition, third party reimbursement, technology obsolescence
prior to successful commercialization, and the acceptability of terms related
to anticipated sources of debt capital.

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-TM-, 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.

<PAGE>

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings. However,
the former manufacturer of SPINPRO-Registered Trademark- has demanded
arbitration in connection with alleged breaches of the contract relating to
the manufacture of SPINPRO-Registered Trademark-. The Company does not
believe that the claims have any merit and believes that the ultimate outcome
of this proceeding will not have a material impact on the Company. The
Company is vigorously contesting such claims and has filed counterclaims
against the former manufacturer. The Company has also filed for arbitration
against a former vendor relating to SPINPRO-Registered Trademark- seeking
damages for alleged breach of contract with respect to the manufacture of
molds for SPINPRO-Registered Trademark- parts.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

The following information is provided with respect to the use of proceeds
from the Company's IPO:

1. Name of issuer: Pacific Biometrics, Inc.
2. a) Effective date of the registration statement: October 29, 1996
b) Commission file number assigned to issuer: 333-11551
3. Offering commencement date: October 29, 1996
4. Managing underwriter: Paradise Valley Securities, Inc.
5. Title of each class of security
(a) Common stock, par value $.01 per share ("Common Stock").
(b) Redeemable Common Stock Purchase Warrants (the "Warrants"). Each
Warrant is exerciseable into one share of Common Stock at an exercise
price of $12 at any time up until June 30, 1998.
6. Amount and aggregate offering price
(a) Common Stock and Warrants:
Amount registered (1) 3,825,000 Shares
Aggregate price of offering amount registered (2) $10,255,250
Amount sold 1,700,000 Units
Aggregate offering price of amount sold (2) $ 8,075,000

(1) Includes 1,700,000 units (the "Units") (each Unit consisting of one share
of Common Stock and one Warrant), the underwriter's over-allotment
option (which was not exercised) for 255,000 Units, and a Warrant to
purchase 170,000 shares of Common Stock at $5.70 per share that was
issued to the underwriter. The amount registered includes 1,955,000
shares of common stock underlying Warrants contained in the Units
(including the over-allotment option).

<PAGE>

(2) Does not include exercise price of Warrants outstanding, none of which
have been exercised to date.

------------------------------------------------------
Direct or indirect payments to Direct or indirect
directors, officers, general payments to
partners of the issuer or their others
For the period ending associates; to persons owning
December 31, 1997 ten percent or more of any class
of equity securities of the issuer;
and to affiliates
------------------------------------------------------

7. Costs of offering:

-----------------------------------------------------------------------------
(01) Underwriting discounts and commissions 807,500
-----------------------------------------------------------------------------
(02) Finder's fees 0
-----------------------------------------------------------------------------
(03) Expenses paid to or for underwriters 242,250
-----------------------------------------------------------------------------
(04) Other expenses 740,540
-----------------------------------------------------------------------------
(05) Total expenses 1,790,290
-----------------------------------------------------------------------------

8. Net offering proceeds after expenses in item 7: 6,284,710

9.
Use of net offering proceeds:
-----------------------------------------------------------------------------
(01) Construction of plant, building and facilities 0
-----------------------------------------------------------------------------
(02) Purchase of machinery and equipment 187,126
-----------------------------------------------------------------------------
(03) Purchase of real estate 0
-----------------------------------------------------------------------------
(04) Acquisition of other business(es) 0
-----------------------------------------------------------------------------
(05) Repayment of indebtedness 60,193 1,115,774
-----------------------------------------------------------------------------
(06) Working capital 804,271
-----------------------------------------------------------------------------
(07) Government securities - greater than 90 days 795,976
-----------------------------------------------------------------------------
(08) Cash and investments - less than 90 days 1,382,474
-----------------------------------------------------------------------------
(11) Research & development 1,938,896
-----------------------------------------------------------------------------

10.Do the use(s) of proceeds in Item 9 represent a material change
in the use(s) of proceeds described in the prospectus? / / YES
/X/ NO

<PAGE>

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - Not Applicable.

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

The following summarize the votes at the annual meeting of the Company's
stockholders held on November 13, 1997:

1. Election of Directors: For Withheld
--- --------
<S> <C> <C>
Ellen A. Rudnick 3,132,373 21,500
Paul G. Kanan 3,132,373 21,500
Mary L. Campbell 3,129,873 24,000
Douglas Harrington, M.D. 3,132,373 21,500
Terry M. Giles 3,132,373 21,500
Craig M. Goldstone 3,129,873 24,000

</TABLE>

2. To increase the total number of shares of Common Stock subject to options
available under the Company's 1996 Stock Incentive Plan.

For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
<S> <C> <C> <C>
1,684,959 115,246 114,518 1,239,150

</TABLE>

3. To ratify the appointment of Coopers & Lybrand, LLP as auditors of the
Company for the year ended June 30, 1998.

For Against Abstentions
--- ------- -----------
<S> <C> <C>
3,051,331 39,000 63,542

</TABLE>

ITEM 5 - OTHER INFORMATION - Not Applicable.

<PAGE>

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

(10.26) Technical Development and License Agreement, dated December 8,
1997, by and between ActiMed Laboratories, Inc., a Delaware corporation,
and the Company.

(10.27) Amended and Restated License Agreement, dated December 30, 1997,
by and among Sudormed, Inc., a California corporation, William R. Miller,
Donald W. Schoendorfer and the Company.

(10.28) Amended and Restated Supply Agreement, dated December 30, 1997,
by and between Sudormed, Inc. and the Company.

(27.1) Financial Data Schedule.

(b) No reports on Form 8-K were filed during the quarter ended December
31, 1997.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DATED: February 17, 1998

/s/PAUL G. KANAN President and Chief Executive
- ---------------- Officer
Paul G. Kanan

/s/PETER B. LUDLUM Vice President and Chief Financial
- ------------------ Officer (Principal Financial
Peter B. Ludlum and Accounting Officer)

<PAGE>
EXHIBIT 10.26

* Portions of this document have been omitted pursuant to a request for
confidential information.

TECHNICAL DEVELOPMENT AND LICENSE AGREEMENT

This Agreement dated as of the 8th day of December, 1997 (the
"Agreement") by and between ACTIMED LABORATORIES, INC. ("ActiMed"), a Delaware
corporation, having its principal place of business at 5 Terri Lane, Burlington,
NJ 08016, and PACIFIC BIOMETRICS, INC. ("PBI"), a Delaware corporation, having
its principal place of business at 1370 Reynolds Avenue, Suite 119, Irvine, CA
92614.

WHEREAS, ActiMed possesses proprietary thin film and dye technology
suitable for use in Product, as herein defined;

WHEREAS, ActiMed further possesses GMP manufacturing facilities and
adaptable manufacturing equipment;

WHEREAS, PBI possesses a proprietary, non-invasive glucose diagnostic
test using a saliva sampling device known as SalivaSac-Registered Trademark-;

WHEREAS, ActiMed and PBI desire to enter into a development
relationship to develop Product, as herein defined;

WHEREAS, PBI desires to obtain from ActiMed and ActiMed desires to
grant to PBI, an exclusive, world-wide license to manufacture and market
Product, as herein defined, in the Field, as herein defined; and

WHEREAS, ActiMed desires to obtain from PBI, and PBI desires to grant
to ActiMed, a right of first refusal to exclusively manufacture Product, as
herein defined.

NOW THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:

1. DEFINITIONS. Unless otherwise provided, each capitalized term
used herein shall have the following meaning.

1.1. "ActiMed Core Technology" shall mean technology, both
devices and methods, described or claimed in the ActiMed Patents, and/or related
to dye, film or ENACT flow-through technology, and any extension, improvement,
enhancement, modification or continuation thereof.

1.2. "ActiMed Patents" shall mean the Patents specified in
Exhibit A, and any additional Patents owned or controlled by ActiMed during the
term of the ActiMed License, the claims of which cover use, sale or manufacture
of Product. Notwithstanding the provisions of this Section 1.2, ActiMed Patents
shall not include ActiMed Program Patents.

<PAGE>

1.3 "ActiMed Program Inventions" shall have the meaning
stated in Section 7.1.1.

1.4. "ActiMed Program Patents" shall mean any Patents claiming
ActiMed Program Inventions.

1.5. "Additional Countries" shall have the meaning stated in
Section 7.8.

1.6. "Affiliate" shall mean any corporation, partnership or
organization which directly or indirectly controls, is controlled by or is under
common control with a party. Existence of such control is established by the
direct or indirect ownership of more than 50% of the voting interest in an
entity.

1.7. "Agreed Countries" shall have the meaning stated in
Section 7.7.

1.8. "Coating" shall mean the steps of manufacturing a Test
Device, either alone or as part of a multi-component Product, involving coating
the physical substrate of the Test Device with Formulation.

1.9. "Development Budget" shall mean the projected cost of
funding the Development Plan, as agreed to by the parties.

1.10. "Development Plan" shall mean a research and development
plan for the development of First Generation Monitoring Product as defined in
Section 1.15, Second Generation Monitoring Product as defined in Section 1.41,
and Screening Product as defined in Section 1.40, through the Development
Program, which plan shall include a Development Budget, a specific schedule for
work, performance milestones, product specifications and personnel requirements
for each product, and which is attached hereto as Exhibit B, and as modified
from time to time.

1.11. "Development Program" shall mean the collaborative
research and development program to develop Product.

1.12. "Field" shall mean human non-invasive saliva glucose
testing for screening for and monitoring diabetes.

1.13. "Finishing" shall mean the steps of manufacturing a Test
Device, either alone or as part of a multi-component Product, after Coating,
involving lamination and cutting.

1.14. "First Commercial Sale" as to a specific type of Product
shall mean the first time such Product is sold to non-Affiliate third parties.

-2-

<PAGE>

1.15. "First Generation Monitoring Product" shall mean a
multi-component sampling and measurement device which shall include a Test
Device, a collection sack based on SalivaSac-Registered Trademark-, and a
measurement meter, which First Generation Monitoring Product, at the time of
manufacture, use or sale, is either (a) covered by one or more claims of the
ActiMed Patents or the ActiMed Program Patents, or produced, processed or
otherwise manufactured by any method and/or process covered by one or more
claims of the ActiMed Patents or the ActiMed Program patents, or (b) covered by
one or more claims of the Joint Program Patents, or produced, processed or
otherwise manufactured by any method and/or process covered by one or more
claims of the Joint Program Patents.

1.16. "Formulation" shall mean a mixture of components, which
may include dyes, stabilizers, surfactants and additives, used in the
manufacture of a Test Device to provide sensitivity to the Test Device.

1.17. "Formulation Transfer Price" shall have the meaning set
forth in Section 6.4.3.1.

1.18. "Formulation Supply Agreement" shall have the meaning set
forth in Section 6.4.3.

1.19. "Fully Absorbed Plant Cost" shall mean the cost of
manufacturing a product or component of a finished product. This cost includes
direct labor, including salary, taxes, and fringe benefits; materials; and plant
overhead, including indirect labor, supervision, rent, utilities, taxes, and
other necessary plant costs applied to the units of product or component
produced. Overhead charges shall be applied on the basis of reasonable
estimates of production volume for the product in question and allowing for
absorption of overhead costs by other products or components produced in the
same plant. GAAP accounting principles shall be applied in the calculation of
cost, and PBI shall have the right to audit the cost calculation at its own
expense.

1.20. "Intellectual Property" shall mean the intellectual
property described by and contained within the ActiMed Patents, the PBI Patents,
and Program Inventions.

1.21. "Invention Owner" shall have the meaning stated in
Section 7.6.

1.22. "Joint Program Inventions" shall have the meaning stated
in Section 7.1.3.

1.23. "Joint Program Patents" shall mean any Patents claiming
Joint Program Inventions.

1.24. "Manufacturing Agreement" shall have the meaning stated
in Section 6.2.

-3-
<PAGE>

1.25. "Manufacturing Process" shall mean all steps of
manufacturing a Test Device from Formulation and necessary raw materials,
including, but not limited to, Coating and Finishing.

1.26. "Manufacturing Process Information" shall have the
meaning stated in Section 6.3.2.

1.27. "Net Sales" shall mean all sales of Product by PBI or its
sublicensees, less: (a) normal trade and cash discounts actually allowed to
customers; (b) credits or refunds actually allowed, including chargebacks,
consistent with a policy to be established by ActiMed and PBI and industry
practices; (c) freight charges and insurance paid directly with respect to the
sale; and (d) sales and other excise taxes imposed and paid directly with
respect to the sale.

1.28. "Non-Owning Party" shall have the meaning stated in
Section 7.6.

1.29. "Overrun Expenses" shall mean research or
development-related expenses in excess of the Development Budget.

1.30. "Patents" shall mean patents, patent applications,
continuations, continuations-in-part, divisionals, patents of addition,
reissues, renewals or extensions thereof and all Supplemental Patent
Certificates ("SPCs").

1.31. "PBI Patents" shall mean the Patents specified in Exhibit
C, and any additional Patents owned or controlled by PBI during the term of the
PBI License, the claims of which cover any aspect of activities pursuant to the
Development Program, and/or the manufacture of Product. Notwithstanding the
provisions of this Section 1.31, PBI Patents shall not include PBI Program
Patents.

1.32. "PBI Patents" shall mean PBI's patent(s) specified in
Exhibit C.

1.33. "PBI Profit Target" shall have the meaning stated in
Section 6.2.1.

1.34. "PBI Program Inventions" shall have the meaning stated in
Section 7.1.2.

1.35. "PBI Program Patents" shall mean any Patents claiming PBI
Program Inventions.

1.36. "Product" shall mean Screening Product, First Generation
Monitoring Product, and/or Second Generation Monitoring Product.

-4-
<PAGE>

1.37 "Product Launch Date" as to a specific type of Product
shall mean the date of First Commercial Sale of such Product in the Field.

1.38. "Program Inventions" shall mean all inventions,
discoveries, designs, works of authorship and other know-how which arise under
the Development Program.

1.39. "Royalty Period" as to a specific type of Product shall
mean the period commencing with the Product Launch Date, and ending on the
termination date of the license granted by ActiMed pursuant to Article 4 hereof.

1.40. "Screening Product" shall mean a multi-component sampling
and screening device consisting of a Test Device that provides a qualitative,
yes/no threshold value and a collection sack based on SalivaSac-Registered
Trademark-, which Screening Product, at the time of manufacture, use or sale, is
either (a) covered by one or more claims of the ActiMed Patents or the ActiMed
Program Patents, or produced, processed or otherwise manufactured by any method
and/or process covered by one or more claims of the ActiMed Patents or the
ActiMed Program Patents, or (b) covered by one or more claims of the Joint
Program Patents, or produced, processed or otherwise manufactured by any method
and/or process covered by one or more claims of the Joint Program Patents.

1.41. "Second Generation Monitoring Product" shall mean an
integrated sampling and measurement device consisting of a Test Device and a
collection sack based on SalivaSac-Registered Trademark-, and a measurement
meter, which Second Generation Monitoring Product, at the time of manufacture,
use or sale, is either (a) covered by one or more claims of the ActiMed Patents
or the ActiMed Program Patents, or produced, processed or otherwise manufactured
by any method and/or process covered by one or more claims of the ActiMed
Patents or the ActiMed Program Patents, or (b) covered by one or more claims of
the Joint Program Patents, or produced, processed or otherwise manufactured by
any method and/or process covered by one or more claims of the Joint Program
Patents.

1.42. "Test Device" shall mean a solid phase, high sensitivity,
disposable device containing a dye described or claimed in the ActiMed Patents
(including, without limitation, a proprietary hydrogen peroxide sensitive dye),
e.g., a C3-based glucose detection film.

1.43. "Third Party Confidentiality Agreement" shall have the
meaning stated in Section 6.4.4.

1.44. "Third Party Manufacturer" shall mean a third party
licensed to manufacture Product pursuant to Section 6.4 hereof.

1.45. "Transfer Price" shall have the meaning stated in
Section 6.2.1.

-5-
<PAGE>

2. DEVELOPMENT PROGRAM.

2.1. PURPOSE. The parties agree that the purpose of the
Development Program is the development of Product for commercial use.

2.2. IMPLEMENTATION OF DEVELOPMENT PLAN. Each of the parties
hereto shall use all commercially reasonable efforts to undertake the
Development Program in accordance with the Development Plan set forth in
Exhibit B, as modified from time to time by written mutual agreement of the
parties, and the milestones set forth therein.

2.2.1. Each party shall designate one (1) of its
employees as a member of an Advisory Committee, and an additional employee as an
alternate member, which Advisory Committee shall oversee the implementation of
the Development Plan. Each party can replace its designated Committee member at
its discretion, but no more frequently than one time per calendar year.

2.2.2. Each of the parties shall provide the Advisory
Committee complete monthly written reports and data on the status of their work
under the Development Plan, and such other reports and information as may be
requested from time to time by the Advisory Committee.

2.3. ADVISORY COMMITTEE. The Advisory Committee shall (a)
meet regularly, but no less than once a quarter, (b) monitor the Development
Program, (c) oversee the implementation of the Development Plan, including, but
not limited to, determining the satisfaction of milestones, reviewing the
Development Budget, monitoring payments thereunder, making strategic decisions
on overall scientific direction, and proposing revisions to the Development Plan
to the parties as necessary, and (d) perform such other duties as the parties
may from time to time agree to in writing. By affirmative vote, the Advisory
Committee may make such changes or modifications to the Development Plan as may
be necessary to achieve the milestones set forth therein. If the Advisory
Committee is unable to agree on any aspect of the implementation of the
Development Plan, including funding issues, strategy, and scientific direction,
such implementation decisions shall be made by PBI, provided that PBI shall give
full consideration and weight to ActiMed recommendations. PBI shall promptly
inform ActiMed of its decision in writing, and within thirty (30) days of
receipt of such notice, ActiMed may terminate the Development Program if ActiMed
in good faith believes that the Development Program is not technically feasible
in light of PBI's decision.

2.4. PROJECT MANAGERS. In addition to the Advisory Committee,
each party shall appoint from its employees other than those on the Advisory
Committee one (1) Project Manager, which Project Managers shall be jointly
responsible for coordination and communication between the parties.

-6-
<PAGE>

2.5. RESEARCH FUNDING.

2.5.1. The Development Budget shall be funded by PBI.

2.5.2. The Development Budget shall be mutually agreed
upon on an annual basis by the Advisory Committee, within sixty (60) days of
the date hereof, and every twelve (12) months thereafter. The Development
Budget shall include a fee of no less than [ * ] per year per full-time
equivalent research scientist working on the Development Program and shall
include additional Program expenses.

2.6. PAYMENTS TO ACTIMED. During the term of the Development
Program, ActiMed shall submit monthly invoices for all costs incurred by ActiMed
pursuant to the Development Plan, inclusive of all taxes (the "Research Fee"),
and which invoice shall be accompanied by documentation sufficient to support
the Research Fee set forth in such invoice. Payment of the Research Fee shall
be made by PBI within thirty (30) days of receipt of an invoice, provided that
the Research Fee is consistent with the Development Budget.

2.7. OVERRUN EXPENSES. Overrun Expenses shall be funded by
the incurring party unless prior written approval of the other party to fund all
or part of such Overrun Expense is obtained.

2.8. DURATION AND EXTENSION OF DEVELOPMENT PROGRAM. The
Development Program shall be conducted for that period of time established in
the Development Plan. The parties anticipate that the Development Program shall
commence on or about January 1, 1998, and shall continue for a period of
twenty-four (24) months, which period may be extended upon the written agreement
of the parties hereto.

3. PBI LICENSE.

3.1. GRANT. PBI hereby grants to ActiMed a non-exclusive,
royalty-free right and license to use the PBI Patents and PBI Program Patents,
solely for the purpose of the Development Program ("PBI License").

3.2. DURATION. The PBI License shall continue for the
duration of the Development Program.

4. GRANT OF ACTIMED LICENSE.

4.1. ActiMed hereby grants to PBI an exclusive, world-wide
right and license, with the right to sublicense, to use the ActiMed Patents, and
ActiMed Program Patents, to make, use, have made, sell, offer for sale, market
and distribute Product solely for use in the Field (the "ActiMed License").

7
*Omitted pursuant to a request for confidential treatment.

<PAGE>

4.2. DURATION. The ActiMed License shall continue in each
country in which there exists a licensed Patent until the last to expire of such
Patents, except as provided in Section 4.3 below.

4.3. TERMINATION. ActiMed shall have the right to terminate
the ActiMed License as to any country if PBI fails to meet its obligations
pursuant to Article 5 to pay Royalties owing for Net Sales of Product by PBI or
its sublicensees in that country, after ninety (90) days of written notice of
PBI's failure and ActiMed's intention to terminate pursuant to this Section.

4.4. EXPLOITATION. PBI shall use commercially reasonable
efforts to produce and market Product for use in the Field, at PBI's expense,
including, but not limited to, obtaining regulatory approval therefor. At PBI's
request, ActiMed shall provide such data and other information in ActiMed's
possession about its Test Device as may be required by PBI in obtaining
regulatory approval of Product.

5. ROYALTIES.

5.1. PBI shall pay royalties for Net Sales of Product by PBI
or its sublicensees in the amount of [ * ] of Net Sales, or as otherwise set
forth on Exhibit D ("Royalties"), subject to this Article 5.

5.2. Forty-five (45) days after the close of each quarter, PBI
shall pay the Royalties for Net Sales made the previous quarter by PBI and sixty
(60) days after the close of each quarter, PBI shall pay the Royalties for Net
Sales made the previous quarter by its sublicensees. Accompanying each payment
of Royalties, PBI shall transmit to ActiMed a report detailing Net Sales for the
quarter by country, including dates and amounts of sale, and sufficiently
detailed to allow ActiMed to calculate Royalties owed.

5.3. PBI shall keep complete and accurate records of all
sales and fees subject to the royalty obligations of this Article 5. ActiMed
shall have the right, at ActiMed's expense, through a certified public
accountant or like person, to examine such records during regular business
hours; provided, however, that such examination shall not take place more
often than once a year. If such examination reveals an underpayment of
Royalties greater than [ * ], PBI shall reimburse ActiMed for
the cost of such examination.

5.4. Beginning at the Product Launch Date for each type of
Product, and for the term of the ActiMed License, PBI shall meet minimum annual
sales volumes as set forth in Exhibit D ("Minimum Annual Sales"). Beginning at
the end of Year 2, and at the end of each Year thereafter, if the sum of all the
annual sales made by PBI and its sublicensees in the preceding two (2) Years is
less than the sum of the Minimum Annual Sales for each of the preceding two (2)
Years, ActiMed in its sole discretion may notify PBI that the ActiMed License as
to that type of Product is henceforth non-exclusive.

8
*Omitted pursuant to a request for confidential treatment.

<PAGE>

6. RIGHT OF MANUFACTURE.

6.1. At such time as PBI determines that it will have Product
manufactured, PBI shall promptly notify ActiMed in writing of its determination.
Such writing shall include sufficient information regarding PBI's manufacturing
requirements as necessary to allow ActiMed to evaluate performing the
manufacture. Within thirty (30) days, ActiMed shall confirm in writing to PBI
its intent to negotiate a manufacturing agreement.

6.2. MANUFACTURING AGREEMENT. In the event ActiMed exercises
its rights pursuant to Section 6.1, the parties shall negotiate in good faith to
enter into a mutually acceptable exclusive manufacturing agreement
("Manufacturing Agreement").

6.2.1. TRANSFER PRICE. Such agreement shall include a
transfer price for delivery of the Product by ActiMed to PBI equal to [ * ] of
Fully Absorbed Plant Cost per Product ("Transfer Price"). ActiMed and PBI agree
and acknowledge that PBI's profit target in each of the screening and monitoring
markets is [ * ] gross profit ("PBI Profit Target"). If, at the time the
parties are negotiating to enter into a Manufacturing Agreement, the parties
reasonably agree that the Product will not be competitive in the target market
at the agreed Transfer Price, the parties will negotiate in good faith to reduce
both the Transfer Price and the PBI Profit Target proportionately to gain and
retain market share for the Product. The Manufacturing Agreement shall contain
terms and conditions allowing for later similar adjustment(s) of the Transfer
Price, if the parties agree an adjustment is necessary, and corresponding
adjustment(s) of the PBI Profit Target.

6.2.2. LICENSE. The Manufacturing Agreement shall
include an exclusive, royalty-free right and license to ActiMed to use the PBI
Patents and PBI Program Patents to make Product for sale or use by PBI and its
sublicensees.

6.2.3. TERMINATION. The Manufacturing Agreement shall
provide that in the event ActiMed should decide to cease the manufacture of
Product, ActiMed shall give 180 days' notice of its decision, and, as requested
by PBI, shall cooperate with PBI in securing a Third Party Manufacturer, and
provide information sufficient to manufacture Product.

6.2.4. OTHER TERMS AND CONDITIONS. The Manufacturing
Agreement shall include other terms and conditions as agreed to by the parties.

6.3. TERMINATION OF RIGHT OF MANUFACTURE. In the event that
ActiMed does not elect to enter into negotiations with PBI, or, if by the
expiration of one hundred twenty (120) days from PBI's initial notice, the
parties cannot agree on terms and conditions of a manufacturing agreement:

6.3.1. PBI shall be free to contract with a third party
for manufacture of the Product, pursuant to Section 6.4; and

9
*Omitted pursuant to a request for confidential treatment.

<PAGE>

6.3.2. ActiMed shall, within sixty (60) days of a
request from PBI for the same, provide PBI with a writing containing such
information as ActiMed possesses at the time of the request regarding the
Manufacturing Process which ActiMed reasonably believes is necessary to enable
PBI or a third party to manufacture Product as specified ("Manufacturing Process
Information"), which Information shall be based on the level closest to
full-scale production achieved through the Development Program, for example,
laboratory tests, pilot plant tests or production line tests. ActiMed shall
have no obligation to develop such Information, other than as specified herein
as part of the Development Program, or to update such Information at any
subsequent time, and makes no representation that the Manufacturing Process
Information is sufficient to allow a third party to manufacture Product.

6.4. THIRD PARTY MANUFACTURE.

6.4.1. PBI shall have the right under Article 4 to
grant a limited license to such Third Party Manufacturer to manufacture Product
from Formulation and raw materials, subject to the terms of this Section. The
Third Party Manufacturer's sublicense shall be limited to manufacture of Product
for PBI and its sublicensees. The Third Party Manufacturer shall not have the
right to (1) manufacture Formulation; (2) manufacture Product for anyone other
than PBI and its sublicensees; (3) use Product; (4) sell Product; (5) assign its
sublicense; or (6) grant sublicenses.

6.4.2. PBI shall be limited to one (1) Third Party
Manufacturer at any given time of any Product component which is either (a)
covered by one or more claims of the ActiMed Patents or the ActiMed Program
Patents, or produced, processed or otherwise manufactured by any method and/or
process covered by one or more claims of the ActiMed Patents or the ActiMed
Program Patents, or (b) covered by one or more claims of the Joint Program
Patents, or produced, processed or otherwise manufactured by any method and/or
process covered by one or more claims of the Joint Program Patents.

6.4.3. FORMULATION SUPPLY AGREEMENT. In the event PBI
exercises its right to grant a license to a Third Party Manufacturer pursuant to
this Section 6.4, PBI and Actimed shall negotiate in good faith to enter into a
mutually acceptable Formulation supply agreement ("Formulation Supply
Agreement").

6.4.3.1. The Formulation Supply Agreement shall
include a transfer price for delivery of Formulation by ActiMed to PBI, or, at
PBI's request, to the Third Party Manufacturer, equal to [ * ] of Fully
Absorbed Plant Cost for manufacture of Formulation, except that should the
transfer price exceed [ * ] per Test Device, for amounts in excess of [ * ]
per Test Device, the transfer price shall be calculated based on [ * ] of
Fully Absorbed Plant Cost ("Formulation Transfer Price").

6.4.3.2. The Formulation Supply Agreement shall
include an obligation by Actimed to supply Formulation in sufficient quantities
and in a timely

10
*Omitted pursuant to a request for confidential treatment.

<PAGE>

fashion to meet PBI's manufacturing needs, subject to sufficient advance
notice by PBI of its projected needs, and such other terms and conditions as
agreed to by the parties.

6.4.4. In the event PBI exercises its right to grant a
license to a Third Party Manufacturer pursuant to this Section 6.4, at PBI's
request, ActiMed shall provide up to five (5) person days to consulting to the
Third Party Manufacturer to assist the Third Party Manufacturer in the
implementation of the Manufacturing Process Information, at the cost to PBI of
[ * ] per day.

6.4.5. PBI shall obtain a signed confidentiality
agreement from any such Third Party Manufacturer ("Third Party Confidentiality
Agreement"), the terms and conditions of which shall be subject to prior written
approval by ActiMed, and a copy of such Third Party Confidentiality Agreement
shall be provided to ActiMed. ActiMed shall be an acknowledged third party
beneficiary of such Third Party Confidentiality Agreement. Any breach of the
terms of the Third Party Confidentiality Agreement by a Third Party Manufacturer
shall be deemed a breach of this Agreement by PBI.

6.4.6. PBI shall give the Third Party Manufacturer only
such Confidential Information as is required for the Third Party Manufacturer to
manufacture the Product and only after such Confidential Information has been
identified to ActiMed. In particular, and without limitation of the other
provisions of this Section 6.4, the Third Party Manufacturer shall not be given
any information regarding the Formulation except as necessary to manufacture
Product. The Third Party Manufacturer shall not utilize the Confidential
Information for any other purpose whatsoever.

7. OWNERSHIP OF INTELLECTUAL PROPERTY.

7.1. OWNERSHIP OF PROGRAM INVENTIONS. As to ownership of
Program Inventions:

7.1.1. ActiMed shall have and retain sole and exclusive
title to Program Inventions, if such Program Invention is related to ActiMed
Core Technology ("ActiMed Program Inventions");

7.1.2. PBI shall have and retain sole and exclusive
title to Program Inventions, if such Program Invention is related to PBI Core
Technology, ("PBI Program Inventions");

7.1.3. ActiMed and PBI shall jointly have and retain
title to Program Inventions, if such Program Invention is related to both
ActiMed Core Technology and PBI Core Technology, or if such Program Invention
involve a combination thereof ("Joint Program Inventions"); and

11
*Omitted pursuant to a request for confidential treatment.

<PAGE>

7.1.4. the employer(s) of the inventing scientist(s)
shall have and retain title, if such Program Invention relates to neither
ActiMed Core Technology nor PBI Core Technology. If the inventing scientist(s)
is/are ActiMed employee(s), such Program Inventions shall be deemed ActiMed
Program Inventions; if the inventing scientist(s) is/are PBI employee(s), such
Program Inventions shall be deemed PBI Program Inventions, and if there is at
least one inventing scientist who is an employee of ActiMed and at least one
inventing scientist who is an employee of PBI, such Program Inventions shall be
deemed Joint Program Inventions.

7.2. ASSIGNMENT OF PROGRAM PATENTS. Each party shall assign
Patents of Program Inventions to the owner of such Program Invention as
established in Section 7.1. Patents of Joint Program Inventions shall be
assigned by the inventing party to both parties.

7.3. Each party hereto shall enter into a written agreement
with each person that it intends to involve in conducting the Development Plan,
prior to the commencement of such person's involvement with the Development
Plan, providing for the prompt disclosure to such party of any technology that
such person may invent or discover, solely or jointly, and assigning to such
party all of such person's right, title and interest in such technology.

7.4. Each party, on behalf of itself and its directors,
employees, officers, shareholders, successors and assigns hereby waives any and
all actions and causes of action, claims and demands whatsoever, in law or
equity of any kind it or they may have against any other party hereto, its
officers, directors, employees, shareholders, agents, successors and assigns,
which may arise in any way, except as a result of gross negligence,
recklessness, or willful misconduct, in performance of Patent activities under
this Article 7.

7.5. Each party hereto shall disclose to the other party all
information that it may receive (other than from the other party hereto)
concerning the institution or possible institution of any interference,
opposition, re-examination, reissue, revocation, nullification or any official
proceeding involving Patents of Program Inventions, including without limitation
the complete text thereof.

7.6. The owner of a solely-owned Program Invention ("Invention
Owner") shall, by qualified independent patent counsel and other intellectual
property counsel, prepare, file and prosecute all United States patent,
copyright and other applications for such Program Invention including divisions,
continuations, continuations-in-part, reissues, reexaminations and derivatives,
at the Invention Owner's expense. If the Non-owning Party is the inventing
party, the Non-owning Party shall cooperate as necessary in the prosecution.
The Invention Owner shall provide the other party ("Non-owning Party") with
copies of all such patent, copyright and other applications and filings within
thirty (30) days of the date of such filing, and shall endeavor to deliver to
the Non-owning Party copies of any communications with the applicable patent or
copyright office, including without limitation, all office actions and
responses, each patent or copyright application and filing, and each
registration that issues thereon.

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<PAGE>

7.7. The Development Plan shall include a list of foreign
countries in which an Invention Owner shall seek foreign patent rights at the
Invention Owner's expense ("Agreed Countries"). The list may be amended from
time to time by mutual agreement of the parties. At the Invention Owner's
discretion, an Invention Owner of a Program Invention may seek foreign patent
rights at the Invention Owner's expense in foreign countries other than the
Agreed Countries.

7.8. PBI may request foreign patent rights in ActiMed Patents
and/or ActiMed Program Patents for which U.S. applications are filed during the
term of this Agreement for foreign countries other than the Agreed Countries
("Additional Countries"). PBI must request such rights, and specify the
Additional Countries, within seven (7) months after the filing date of the U.S.
application. PBI shall pay all costs associated with preparation, filing,
prosecution, and maintenance of ActiMed Patents and ActiMed Program Patents in
Additional Countries. All ActiMed Patents and ActiMed Program Patents will be
held in the name of ActiMed and obtained using counsel selected by ActiMed.
Failure to request such foreign patent rights will be considered an election not
to seek foreign patent rights. ActiMed may file patent application(s) at its
own expense in any Additional Country in which PBI has not elected to secure
foreign rights, and any such foreign application(s) and resultant patent(s)
shall not be subject to this Agreement. Nothing in this Section 7 is intended
to, or shall, preclude PBI from selling or using Product in countries in which
no patent protection exists.

7.9. As to Patents of Joint Program Inventions, the parties
shall agree on a case-by-case basis as to which party shall control the
preparation, filing and prosecution of such Joint Program Patents in the United
States, in Agreed Countries and in such foreign countries listed on Exhibit E,
and how the expenses of seeking such patent rights shall be allocated. The
parties agree that patent rights shall be sought for Joint Program Inventions in
the United States and in Agreed Countries, and that it would be highly desirable
to seek patent rights in the Additional Countries listed on Exhibit E. All
Joint Program Patents will be held in the name of both parties. Neither party
shall seek Patent rights in a foreign country other than the Agreed Countries
and the Additional Countries listed on Exhibit E without prior written consent
of the other party.

7.10. PBI may terminate its license to a foreign patent
application(s) or patent(s) in an Additional Country, and its obligation to pay
for those foreign rights, upon ninety (90) days written notice to ActiMed.
ActiMed may, at its sole discretion and expense, continue prosecution and/or
maintenance of any patent(s) or application(s) for which PBI has relinquished
rights.

7.11. DISCONTINUANCE OF OBLIGATION TO PROSECUTE. The Invention
Owner may, at any time, in its sole discretion decide that it desires to
discontinue its responsibility for prosecution or maintenance of a particular
Patent or copyright application or applications, or with respect to one or more
Patent or copyright applications in a particular country. In such event, the
Invention Owner shall promptly notify in writing the Non-owning Party of its
intention

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<PAGE>

to discontinue responsibility for prosecution or maintenance for such Patent or
copyright application or applications, and, in any event, at least sixty (60)
days prior to the effective date of such proposed discontinuance, in order to
permit the Non-owning Party to determine whether it wishes to assume the
responsibility therefor. The Non-owning Party shall have the right and option,
but not the obligation, to assume the responsibility for prosecution and
maintenance of such Patent or copyright or applications therefor which the owner
desires to discontinue. The Non-owning Party shall inform the Invention Owner
in writing of its decision to assume the responsibility for prosecution and
maintenance of such Patent or copyright or applications therefor and the
Invention Owner shall execute and deliver such documents and take such actions
as are reasonably necessary or appropriate to effect such assumption and
transfer of responsibility.

7.12. MAINTENANCE OF PROPRIETARY RIGHTS. From and after the
date of this Agreement, except as otherwise set forth in this Article 7, the
party that has responsibility for particular Intellectual Property, shall take
all actions reasonably necessary to diligently prosecute and maintain any
Patents, copyrights or applications therefor covered by such Intellectual
Property in the respective offices in which such patent or copyright
applications have been filed. Such party shall also pay for all reasonable
costs for the preparation, prosecution, issuance and maintenance of all patent
and copyright applications that may be filed after the execution of this
Agreement that cover the Intellectual Property.

7.13. CONTROL OF JOINT PROGRAM PATENTS. The parties agree that
each will use Joint Program Patents solely for the purpose of the Development
Program and manufacturing, marketing and distribution of Product in the Field,
pursuant to the terms and conditions of this Agreement, as except as otherwise
agreed in a writing signed by both parties. The parties agree to negotiate in
good faith to reach such agreement. The parties specifically acknowledge that
without such signed writing, neither will use Joint Program Patents outside the
Field.

7.14. THIRD PARTY INFRINGEMENT. In the event that ActiMed or
PBI becomes aware of actual or threatened infringement of a Program Invention in
the Field, that party shall promptly notify the other party in writing.

7.14.1. SOLELY OWNED PROGRAM INVENTIONS. As to solely
owned Program Inventions, the Invention Owner shall have the first right but not
the obligation to bring, at its own expense, an infringement action against any
third party and to use the Non-owning Party's name in connection therewith. If
the Invention Owner elects not to commence a particular infringement action
against a third party, then the Invention Owner shall

(a) negotiate with such third party in lieu of such
action, for a period not to exceed six (6) months, except with the written
consent of the Non-owning Party, or

(b) within forty-five (45) days after becoming
aware of actual or threatened infringement, give written notice to the
Non-owning Party and permit the

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<PAGE>

Non-owning Party to institute and prosecute such infringement action at its own
expense. The party conducting such action shall have full control over its
conduct, including settlement thereof provided such settlement shall not be made
without the prior written consent of the other party if it would adversely
affect the rights of the other party. In any event, ActiMed and PBI shall
assist one another and cooperate in any such litigation at each other's request
without expense to the requesting party.

7.14.2. JOINT PROGRAM INVENTIONS. As to Joint Program
Inventions, within fifteen (15) days of such notice, the parties shall agree
upon (1) whether to negotiate with such third party or to bring an infringement
action; (2) counsel for such action; and (3) allocation of expenses therefor.
If the parties fail to agree within fifteen (15) days, either party may
unilaterally, at its own expense, take such action it deems reasonably necessary
to protect the Joint Program Invention, and may seek reimbursement of a portion
of such expenses through arbitration pursuant to Section 13.2 hereof.

8. REPRESENTATIONS AND WARRANTIES.

8.1. BY ACTIMED. ActiMed represents and warrants to PBI as
follows:

8.1.1. ActiMed has all necessary corporate power to
authorize the execution and consummation of this Agreement, and its execution
and consummation will not contravene, result in the breach of, or constitute a
default under any order, judgment, decree or award of any court or other
governmental body, or any agreement or instrument by which it is bound.

8.1.2. ActiMed has the full right, power and authority
to grant the licenses in the Intellectual Property that it has granted, or will
grant, as the case may be, under this Agreement; it has not assigned,
transferred or otherwise encumbered such right, power and authority; to the best
of its actual knowledge, no other person or entity has any claim of ownership
whatsoever with respect to its intellectual property; to the best of its actual
knowledge, the exercise of the rights granted by it in its license grants in
this Agreement will not infringe any rights (including without limitation patent
rights) owned or possessed by any third party; and to the best of its actual
knowledge, there are no pending claims or litigation relating to its
intellectual property.

8.2. BY PBI.

8.2.1. PBI has all necessary corporate power to
authorize the execution and consummation of this Agreement, and its execution
and consummation will not contravene, result in the breach of, or constitute a
default under any order, judgment, decree or award of any court or other
governmental body, or any agreement or instrument by which it is bound.

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<PAGE>

8.2.2. PBI has the full right, power and authority to
grant the licenses in the Intellectual Property that it has granted, or will
grant, as the case may be, under this Agreement; it has not assigned,
transferred or otherwise encumbered such right, power and authority; to the best
of its actual knowledge, no other person or entity has any claim of ownership
whatsoever with respect to its intellectual property; to the best of its actual
knowledge, the exercise of the rights granted by it in its license grants in
this Agreement will not infringe any rights (including without limitation patent
rights) owned or possessed by any third party; and to the best of its actual
knowledge, there are no pending claims or litigation relating to its
intellectual property.

9. INDEMNIFICATION.

9.1. INDEMNIFICATION BY ACTIMED. ActiMed shall indemnify and
hold harmless PBI, its affiliates, officers, directors, employees, agents and
representatives and any person claiming by or through any of them from and
against any and all losses arising out of or resulting from: (i) any breach of
any of the representations or warranties made by ActiMed in this Agreement; and
(ii) any failure by ActiMed to perform in all material respects any of its
covenants or agreements contained in this Agreement, except to the extent such
losses arise from the gross negligence or willful misconduct of PBI.

9.2. INDEMNIFICATION BY PBI. PBI shall indemnify and hold
harmless ActiMed, its affiliates, their respective officers, directors,
employees, agents and representatives and any person claiming by or through any
of them from and against any and all losses arising out of or resulting from:
(i) any breach of any of the representations or warranties made by PBI in this
Agreement; (ii) any failure by PBI to perform in all material respects any of
its covenants or agreements contained in this Agreement, except to the extent
such losses arise from the gross negligence or willful misconduct of ActiMed;
and (iii) any claim of bodily injury or property damage relating to the
development, manufacture, use, distribution or sale of the Product or due to the
negligence or willful misconduct of PBI or its employees or agents.

9.3. PROCEDURE.

9.3.1. In the event that an indemnified party
("Indemnitee") shall suffer a loss which is not the subject of a claim, demand,
action, suit, proceeding, arbitration, investigation or inquiry (each and all of
the foregoing items being herein referred to as "Litigation"), the Indemnitee
shall give notice thereof to the party from whom such indemnification is being
sought (the "Indemnitor").

9.3.2. Promptly after receipt by an Indemnitee of
written notice of the assertion or the commencement of any Litigation with
respect to any matter referred to in this Article 9, the Indemnitee shall give
written notice thereof to the Indemnitor and shall thereafter keep the
Indemnitor reasonably informed with respect thereto, provided that failure of
the Indemnitee to give the Indemnitor prompt notice as provided herein shall not
relieve the Indemnitor of any of its obligations hereunder. In case any such
Litigation is brought against any

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<PAGE>

Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by
written notice to the Indemnitee of its intention to do so, within thirty (30)
calendar days after receipt of notice from the Indemnitee, with counsel
reasonably satisfactory to the Indemnitee at the Indemnitor's own expense. If
the Indemnitor shall assume the defense of such Litigation, it shall not settle
such Litigation unless such settlement includes as an unconditional term thereof
the giving by the claimant or the plaintiff of a release of the Indemnitee,
satisfactory to the Indemnitee, from all liability with respect to such
Litigation. Notwithstanding the assumption by the Indemnitor of the defense of
any Litigation as provided in this subsection, the Indemnitee shall be permitted
to join in the defense of such Litigation and to employ counsel at its own
expense.

9.3.3. If the Indemnitor shall fail to notify the
Indemnitee of its desire to assume the defense of any such Litigation within
the prescribed period of time, or shall notify the Indemnitee that it will
not assume the defense of any such Litigation, then the Indemnitee may assume
the defense of any such Litigation, in which event it may do so in such
manner as it may deem appropriate, and the Indemnitor shall be bound by any
determinations made in such Litigation or any settlement thereof effected by
the Indemnitee. The Indemnitor shall be permitted to join in the defense of
such Litigation and to employ counsel at its own expense.

10. LIMITATION OF LIABILITY. Except as set forth in Article 9,
the parties' liability to each other for any losses or damages, direct or
indirect, in contract, tort or otherwise, arising out of the subject matter
of this Agreement shall be limited to actual and direct damages. In no event
shall either party be liable to the other for special, punitive, incidental
or consequential damages.

11. TERM, TERMINATION AND BREACH.

11.1. TERM. The term of this Agreement shall begin on the
date hereof, and shall continue until the ActiMed License terminates unless
terminated earlier under this Article 11. Termination of the Development
Program shall not terminate this Agreement, which shall continue in full
force and effect.

11.2. MATERIAL BREACH. Either party may terminate this
Agreement upon a material breach of any of the terms of this Agreement by the
other party if the terminating party has given the breaching party notice of
the breach and the breaching party has failed to remedy such breach within
forty-five (45) days of notice of such breach. For purposes of this
Agreement, failure of either party to materially comply with the Development
Plan, including a failure to achieve milestones, shall constitute a breach.

11.3. RIGHTS UPON TERMINATION.

11.3.1. In the event this Agreement is terminated by
either party, then each of the parties shall promptly return the other's
Confidential Information, as defined in Article 12.

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11.3.2. Upon termination, PBI shall cease manufacture
and sale of the Product, except that PBI shall be permitted to sell existing
inventory of the Product for a commercially reasonable time.

11.4. SURVIVAL. In the event that this Agreement is terminated
by either party for any reason, the following sections shall remain in force and
in effect: Article 5, Article 7, Article 12, Section 13.2, Section 13.13.

12. CONFIDENTIALITY.

12.1. CONFIDENTIAL INFORMATION. Except as provided below, each
party to this Agreement shall keep secret and confidential the information,
data, results and materials of the others disclosed to it prior to and during
the term of this Agreement (collectively, the "Confidential Information"). In
addition, the Confidential Information shall include the terms and conditions of
this Agreement. For purposes of this Article 12, a party or parties receiving
Confidential Information shall be termed the "Recipient" and the party providing
the Confidential Information to the Recipient shall be termed the "Discloser".

12.2. NON-DISCLOSURE. Recipient shall safeguard and hold
confidential the Confidential Information with the same degree of care (but not
less than a reasonable standard of care) it customarily employs with its own
proprietary information, and shall not cause or permit the disclosure to, or use
by, any person of such information, except as expressly permitted in writing by
the Discloser or as specifically permitted in this Article 12.

12.3. PERMITTED DISCLOSURE. Recipient shall limit disclosure
of the Discloser's Confidential Information to those of its officers, employees,
agents and representatives who shall have a need to know such information.
Recipient may disclose Discloser's Confidential Information to the extent
required by law, after providing Discloser with thirty (30) days' advance
written notice of Recipient's intent to disclose, specifying the Confidential
Information which Recipient intends to disclose. On a case by case basis,
Recipient may seek written permission from Discloser to disclose specific
Confidential Information to actual or potential sublicensees and distributors,
subject to appropriate confidentiality obligations, which permission shall not
be unreasonably withheld.

12.4. NON-CONFIDENTIAL INFORMATION. The obligations of this
Article 12 shall not apply to information that: (a) is publicly known prior to
or after disclosure hereunder other than through acts or omissions attributable
to the Recipient or its employees or representatives; (b) as demonstrated by
prior written records, is already known to Recipient at the time of disclosure
hereunder; (c) is disclosed in good faith to Recipient (without obligation as to
confidentiality) by a third party having a lawful right to do so; (d) is
independently developed by Recipient which independent development can be
documented by Recipient; or (e) is required to be disclosed pursuant to a court
order.

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<PAGE>

12.5. ADDITIONAL MEASURES. Recipient shall take such actions
as Discloser may reasonably request from time to time to safeguard the
confidentiality of any information subject to the terms of this Article 12.

13. MISCELLANEOUS PROVISIONS.

13.1. REMEDIES. Each of the parties hereto acknowledges and
agrees that in the event of a breach or threatened breach of Article 12 of this
Agreement, the other party has no adequate remedy at law and accordingly shall
be entitled to injunctive and other equitable remedies in addition to any remedy
it might have at law or in equity.

13.2. ARBITRATION. Any controversy, dispute or claim among the
parties arising out of or relating to this Agreement which cannot be amicably
settled by the parties, shall be decided by arbitration in accordance with the
rules of the American Arbitration Association for commercial arbitration in
effect at the time the dispute arises, unless the parties hereto mutually agree
otherwise. Any demand for arbitration must be made in writing to the other
party, within a reasonable time after the controversy, dispute or claim arises.
There will be a panel of three (3) arbitrators, one (1) selected by ActiMed, one
(1) selected by PBI, and one (1) selected by mutual agreement of the arbitrators
selected by ActiMed and PBI, respectively. If the arbitrators selected by
ActiMed and PBI, respectively, cannot agree on a third arbitrator within thirty
(30) days, then the American Arbitrators Association shall select the third
arbitrator. Any arbitration involving Patents, Products, Program Inventions, or
improvements thereof shall be heard by arbitrators who are experts in such
areas. The seat of the arbitration shall be in New Jersey if PBI demands
arbitration, and in California if ActiMed demands arbitration. There shall be a
stenographic record of the proceedings. The decision of the arbitrators shall
be made by majority vote and shall be final and binding upon both parties.
Neither party shall have the right independently to seek recourse to a court of
law or other authorities in lieu of arbitration. Reasonable expenses of the
arbitration shall be borne equally by the parties. Each party shall bear the
expenses of its counsel and other experts.

13.3. PUBLIC COMMUNICATIONS. Neither party shall make any
press release or other similar public disclosure or announcement concerning this
Agreement, without the prior written consent of the non-disclosing party, except
as otherwise required by law. Consent will be deemed granted if no response is
received from the non-disclosing party within five (5) business days of its
confirmed written request for approval from the disclosing party.
Notwithstanding the foregoing, in the event such disclosure or public
announcement is required to be made on a more immediate basis in order to comply
with applicable state or federal securities laws, then approval will be deemed
granted if no response is received from the on-disclosing party within the time
frames required by law; provided, however, that the disclosing party provides
the non-disclosing party with notice of the legally required time frame for
approval of the disclosure at the time of providing a copy of the proposed
disclosure or announcement.

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13.4. APPROVAL OF PUBLICATIONS. All proposed publications,
abstracts or oral presentations disclosing research or results obtained in the
performance of the Development Program must be agreed to by both parties and
must be submitted for review at least sixty (60) days in advance of the expected
publication or presentation date. In the event either party is of the opinion
that such publication, abstract or presentation would constitute the disclosure
of subject matter proprietary to either company or the premature publication of
patentable subject matter, either party shall promptly notify the other in
writing, who should then delay publication or presentation of such article or
abstract for a period of sixty (60) days until either (a) a United States patent
application shall have been filed, or (b) the relevant teaching shall have been
sufficiently deleted from the proposed publication, abstract or presentation in
order to preclude public disclosure of the subject matter.

13.5. CONSENTS NOT UNREASONABLY WITHHELD OR DELAYED. Whenever
provision is made in this Agreement for either party to secure the consent or
approval of the other, such consent or approval shall not be unreasonably
withheld or delayed.

13.6. ENTIRE AGREEMENT; WAIVERS. This Agreement constitutes
the entire agreement among the parties hereto pertaining to the subject matter
hereof and supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties with
respect to such subject matter. No waiver of any provision of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar).

13.7. AMENDMENT OR MODIFICATION. The parties hereto may not
amend or modify this Agreement except in such manner as may be agreed upon by a
written instrument executed by both parties.

13.8. INDEPENDENT CONTRACTORS. The parties agree that with
respect to the business arrangement contemplated herein they shall both be
acting as independent contractors and nothing herein contained or contained in
this Agreement shall constitute the parties as entering upon a joint venture nor
shall constitute either party as the agent for the other for any purposes
whatsoever.

13.9. SEVERABILITY. In the event that any provision hereof
would, under applicable law, be invalid or unenforceable in any respect, such
provision shall (to the extent permitted under applicable law) be construed by
modifying or limiting it so as to be valid and enforceable to the maximum extent
compatible with, and possible under, applicable law. The provisions hereof are
severable, and in the event any provision hereof should be held invalid or
unenforceable in any respect, it shall not invalidate, render unenforceable or
otherwise affect any other provision hereof.

13.10. ASSIGNMENT; BINDING EFFECT. Neither party shall assign,
transfer or otherwise dispose of this Agreement in whole or in part to any
individual, firm or corporation without the prior written consent of the other
party, which consent shall not be unreasonably

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withheld. Notwithstanding the foregoing, this Agreement shall be assignable
by either party without the consent of the other to an Affiliate or in the
event of a merger, consolidation or sale of substantially all of the assets
or stock of the assigning party. All of the terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective transferees, successors and assigns (each of
which such transferees, successors and assigns shall be deemed to be a party
hereto for all purposes hereof).

13.11. NOTICES. Any notices or other communications required or
permitted hereunder shall be sufficiently given if in writing and delivered
personally or sent by telecopier, Federal Express (or similar courier service),
or registered or certified mail, postage prepaid, addressed as follows:

If to ActiMed, to it at:
5 Terri Lane
----------------------------------
Burlington, NJ 08016
----------------------------------
----------------------------------

If to PBI, to it at:
1370 Reynolds Ave
----------------------------------
Suite 119
----------------------------------
Irvine, CA 92614
----------------------------------

Unless otherwise specified herein, such notices or other
communications shall be deemed received (a) on the date delivered, if delivered
personally, (b) three business days after being sent by Federal Express or a
similar overnight courier service, if sent by Federal Express or such similar
courier service, (c) one business day after being delivered, if delivered by
telecopier and (d) five business days after being sent, if sent by registered or
certified mail. Each of the parties hereto shall be entitled to specify a
different address by giving notice as aforesaid to the other party hereto.

13.12. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one and the same instrument.

13.13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts executed in and to be performed in that state, without giving effect
to any choice or conflict of law provision or rule that would cause the
application of the laws of any other jurisdiction. The parties agree that New
Jersey courts (state and federal) will have exclusive jurisdiction over any
disputes arising out of this Agreement.

-21-
<PAGE>

13.14. FORCE MAJEURE.

13.14.1. MEANING. "Force Majeure" shall mean any
cause which is beyond the reasonable control of the party invoking Force Majeure
and which, by the exercise of reasonable diligence, such party is unable to
prevent, including but not limited to, and whether or not of the same class or
kind as, the following: any law, decree, regulation, order, or request of any
governmental authority (national, state, or regional), nationalization,
expropriation, confiscation, requisition, riot, war, hostilities, public
disturbance, act of the public enemy, act of terrorism, strike, lockout or other
labor dispute, fire, flood, earthquake, storm, tidal wave, explosion, Act of
God, accident of navigation, breakdown or failure of transportation or
transportation facilities.

13.14.2. LIMITATIONS. The provisions of this
Section 13.14 shall not be available to a party if such party fails to use
reasonable diligence to remedy the applicable situation described in
Section 13.14 in an adequate manner and with all reasonable dispatch or if such
applicable situation is caused by such party, except that this Section 13.14
shall not require the settlement of strikes or labor controversies by acceding
to the demand of the opposing party or parties.

IN WITNESS WHEREOF, the parties hereto have caused this Research and
Development Agreement to be executed effective as of the date first above
appearing.

ACTIMED LABORATORIES, INC.

By: /s/ James A. Wylie, Jr.
---------------------------------
Name: James A. Wylie, Jr.
Title: President

Date: 12/11/97
-------------------------------

PACIFIC BIOMETRICS, INC.

By: Paul G. Kanan
---------------------------------
Name: Paul G. Kanan
Title: President and CEO

Date: 12/8/97
-------------------------------

-22-

<PAGE>

EXHIBIT 10.27

*Portions of this document have been omitted pursuant to a request for
confidential information.

AMENDED AND RESTATED LICENSE AGREEMENT

This Amended and Restated License Agreement is entered into and made
effective as of the 30th day of December, 1997 by and between Sudormed, a
California corporation, having its principal place of business at 12341 Newport
Avenue, D-200, Santa Ana, California 92705 (hereinafter "LICENSOR"), and Pacific
Biometrics, Inc., a Delaware corporation having its principal place of business
at 1370 Reynolds Avenue, Suite 119, Irvine, California 92614 (hereinafter
"LICENSEE") and, for the purposes of Section 7a only, William R. Miller, an
individual currently having a place of residence at 10841 Hideaway Drive, Santa
Ana, California 92705 ("MILLER"), and Donald W. Schoendorfer, an individual
currently having a place of residence at 1842 White Stone Terrace, Santa Ana,
California 92605 ("SCHOENDORFER").

WHEREAS, LICENSOR (as assignee of Sudor Partners, a partnership organized
under the laws of the State of California) and BioQuant, Inc., (a wholly-owned
subsidiary of LICENSEE and successor-in-interest to CEO Advisors, Inc.) are
parties to that certain License Agreement dated December 31, 1992, as amended
pursuant to Amendment No. One to License Agreement dated August 6, 1993,
assigned to BioQuant, Inc., a Michigan corporation on October 14, 1993, and
further by Letter Agreement dated September 14, 1994 (the "Osteo License"); and

WHEREAS, LICENSOR (as assignee of Sudor Partners, a partnership organized
under the laws of the State of California) and BioQuant, Inc. (a wholly-owned
subsidiary of LICENSEE and successor-in-interest to CEO Advisors, Inc.) are
parties to a License Agreement dated October 1, 1993, amended by Letter
Agreements dated March 14, 1994, July 27, 1994 and September 14, 1994, and
assigned to BioQuant, Inc., a Michigan corporation, on October 14, 1993 (the
"Lead License"); and

<PAGE>

WHEREAS, LICENSOR and LICENSEE desire to amend and restate the Osteo
License and the Lead License to provide that LICENSEE be the licensee
thereunder, and increase the scope thereof and otherwise modify the terms
thereof, all as set forth herein; and

WHEREAS, LICENSOR is the exclusive owner with right to grant licenses of
certain proprietary information relating to the use of skin patches; and

WHEREAS, LICENSEE desires a certain exclusive license under such
Proprietary Information, which license LICENSOR is willing to grant.

NOW, THEREFORE, in consideration of the mutual covenants and undertakings
hereinafter set forth, the parties hereto agree as follows:

1. DEFINITIONS.

As used herein, the following terms shall have the following meanings:

a. The term "Field Of Use" shall mean the use of skin patches for
all applications covered by the Licensed Technology, other than laboratory
testing for the presence of (i) cocaine, marijuana, opiates, phencyclidines,
amphetamines and alcohol or metabolites thereof, and (ii) substances susceptible
to abuse listed at any time during the term of this Agreement in United States
of America Drug Enforcement Administration Schedules I, II, III, IV and V, or
metabolites thereof, including without limitation barbiturates, benzodiazepines,
lysergic acid diethylamide and methadone, where detection levels are consistent
with abuse of such substances, excluding laboratory testing for the presence of
such substances in connection with therapeutic applications.

b. The term "Affiliate" shall mean, with respect to any Person, any
other Person which controls, is controlled by, or is under common control with
the first Person. For purposes of this

<PAGE>

definition, "control" means: (a) in the case of corporate entities, direct or
indirect ownership of more than fifty percent (50%) of the stock or shares
entitled to vote for the election of directors; and (b) in the case of
non-corporate entities, direct or indirect ownership of more than fifty percent
(50%) of the equity interest with the power to direct the management and
policies of such non-corporate entities. Notwithstanding the foregoing, MILLER
and SCHOENDORFER shall be deemed Affiliates of LICENSOR.

c. The term "Person" shall mean any person, corporation,
organization, body or other legal entity.

d. The term "Licensed Know-How" shall mean any and all confidential
information, trade secrets, research and results thereof, technology, know-how,
discoveries, records of inventions, developments, improvements, techniques,
data, methods, processes, instructions, formulae, recipes, drawings and
specifications relating to the research, development, registration, use,
marketing or sale of skin patches, owned or controlled by LICENSOR or its
Affiliates as of the date hereof and thereafter acquired.

e. The term "Licensed Patents" shall mean United States Patent
Numbers 4,957,108, 5,076,273, 5,203,327, 5,441,048, 5,438,984, 5,445,147,
5,465,713, 5,589,346 and United States Patent Application Numbers 08/483,504 and
08/454,850 and any corresponding foreign patent applications, and any
continuations, continuations-in-part, divisions, reissues or extensions of the
foregoing, and any patents issuing form the foregoing applications, and any
patent now or hereinafter owned or controlled by LICENSOR or its Affiliates
necessary for the development, manufacturing, use and/or commercialization of
skin patches.

<PAGE>

f. The term "Licensed Technology" shall mean the Licensed Patents
and the Licensed Know-How.

g. The term "Licensed Products" shall mean any skin patch which
embodies or otherwise uses the Licensed Technology.

h. The term "Osteoporosis" shall have its ordinary medical meaning,
namely the abnormal decrease in density, but not volume, of bone.

i. The term "Improvements" shall mean all modifications of a
Licensed Product or method of using a Licensed Product.

j. The term "Supply Agreement" shall mean that Supply Agreement
dated the date hereof between LICENSEE and LICENSOR.

2. LICENSE GRANT, EXCLUSIVITY.

a. Subject to the payment of the fees and the other conditions
hereinafter set forth, LICENSOR hereby grants to LICENSEE an exclusive,
worldwide license under the Licensed Technology to use and sell Licensed
Products but solely for application within the Field Of Use. Such exclusivity
shall be subject to LICENSEE's obligations under Section 3.2 of the Supply
Agreement. LICENSEE shall have no right to manufacture Licensed Products except
as provided for in paragraph 4.1 of the Supply Agreement.

b. LICENSEE shall purchase the Licensed Products only from LICENSOR,
or an assignee of LICENSOR of its rights under this Section 2.b. The terms and
conditions of purchase are set forth in the Supply Agreement, of even date
herewith.

<PAGE>

c. LICENSEE may grant sublicenses to others, including end-users, to
use or sell Licensed Products purchased by LICENSEE from LICENSOR but only if
such sublicenses are expressly limited in writing to applications within the
Field Of Use, it being the intention that all purchasers, including the
end-users, of Licensed Products are to be limited in writing to use of the
Licensed Products within the Field Of Use. No other sublicenses may be granted
by LICENSEE. LICENSEE shall notify the LICENSOR of all sublicenses granted by
LICENSEE within 10 days of execution of such a sublicense.

d. Termination under any of the provisions of Section 8 of the
license granted to LICENSEE in this Agreement shall terminate all sublicenses
which may have been granted by LICENSEE provided that all sublicensees may
thereafter use within the Field of Use any Licensed Products then in possession
of sublicensee and, provided further, that LICENSOR may elect to continue any
license granted under a sublicense of LICENSEE by advising any sublicensee
within sixty (60) days of such termination of its desire to continue the
sublicense and provided the sublicensee agrees in writing to assume in respect
to LICENSOR all the obligations (including obligations for payment) contained in
its sublicensing agreement with LICENSEE. Any sublicense granted by LICENSEE
shall contain provisions corresponding to those of this paragraph respecting
termination and the conditions of continuance of sublicenses.

e. The granting by LICENSEE of sublicenses under the Licensed
Products shall be in the discretion of LICENSEE, and LICENSEE shall have the
sole power to determine whether or not to grant such sublicenses, the identity
of the sublicensees, and the conditions of such sublicenses other than those
dictated by this License Agreement.

<PAGE>

f. Notwithstanding Sections 2c, 2d and 2e above, if prior to the
grant of a sublicense, LICENSEE provides such sublicense to LICENSOR and
LICENSOR specifically agrees in writing (which shall not be unreasonably
withheld) that such sublicense, or selected portions thereof, may survive a
termination of the license granted to LICENSEE in this Agreement, then such
sublicenses, and only such sublicenses, shall be automatically assigned by
LICENSEE to LICENSOR so that LICENSOR shall be the direct licensor to each such
sublicensee, upon termination of the license as provided in Section 8..

3. LICENSE FEES, CONSIDERATION, PAYMENTS

a. LICENSEE shall pay LICENSOR an aggregate of [
* ] in license Fees as
Follows
[

]

None of the foregoing license fees shall be refundable by
LICENSOR or creditable against any other obligations of LICENSEE hereunder.

*Omitted pursuant to a request for confidential treatment.

<PAGE>

b. LICENSEE shall pay to LICENSOR an additional license fee of
[ * ] for each Licensed Product purchased by LICENSEE or its
Affiliates and sublicensees from LICENSOR (or its assignees). Such
additional license fee shall be due and payable concurrently with the
purchase price for such Licensed Product. No such license fee shall be
payable with respect to Licensed Product purchased with a bona fide intent to
use in a clinical or marketing study for which LICENSEE or its Affiliates or
sublicensees do not charge customers or end users for the Licensed Product.
If LICENSEE or its Affiliates or sublicensees do subsequently charge for such
units of Licensed Products, such additional license fee shall be immediately
due and payable.

c. An additional license of [ * ]
shall be due at the end of each Payment Period (as defined in Section 3g below)
with respect to Licensed Products labeled for use for the diagnosis of
Osteoporosis. If the amount paid or due under subparagraph (b) with respect to
such Licensed Products for Osteoporosis in such Payment Period is less than [
* ], LICENSEE shall pay the difference between the amount paid or
due under the terms of subparagraph (b) and [ * ] for that Payment
Period.

d. LICENSEE has previously paid LICENSOR [
* ]. Such amount may be credited by LICENSEE against
payments to LICENSOR pursuant to subparagraph (b) or subparagraph (c) above.

e. In the event LICENSEE or its Affiliates (or sublicensees) sell or
otherwise transfer for value any Licensed Product which was not purchased from
LICENSOR, LICENSEE shall pay to LICENSOR an additional license fee of [ *
] for each such Licensed Product, as adjusted in accordance with the
following provisions of this Section 3e. In the event that such Licensed
Product is purchased from a third party, and LICENSEE's purchase price per unit
payable to

* Omitted pursuant to a request for confidential treatment.

<PAGE>

such third party exceeds the price per unit which LICENSEE would pay to
LICENSOR under the Supply Agreement, then such excess price per unit shall be
deducted from the [ * ] payable by LICENSEE to LICENSOR, but
in no event shall the amount so deducted exceed [ * ].
For purposes of the foregoing, LICENSEE's purchase price shall not include any
amounts payable to such third party for matters other than manufacturing and
supply of the Licensed Product, even if such other amounts are payable on a per
unit basis. In the event that such Licensed Product is manufactured internally
by LICENSEE, and LICENSEE'S direct cost thereof exceeds the price per unit which
LICENSEE would pay to LICENSOR under the Supply Agreement, then such excess cost
per unit shall be deducted from the [ * ] payable by
LICENSEE to LICENSOR, but in no event shall the amount so deducted exceed [
* ]. For purposes hereof, LICENSEE's direct cost shall
mean only the sum of the costs of direct labor, direct material and normal
production overhead, all determined in accordance with generally accepted
accounting principles.

f. In addition to the payments set forth above, LICENSEE shall pay
to LICENSOR a processing fee for each Licensed Product which is analyzed after
use for diagnostic or evaluative purposes (whether by LICENSEE, an Affiliate or
sublicensee of LICENSEE, a distributor of LICENSEE, a customer of LICENSEE, an
end-user or any third party using any Licensed Product, whether or not supplied
pursuant to the Supply Agreement). Such processing fee shall be:

[

*
]

*Omitted pursuant to a request for confidential treatment.

<PAGE>

[
*

]

Such processing fee shall also apply if no separate analysis procedure
is required, as in the case, for example, of a Licensed Product which changes
appearance to indicate results (a "Self-Analyzing Product"), provided however,
that in the event LICENSEE commences marketing Self-Analyzing Product, LICENSEE
and LICENSOR shall mutually evaluate appropriate modifications to the processing
fees for such Self-Analyzing Product.

No such processing fee shall be payable with respect to analyses
conducted (i) on the first [ * ] units of Licensed Product purchased by
LICENSEE under the Supply Agreement, and (ii) for no charge to a customer or end
user in connection with clinical or marketing studies conducted by LICENSEE, an
Affiliate or sublicensee of LICENSEE.

g. All license and other payments under this License Agreement shall
be made payable to LICENSOR. The amounts set forth in Section 3e and Section 3f
above shall be first calculated for the three (3) months ending December 31,
1997, and again at the end of each and every three-month period thereafter (each
such three-month period shall be referred to herein as a "Payment Period"). The
minimum amount provided for in Section 3c above shall be paid on the last day of
each Payment Period and any other amount for such Payment Period shall be paid
within sixty (60) days after such Payment Period.

h. Except as set forth in Section 3i below, failure to make any
payment within fifteen (15) days after the date due under this License Agreement
shall result in the termination of this

*Omitted pursuant to a request for confidential treatment.

<PAGE>

License Agreement upon written notice by LICENSOR to LICENSEE if such amount is
not paid within five (5) days of such notice. Notwithstanding the foregoing, if
LICENSEE has failed to pay (i) processing fees under Section 3f above, as a
result of a good-faith dispute with one of its sublicensees, distributors,
customers, end-users or other third-parties using any Licensed Product, or (ii)
the license fees under Section 3b and 3e above, and/or the processing fees under
Section 3f above, as a result of a good-faith dispute with LICENSOR over such
fees (provided all other payments have been made, including the undisputed
portion of such fees), then LICENSEE shall have an additional ninety (90) days
to pay such fees to LICENSOR, provided LICENSEE is diligently working in good
faith to resolve such dispute. LICENSOR and LICENSEE may agree to revive this
License Agreement only in writing.

i. In addition to the other payments set forth in this Section 3
above, as a condition of this License Agreement, LICENSEE shall pay to LICENSOR,
or to Marine National Bank for the benefit of LICENSOR, not later than the first
day of each month, commencing on January 1, 1998, an amount equal to the
interest due under that certain Promissory Note dated October 1, 1997, of
LICENSOR in favor Marine National Bank, and on December 31, 1998, shall pay to
LICENSOR an amount equal to the principal then due on such Note. Failure to
make any payment within five (5) days of the date due under this Section 3i
shall result in the termination of this License Agreement without further action
by either party.

4. REPORTS

LICENSEE shall submit a written report to LICENSOR, together with each
payment made pursuant to Section 3, setting forth the following as to LICENSEE's
and its Affiliates' operations and the operations of each of LICENSEE's and
Affiliates' sublicensees, if any:

<PAGE>

a. The total quantity of Licensed Products purchased by LICENSEE,
Affiliates and/or sublicensees from LICENSOR (or its assignees) in the preceding
Payment Period, and

b. The total quantity of Licensed Products sold or otherwise
transferred for value which were purchased from a source other than LICENSOR (or
its assignees), and

c. The total number of Licensed Products for which LICENSEE or its
Affiliates, sublicensees or customers or any third party using Licensed Product
supplied by any of such entities provided after-use diagnostic or evaluative
analysis plus the total number of Self-Analyzing Products sold or otherwise
supplied by LICENSEE or its Affiliates or sublicensees, and

d. The license fees, processing fees and other amounts due.

All in such detail as reasonably requested by LICENSOR to enable it to
verify the accuracy of such report.

5. BOOKS AND RECORDS

a. LICENSEE agrees to keep full and accurate books and records
regarding the purchase, sale, use, sublicensing and analysis of Licensed
Products, and to retain such books and records for at least five (5) years, in
sufficient detail to enable amounts payable hereunder to be determined.

b. LICENSEE agrees that such books and records shall be maintained
in accordance with generally accepted accounting principles and that LICENSEE
shall make such books and records available for inspection by LICENSOR, or its
representatives, upon a reasonable advance request in writing, but not more
often than one time within any twelve-month period. If LICENSEE

<PAGE>

underpays any amount due hereunder, such unpaid amount shall bear interest at
Bank of America's prime rate (but not in excess of that permitted by law)
from the due date thereof.

c. LICENSEE shall include in all sublicense agreements provisions
substantially identical to the foregoing to allow LICENSOR to verify compliance
with this Agreement and the accuracy of all payments due hereunder.

6. PROSECUTION, ENFORCEMENT OF LICENSED PATENTS

a. LICENSOR shall file, prosecute and maintain, and pay the costs
thereof, of all Licensed Patents existing as of the date hereof and relating to
any Improvements licensed hereunder made solely by LICENSOR or its Affiliates,
in the United States and in such foreign jurisdictions as it reasonably
determines. To the extent any such Improvements under the Licensed Technology
are made jointly by LICENSOR or its Affiliates and LICENSEE, LICENSOR and
LICENSEE shall jointly file, prosecute and maintain, and pay equally the costs
thereof, of such Licensed Patents in the United States and in such foreign
jurisdiction as they mutually reasonably agree.

b. In the event that LICENSOR or LICENSEE determines or otherwise
becomes aware that a third party is infringing a Licensed Patent, it will
promptly notify the other party. LICENSOR may (but shall not be obligated in any
event to) commence legal action leading toward an infringement suit against such
third party and have the right to select counsel of its choice and to control
such action as it deems appropriate. For purposes hereof, "legal action" does
not mean the actual filing of a lawsuit, but rather the taking of affirmative
legal steps shall suffice for purposes of commencing such action. If LICENSOR
does not commence such action within ninety (90) days of such notice, LICENSEE
shall have the right, but not the obligation, to institute a suit or take other
legal action against such third party subject to and consistent with the
respective rights of the other licensees

<PAGE>

of LICENSOR with respect to field of use other than the Field Of Use to do
the same and to join in such suit or legal action. If suit is commenced by
LICENSOR and the court determines that LICENSEE is a necessary or
indispensable party to such lawsuit, LICENSEE shall join in such suit. In
any event, each party shall reasonably assist the other party in the
prosecution of such suit or legal action and in the protection and
enforcement of LICENSOR's rights in and to the Licensed Technology. Subject
to the terms and provisions of paragraph c. below, the party instituting such
suit or legal action shall bear the costs and expenses of such suit or legal
action. Notwithstanding anything herein to the contrary, LICENSEE may not
settle any such action without the prior written approval of LICENSOR, which
approval will not be unreasonably withheld.

c. In the event that LICENSOR or LICENSEE, whichever is the party
initiating the action pursuant to the terms of this Section 7 (the "Initiating
Party"), as a result of a judgment or a reasonable settlement entered into in
good faith as a result of such action, recovers royalties or other amounts from
a third party, the Initiating Party shall deduct and retain from such recoveries
an amount equal to all of such party's out-of-pocket costs and expenses,
including, without limitation, attorneys' fees, incurred as a result of such
action and then reimburse the other party for any such party's out-of-pocket
costs and expenses, including, without limitation, attorneys' fees, incurred as
a result of such action. The remaining amount (hereinafter referred to as the
"Remainder") shall be allocated among the appropriate parties in an equitable
manner taking into account the respective money damages to such parties, or as
otherwise allocated by the court in which such suit or legal action is pursued.

d. LICENSEE shall notify LICENSOR of every suspected infringement of
the Licensed Patents and shall use its reasonable efforts to cause each of its
Affiliates, sublicensees, distributors and customers to do the same and shall
take all reasonable measures to protect

<PAGE>

LICENSOR's rights in and to the Licensed Patents and the Licensed Products
and to reasonably assist LICENSOR and LICENSEE in connection with any
litigation or legal action related thereto.

7. IMPROVEMENTS

a. In the event LICENSOR, MILLER or SCHOENDORFER should make any
Improvements, it or he shall communicate the same to LICENSEE and LICENSEE shall
have the right to use such Improvements under the terms of this Agreement. In
the event LICENSOR, MILLER or SCHOENDORFER should secure the grant of Letters
Patent on the Licensed Products or on any such Improvements, it will notify
LICENSEE, and such Letters Patents shall be deemed a Licensed Patent within the
terms of the present Agreement.

b. In the event LICENSEE (i) should make any Improvements and
(ii) the license under this Agreement has become non-exclusive or is terminated
as a result of a breach by LICENSEE, LICENSEE hereby grants to LICENSOR a
non-exclusive, perpetual worldwide license, with the right to assign and
sublicense to all such Improvements, including any patents embodying such
Improvements. LICENSEE agrees to promptly communicate to LICENSOR any facts
known to LICENSEE respecting said Improvements. As consideration for such
license, LICENSOR, or its assignees or sublicensees, shall pay to LICENSEE a
royalty equal to [ * ] of Net Sales by LICENSOR, or its assignees or
sublicensees, of any product embodying any such Improvement, which Improvement
is covered by an issued patent. For purposes of this Section 7b, "Net Sales"
shall mean the amount invoiced for sales, leases or other dispositions of such
product incorporating an Improvement (other than sales, leases or other
dispositions to Affiliates unless such Affiliate is the end user) less the
following deductions (to the extent they are not already reflected in the amount
billed):

*Omitted pursuant to a request for confidential treatment.

<PAGE>

(a) Discounts, uncollectable debt, and wholesaler chargebacks
allowed and taken in amounts customary in the trade;

(b) Import, export, excise, sales or use taxes, tariffs and
duties directly imposed and with reference to particular
sales;

(d) Amounts allowed or credited on returns or retroactive price
deductions.

Such products shall be considered "sold" when billed out or
invoiced to a third party. If such product is incorporated into another product
or is sold in combination with other products or services and not invoiced
separately, such product shall be included in Net Sales at the then current list
price for such quantities of such product with any discount from list price
being applied proportionately to the discount from list price of the product
into which such product was incorporated or the list price of the other products
sold, as the case may be. If there is no then current list price for such
product, Net Sales will be based on the separate value of such product and such
other products or services.

Such royalty payment shall be made by LICENSOR or its Affiliates or
sublicensees within thirty (30) days of the end of each calendar quarter and
shall be accompanied by a report setting forth the Net Sales with respect to
such products. The provisions of Section 5 above, regarding Books and Records,
shall apply to LICENSOR in the event LICENSOR is obligated to pay royalties
under this Section 7b.

c. LICENSEE shall require that all of its sublicensees agree in
writing that should such sublicensee make any Improvements, that the sublicensee
grants and agrees to grant to

<PAGE>

LICENSOR the license set forth in Section 7b above. LICENSEE shall also
require that all of its sublicensees agree to promptly communicate to
LICENSOR any facts known to the sublicensee respecting said Improvements.

8. TERMINATION

a. Subject to Section 8b and Section 8c below, and in addition to
the termination events set forth in Section 3h and Section 3i above, in the
event that either LICENSOR or LICENSEE fails to perform any of its obligations
under this Agreement, the other party may, in addition to any other remedy they
may have, terminate this Agreement by giving sixty (60) days written notice to
the defaulting party of their intention to do so, specifying the default and the
intended effective date of the termination notice. Such termination notice will
be effective to terminate this Agreement on the stated date unless such
defaulting party has, within the sixty (60) day cure period, cured the alleged
default and provided written verification establishing that the default has been
cured. If, before the stated termination date, such defaulting party has cured
all actual defaults, then the notifying party shall, upon written request,
acknowledge in writing that the default has been cured.

b. In the event that LICENSOR terminates the Supply Agreement
pursuant to Section 2.2 thereof as a result of LICENSEE failing to pay certain
amounts due under the Supply Agreement (after giving effect to the fifteen (15)
day grace period therein), and if such amount is not paid in full within five
(5) days of such notice, such termination shall take effect immediately, upon
the expiration of such five (5) day period.

c. This License Agreement shall terminate after the expiration of
the last Licensed Patent that contains at least one claim that reads on the
Licensed Products.

<PAGE>

9. EFFECT OF TERMINATION

In the event of the termination of this Agreement pursuant to
Section 8c, LICENSEE shall have a fully paid, non-exclusive license to the
Licensed Know-How for the Field of Use. Upon termination of this Agreement for
any other reason, LICENSEE shall cease and desist from using and selling
Licensed Products and/or Improvements, provided however that LICENSEE may
continue to sell any Licensed Product in its inventory at the date of
termination.

10. REGULATORY MATTERS

LICENSEE shall hold title to and own in its own name, any
registrations of approval from a government agency, such as the United States
Food and Drug Administration (FDA), for the Licensed Products. However, if this
License Agreement is terminated for any reason, other than pursuant to Section
9c, then LICENSEE agrees to negotiate in good faith the transfer of such
registrations to LICENSOR.

11. CONFIDENTIALITY

a. CONFIDENTIAL INFORMATION. Confidential information shall consist
of (i) any information designated as confidential, and (ii) any information
relating to the Licensed Products, Licensed Patents, Licensed Know-How and
Improvements.

b. EXCEPTIONS. The restrictions set forth in Section 11a. shall not
apply to confidential information that (i) was generally known or otherwise
generally available to the public prior to disclosure hereunder, or becomes
generally known to the public subsequent to such disclosure through no wrongful
act or omission of the receiving party, (ii) was known to the receiving party at
time of disclosure, (iii) was received by the receiving party, without
restriction, from a third party not

<PAGE>

under any obligation to the other party not to disclose it and otherwise not
in violation of the other party's rights, (iv) is disclosed by the receiving
party pursuant to the order or requirement of a court, administrative agency
or governmental body, provided, however, that the receiving party shall
provide prompt notice thereof to the disclosing party to enable the
disclosing party to seek a protective order or otherwise prevent such
disclosure, or (v) has been approved for release in writing by the disclosing
party.

c. REMEDIES. Any breach of the restrictions contained in this
Section 11 by a party to this Agreement is a breach of this Agreement which may
cause irreparable harm to the other party entitling such other party to
injunctive relief in addition to all legal remedies.

12. GENERAL

a. ENTIRE AGREEMENT: This Agreement sets forth the entire Agreement
and understanding of the parties relating to the subject matter contained herein
and merges all prior discussions between them. No claimed oral agreement in
respect hereto shall be considered as any part thereof. No modification or
claimed waiver of any of the provision hereof shall be valid unless in writing
and signed by authorized representatives of the party against whom such
modification or waiver is sought to be enforced.

b. SEVERABILITY: Should any part or provision of this Agreement be
held unenforceable or in conflict with the law of any jurisdiction, the validity
of the remaining parts or provisions shall not be affected by such holding.

c. ASSIGNABILITY: LICENSEE agrees that it can neither assign its
rights nor delegate its duties under this Agreement. Notwithstanding the
foregoing, LICENSEE may assign its

<PAGE>

rights and delegate its duties under this Agreement to (i) an entity formed by
LICENSEE together with equity investors providing adequate capital for the
commercialization of the Licensed Products within the Field Of Use, or (ii) to
any party in connection with the transfer of substantially all of its business,
provided in both cases that such assignee expressly agrees in writing to be
bound by this Agreement and to maximize the exploitation of the Licensed
Products within the Field Of Use.

LICENSOR agrees that it will not sell, transfer, assign or pledge
the Licensed Patents unless such buyer, transferee, assignee or pledgee takes
such Licensed Patents subject to LICENSOR's rights hereunder.

d. GOVERNING LAW: This Agreement shall be interpreted and construed
and the legal relations created herein shall be determined in accordance with
the laws of the State of California.

e. GENERAL ASSURANCES: The parties agree to execute, acknowledge,
and deliver all such further instruments, and do all such other acts, as may be
necessary or appropriate from time to time in order to carry out the intent and
purpose of this Agreement.

f. NOTICES AND STATEMENTS: Any notice, statement, or report
permitted or required to be given under the provision of this Agreement shall be
in writing signed by the party giving such notice, statement or report and shall
be sent to the appropriate address given below, unless such party has been
previously given ten (10) days' written notice of a change of address of the
party to receive such notice, statement or report shall be sent to the changed
address.

LICENSOR:

Sudormed, Inc.
12341 Newport Avenue, Suite D-200
Santa Ana, California 92705

<PAGE>

LICENSEE:

Pacific Biometrics, Inc.
1370 Reynolds Avenue, Suite 119
Irvine, California 92614

Any such notice, statement or report that is dispatched by prepaid
registered or certified mail shall be deemed to have been duly given upon
mailing thereof.

g. WAIVER OF DEFAULT NOT BEING A WAIVER FOREVER: No waiver by
LICENSOR of any provision of this Agreement shall be deemed a waiver of any
other provision hereof or of any subsequent breach by LICENSEE of the same or
any other provision. LICENSOR's consent to, or approval of, any act shall not
be deemed to render unnecessary the obtaining of LICENSOR's consent to, or
approval of, any subsequent act by LICENSEE. The acceptance of late payment of
fees due hereunder by LICENSOR shall not be a waiver of the automatic
termination provisions of this License Agreement. No remedy or election as
provided for in this Agreement shall be deemed exclusive but shall, wherever
possible, be cumulative with all other remedies at law or in equity.

h. PRODUCT LIABILITY INSURANCE: Prior to the first use of a
Licensed Product clinically, LICENSEE shall add LICENSOR as a "Named Insured" on
its product liability insurance coverage and provide satisfactory evidence
thereof to LICENSOR, and LICENSOR shall add LICENSEE as a "Named Insured" on its
product liability insurance coverage.

i. BINDING EFFECT. This Agreement shall be binding on and inure to
the benefit of LICENSOR and LICENSEE and their respective heirs, successors and
permitted assignees.

<PAGE>

j. REPRESENTATIONS.

LICENSOR hereby represents as follows:

(1) LICENSOR is the owner of the Licensed Patents;

(2) LICENSOR has not licensed to any other person or entity any
rights to the Licensed Patents within the Field Of Use;

(3) to LICENSOR's knowledge, there are no actions, suits or
proceedings pending or threatened against LICENSOR in any way relating to the
Licensed Patents; and

(4) to LICENSOR's knowledge, LICENSEE's use and sale of the
Licensed Products within the Field Of Use does not and will not infringe the
intellectual property rights of any third party.

LICENSOR

SUDORMED, INC.

Dated: 12/30/97 By: /s/ William R. Miller
----------------------------- -----------------------------------
William R. Miller, President

Dated: 12/30/97 /s/ William R. Miller
----------------------------- ----------------------------------------
William R. Miller, Individually, for
purposes of Section 7a only

Dated: 12/30/97 /s/ Donald W. Schoendorfer
----------------------------- ---------------------------------------
Donald W. Schoendorfer, Individually,
for purposes of Section 7a only

LICENSEE

PACIFIC BIOMETRICS, INC.

Dated: 12/30/97 By: Paul G. Kanan
----------------------------- ----------------------------------
Paul G. Kanan, President and Chief
Executive Officer

<PAGE>

EXHIBIT 10.28

* Portions of this document have been omitted pursuant to a request for
confidential information.

AMENDED AND RESTATED SUPPLY AGREEMENT

THIS AMENDED AND RESTATED SUPPLY AGREEMENT (this "Agreement") is entered
into as of the 30th day of December, 1997 by and between SUDORMED, INC., a
California corporation ("Sudormed"), and PACIFIC BIOMETRICS, INC., a Delaware
corporation ("Customer").

R E C I T A L S:

A. Sudormed and Customer are concurrently entering into an Amended and
Restated License Agreement dated the date hereof (the "License Agreement"); and

B. Sudormed and BioQuant, Inc. (a wholly-owned subsidiary of Customer, as
successor-in-interest to CEO Advisors, Inc.) are parties to a Supply Agreement
dated August 6, 1993; and

C. Sudormed and Customer desire to amend and restate the previous Supply
Agreement to provide that Customer be a party thereto, and to modify the terms
thereof, all as set forth herein; and

D. The License Agreement provides that the Customer shall purchase from
Sudormed the "Licensed Products", as defined in the License Agreement, pursuant
to a "Supply Agreement".

E. Sudormed and Customer desire to enter into this Agreement and
acknowledge that this Agreement constitutes the "Supply Agreement" referred to
in Recital D above.

NOW, THEREFORE, for good and valuable consideration, the receipt of which
is hereby acknowledged, the parties agree as follows:

<PAGE>

1. PRODUCT DEFINITION.

For purposes of this Agreement, "Product" shall mean an adhesive patch
meeting the specifications set forth on Exhibit A. The parties may, by mutual
agreement, modify such specifications, or add additional specifications for
other variants, all of which shall be deemed "Product" for the purposes of this
Agreement.

2. TERM AND TERMINATION.

2.1 TERM. The term of this Agreement shall commence on the date
hereof and shall continue for a period terminating on the earlier to occur of
(i) the termination of the License Agreement or (ii) as otherwise provided in
this Agreement.

2.2 TERMINATION DUE TO MONETARY DEFAULT. If Customer fails to
make payment of any monetary amount within fifteen (15) days after the date due
under this Agreement, Sudormed may, at its sole discretion, terminate this
Agreement by providing notice of termination to Customer, and, if such monetary
amount is not paid in full within five (5) days of such notice, such termination
shall take effect immediately upon the expiration of such five (5) day period.

2.3 TERMINATION DUE TO OTHER DEFAULTS. Except as provided in
paragraph 2.2, upon a default by a party of any material obligation of such
party in this Agreement, the non-defaulting party may give notice in writing to
the party in default and the defaulting party shall have sixty (60) days from
such notice to cure the default. If the defaulting party does not cure the
default within such sixty (60) days, the non-defaulting party may terminate this
Agreement by providing notice of termination which shall take effect ten (10)
days from the giving of such notice by the defaulting party.

2.4 NO WAIVER. Termination under this Section 2 shall not
relieve either party of any obligation existing upon the date of termination
or relieve the defaulting party from liability for breach of this Agreement.
Waiver by either party of a single default or a succession of defaults

<PAGE>

shall not deprive such party of any right to terminate this Agreement arising
by reason of any subsequent default.

2.5 CONTINUING PROVISIONS. The termination of this Agreement
shall not relieve Sudormed and Customer of their respective obligations set
forth in Sections 4, 8, 9, 10 and 11, and obligations under then existing
Quarterly Purchase Orders (as defined in paragraph 5.2) for purchase and
delivery of Product, except that the terminating party may elect whether such
Quarterly Purchase Orders will remain in effect.

3. REQUIREMENTS.

3.1 PURCHASE AND SALE. Customer agrees, for itself, its
sublicensees, and any entity controlled by or in control of Customer, to
purchase all the Product requirements of each of the foregoing from Sudormed
and Sudormed shall use its best efforts to supply all such Product, subject
to the terms and provisions of this Agreement. Notwithstanding anything in
this Agreement to the contrary, if Sudormed is unable to correct a recurring
problem in delivering non-defective Product timely, then Customer shall not
be obligated to purchase all of its requirements from Sudormed (in so doing,
Customer shall not be waiving any claims for breaches which may have
occurred). A recurring problem in delivering non-defective Product shall be
deemed to occur if, and only if, Sudormed has failed to supply non-defective
Products equal to at least [ * ] of the Product ordered by
Customer, averaged over three (3) consecutive quarters, and the amounts so
ordered have not exceeded the forecasted amounts in accordance with Section
5.1 below. A Product shall be defective only if it fails to meet the
specifications set forth on Exhibit A. The use and sale by Customer of all
Product so purchased shall be subject to the restrictions, terms and
provisions contained in the License Agreement, and the sale of Product to
Customer is conditioned upon Customer complying fully with such restrictions,
terms and provisions. It is understood that Sudormed shall have the right to
contract with respect to the manufacture of the Product with such third
parties as Sudormed deems advisable.

*Omitted pursuant to a request for confidential treatment.

<PAGE>

3.2 MINIMUM PURCHASE ORDERS. Notwithstanding anything in this
Agreement to the contrary, if Customer does not order the minimum number of
units of Product during each period set forth on Exhibit B (the "Minimum
Quantity"), then commencing on the first day after the end of such period, and
thereafter IRRESPECTIVE of the quantity of Product ordered, the license grant in
paragraph 2.a. of the License Agreement shall become and remain nonexclusive in
accordance with the terms of the License Agreement.

4. PRICE AND TERMS OF PAYMENT.

4.1 PURCHASE PRICE. The purchase price of the Product shall be as
set forth on Exhibit C. The Customer agrees that Sudormed may change the price
at any time and from time to time, provided, however, that any price change
shall be due to changes in Sudormed's direct Product costs. Sudormed shall
provide to the Customer such documents confirming any cost increases as shall
reasonably be requested from time to time by the Customer. In the event that
any such price change is such that the business relationship between the parties
is not beneficial economically, then the parties agree to negotiate the price
and, if a new price cannot be mutually agreed upon, the Customer may either
accept such price change as announced by Sudormed or terminate the relationship
by giving Sudormed written notice of such termination within thirty (30) days of
the announcement of such change, which termination shall be effective upon the
expiration of such thirty (30) day period. In addition, in the event any
Product is approved for use as an over-the-counter ("OTC") product, Customer and
Sudormed shall mutually evaluate appropriate modifications to the Minimum
Quantities set forth on Exhibit B and the prices set forth on Exhibit C. In the
event Sudormed's supplier of Product reduces its price charged to Sudormed, then
Sudormed shall equally reduce the price payable by Customer to Sudormed. In
addition, should Customer request any changes to the Product, including without
limitation, any changes required for new indications or regulatory compliance,
Sudormed shall inform Customer of (i) any non-recurring costs in implementing
such change, and (ii) any recurring incremental change in Sudormed's direct
Product costs. If Customer elects to proceed with such change, Customer shall

<PAGE>

reimburse Sudormed the non-recurring costs, as invoiced by Sudormed, and the
Product price, as set forth on Exhibit C, shall be amended to reflect such
incremental cost changes. In addition to the foregoing price, Customer shall be
responsible for and pay or reimburse Sudormed for any sales or use tax which may
be imposed on any sale of Product under this Agreement.

4.2 TERMS OF PAYMENT. Sudormed will submit after each shipment an
invoice for the purchase price of the Product so shipped. The Customer shall
make payment to Sudormed in the amount of such invoice within thirty (30) days
of the date of such invoice.

5. FORECASTS, QUARTERLY ORDERS, MINIMUMS AND ACCEPTANCE.

5.1 FORECASTS. For each calendar quarter during the term of this
Agreement, the Customer shall provide Sudormed a written forecast of the
Customer's anticipated maximum and minimum requirements of the Product for such
quarter and the succeeding three (3) calendar quarters. Such forecast shall be
provided within ten (10) days of the date hereof with respect to the quarters
commencing January 1, 1998 and April 1, 1998 and at least one hundred eighty
(180) days prior to the beginning of each quarter thereafter.

5.2 QUARTERLY ORDERS; MINIMUMS. For each calendar quarter during
the term of this Agreement, the Customer shall provide a written purchase order
for Product for such calendar quarter (the "Quarterly Purchase Order"). Such
purchase order shall be provided within ten (10) days of the date hereof with
respect to the quarter commencing January 1, 1998 and at least one hundred
twenty (120) days prior to the beginning of each quarter thereafter. Each
Quarterly Purchase Order will include without limitation the shipment
destination and a requested delivery date or, in the event that the Customer
desires that Product be shipped in more than one shipment, a shipment
destination and a requested delivery date for each such shipment. The Quarterly
Purchase Order shall be for Product within the estimated maximum and minimum
requirements last provided to Sudormed by the Customer pursuant to paragraph 5.1
above.

<PAGE>

5.3 ACCEPTANCE. Within thirty (30) days after receipt of any Quarterly
Purchase Order, Sudormed shall accept such Quarterly Purchase Order in writing;
provided, however, that the Customer delivered such Quarterly Purchase Order to
Sudormed in accordance with Section 5.2. Acceptance of any order placed by
Customer does not constitute acceptance by Sudormed of any of the terms and
conditions of those orders, except as to quantity of Product involved. All
orders are governed by the provisions of this Agreement.

6. SHIPMENT.

6.1 REASONABLE EFFORTS. Sudormed shall use reasonable efforts to
ship all orders according to any reasonable shipping schedule and method of
shipment specified by the Customer, but Sudormed shall not be liable for failure
to meet shipping schedules.

6.2 RISK OF LOSS. All shipments of Product will be F.O.B.
delivery to the carrier at Sudormed's facilities or other domestic place of
shipment to a shipment destination selected by the Customer. Title and risk of
loss or damage shall pass to the Customer at the time of delivery of the Product
to the carrier.

6.3 CONTAINERS. Sudormed shall ship the Product to the Customer
in containers to be selected by Sudormed, provided that such containers are
reasonably acceptable to the Customer.

6.4 COSTS OF SHIPMENT. All freight, insurance, and other shipping
expenses shall be borne by the Customer. The Customer shall also bear any and
all applicable taxes, duties, customs, brokerage fees and other similar charges
that may be assessed against shipments of the Product. The Customer shall be
responsible for filing all freight claims.

6.5 RISK OF LOSS AND COSTS - SPECIAL ARRANGEMENTS.
Notwithstanding the foregoing, if Sudormed has the Product manufactured by a
third party and such third party has agreed to retain title and bear the risk of
loss until the Product is delivered and has agreed to drop

<PAGE>

ship the Product directly to Customer at such party's cost, then Customer
shall be entitled to the same terms as Sudormed with respect to such shipment.

7. MANUFACTURING STANDARDS AND QUALITY ASSURANCE.

7.1 SPECIFICATIONS. Sudormed will manufacture Product for
Customer in accordance with the manufacturing specifications set forth in the
attached Exhibit A, and any further specifications as shall be furnished by
Customer and agreed to in writing by Sudormed which will not be unreasonably
withheld (the "Specifications"), subject to reimbursement for costs and
adjustments in price, as set forth in Section 4.1.

7.2 ACCEPTANCE OF PRODUCT. Customer may reject any Product which
does not conform to the Specifications within sixty (60) days after receipt of
such Product and, if not so rejected, shall be deemed to have been accepted.
Any such rejection must be accompanied by a detailed explanation of the
nonconformance. IF ANY PRODUCT IS NOT IN COMPLIANCE WITH THE SPECIFICATIONS,
SUDORMED'S SOLE OBLIGATION SHALL BE TO PROMPTLY REPLACE THE DEFECTIVE PRODUCT OR
TO CREDIT CUSTOMER'S ACCOUNT.

7.3 MANUFACTURING PRACTICES. Sudormed will manufacture Product in
accordance with Good Manufacturing Practices and Quality System Regulations as
defined under the United States Food, Drug and Cosmetic Act, and regulations
thereunder, and maintain records and files, as legally required.

8. INDEMNITIES, PRODUCT WARRANTY, LIABILITY LIMITATION.

8.1 CUSTOMER'S INDEMNITY. Customer shall defend, indemnify and
hold harmless Sudormed from any and all loss or liability for any and all
claims, causes of action, suits, proceedings, losses, damages, demands, fees,
expenses, fines, penalties and costs (including without limitation attorney's
fees, costs and disbursements) arising from any injury or alleged

<PAGE>

injury to any person or business for property damage, personal injury or
incidental, special or consequential damages arising out of or based upon the
Product or its use unless any such loss or liability was due to Sudormed's
failure to manufacture the Product in accordance with the specifications set
forth in Exhibit A.

8.2 SUDORMED'S INDEMNITY. Sudormed shall defend, indemnify and
hold harmless Customer from any and all loss or liability for any and all
claims, causes of action, suits, proceedings, losses, damages, demands, fees,
expenses, fines, penalties or costs (including without limitation attorney's
fees, costs and disbursements) arising from any injury or alleged injury to any
person or business for property damage, personal injury or incidental, special
or consequential damages to the extent that it results from Sudormed's failure
to manufacture the Product in accordance with the specifications set forth in
Exhibit A as determined at the time the Product is delivered to the carrier as
provided in paragraph 6.2 above; provided, however, Sudormed shall be liable
only to the extent its failure to meet specifications at the time of delivery
resulted in the harm or injury for which Customer seeks indemnification.
Sudormed shall also not be obligated to indemnify Customer for any loss or
liability which results from or is caused by or is based upon any loss or
liability referred to above in paragraph 8.1 for which Sudormed is entitled to
indemnification.

8.3 DEFENSE. Customer and Sudormed shall promptly notify each
other of any claims under paragraphs 8.1 and 8.2 of this Agreement. Each party
shall be entitled to control its own legal defense of any claim. To the extent
that one party is indemnifying the other party pursuant to paragraph 8.1 or 8.2
of this Agreement, the indemnifying party shall have the sole control of the
defense and, in such event, to the extent that the indemnified party incurs its
own legal costs, such legal costs shall be borne by the indemnified party.
Furthermore, the indemnified party shall provide, at the indemnifying party's
expense, information and assistance as the indemnifying party may reasonably
request for the purpose of defense. In no event shall the

<PAGE>

indemnified party be entitled to settle any claim without the consent of the
indemnifying party, which consent shall not be unreasonably withheld.

8.4 PRODUCT WARRANTY. Sudormed warrants only that the Product
will meet the applicable physical product specifications set forth in Exhibit A
at the time of delivery to the carrier for shipment. Sudormed specifically does
not warrant the Product for any unintended uses (whether or not foreseeable),
for incompatibility or unsuitability with other product components or with
pharmaceutical compounds, for noninfringement (other than to the same extent as
warranted by Sudor Partners under the License Agreement), for intolerance to
methods of sterilization, handling or storage, or for the suitability or
acceptability of the product specifications, nor does Sudormed make any warranty
on whether the Product will perform as anticipated. Customer shall make its own
independent determination of the Product's suitability and acceptability. THIS
WARRANTY IS MADE IN PLACE OF ANY OTHER WARRANTIES. SUDORMED NEITHER EXPRESSES
NOR IMPLIES ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.

8.5 EXCLUSIVE REMEDY. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY FOR
ANY DEFECTIVE PRODUCTS OTHER THAN AS SPECIFIED IN PARAGRAPHS 8.1 THROUGH 8.4 IS,
AT SUDORMED'S OPTION, TO SEEK REPLACEMENT OR TO SEEK A CREDIT TO ITS ACCOUNT FOR
THE DEFECTIVE PRODUCTS.

8.6 LIMITED LIABILITY. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE
CONTRARY, SUDORMED WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS
AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGEND OR
EQUITABLE THEORY (i) FOR ANY LOST PROFITS, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
EVEN IF SUDORMED HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR (ii)
FOR COST OF PROCUREMENT OF SUBSTITUTE GOODS.

<PAGE>

9. INSURANCE.

Customer will maintain liability insurance covering such risks as are
appropriate in accordance with sound business practice and its obligations under
this Agreement including, but not limited to, at least the following liability
coverages and limits:

Annual Product Amount of Insurance
Sales Revenue Coverage
------------- -----------------
<S> <C>
Under $1,000,000 $2,000,000
$1,000,000 to $5,000,000 $5,000,000
$5,000,001 to $10,000,000 $10,000,000
Over $10,000,000 $20,000,000

</TABLE>

Customer shall provide Sudormed with a certificate of insurance evidencing
the existence of these coverages.

10. PRODUCT APPROVALS; REGULATORY COMPLIANCE.

Sudormed does not represent that the Product has been approved for
marketing by the FDA or is covered by any application for approval for marketing
filed with the FDA, or any comparable regulatory authority in the world.
Customer shall, with respect to the use, sale or promotion of the Product, (i)
comply with all applicable laws, regulations and standards of industry
(including the maintenance and retention of records regarding sales and
customers), and (ii) obtain and maintain all applicable approvals, registrations
or notifications. Customer shall immediately notify Sudormed of any adverse or
unexpected result or any actual or potential government action with respect to
the Product.

11. TRADEMARKS; CONFIDENTIAL INFORMATION.

11.1 TRADEMARKS; APPROVAL OF CERTAIN MATERIALS, ETC. The parties
agree that Sudormed is to use Customer's own trademark(s) on the packaging of
the Products. It is agreed that Customer is not authorized or licensed to use
Sudormed's trademark(s) for any purpose, except as permitted by Sudormed, either
during the term of this Agreement or thereafter.

<PAGE>

Customer agrees that all labels and any other written material mentioning
either the Product or Sudormed's name shall not be used or distributed
without the prior written consent of Sudormed.

11.2 CONFIDENTIAL INFORMATION. Customer and Sudormed acknowledge
that each will receive confidential information from the other party. Both
parties agree that during the term of this Agreement each shall only use
confidential information to carry out the purposes of this Agreement, shall keep
secret all such confidential information and shall use such care as each uses in
maintaining the confidentiality of its own secret information. The obligations
under this Section 11.2 shall survive termination of the Agreement.

11.3 EXCEPTIONS. The obligation of confidentiality under
paragraph 11.2 shall not apply:

(a) to information known, as shown by written record, at
the time of receipt thereof from the other party; or

(b) to information which is lawfully received from a third
party under no obligation of confidentiality; or

(c) to information which at the time of disclosure was in
the public domain or thereafter becomes part of the public domain through no
breach of this Agreement.

12. MISCELLANEOUS.

12.1 EXCUSED PERFORMANCE. Neither Customer nor Sudormed shall be
considered in default or be liable to the other party for any delay in
performance or non-performance caused by circumstances beyond the reasonable
control of such party, including but not limited to acts of God, explosion,
fire, flood, war (whether declared or not), accident, labor strike or labor
disturbances, inability of third party vendors to provide supplies, sabotage,
order or decree of any court or action of government authority.

12.2 NO ASSIGNMENT. Customer may not assign this Agreement or the
rights herein granted or obligations undertaken to any other party without the
express written consent of

<PAGE>

Sudormed. Notwithstanding the foregoing, Customer shall be entitled to assign
its rights and delegate its duties under this Agreement as provided in
Section 12.c. of the License Agreement.

12.3 GOVERNING LAW. This Agreement shall be interpreted under and
governed by the laws of the State of California notwithstanding any choice of
law provision to the contrary. The courts in Orange County, California (with
the Federal court being the first choice) shall have exclusive jurisdiction over
and venue to hear any and all disputes arising under or concerning this
Agreement, and each of the parties hereby submits itself to the exclusive
jurisdiction and venue of such courts for the purpose of such actions.

12.4 SEVERABILITY. The provisions of this Agreement shall be
deemed severable. If any part of this Agreement is rendered void, invalid or
unenforceable, such rendering shall not affect the validity and enforceability
of the remainder of this Agreement unless the part or parts which are void,
invalid or unenforceable as aforesaid shall substantially impair the value of
the whole Agreement to either party.

12.5 ENTIRE AGREEMENT; MODIFICATION. This Agreement and
Exhibits A, B and C attached to this Agreement set forth the entire agreement
between the parties relating to the subject matter contained in this Agreement.
This Agreement may not be modified, amended or discharged except as expressly
stated in this Agreement or by a written agreement signed by the parties hereto.

12.6 NOTICES. Any and all communications provided for in this
Agreement shall be in writing and sent by first class mail, postage prepaid and
addressed to the last known address of the parties to be served therewith.
Communications sent by Certified Mail - Return Receipt Requested, shall be
deemed to have been duly given upon the mailing thereof. Any communication to
be given to Sudormed shall be addressed to:

Sudormed, Inc.
12341 Newport Avenue, Suite D200
Santa Ana, California 92705

Any communication to be given to Customer shall be addressed to:

<PAGE>

Pacific Biometrics, Inc.
1370 Reynolds Avenue, Suite 119
Irvine, California 92614

Any change in address shall be promptly communicated in writing from either
party to the other party.

12.7 BINDING EFFECT. This Agreement shall be binding on and inure
to the benefit of the parties hereto and their respective successors and
assigns.

12.8 ATTORNEYS' FEES. If legal action is instituted on this
Agreement, the prevailing party shall be entitled to recover all costs of suit,
including reasonable attorneys' fees.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

SUDORMED, INC., PACIFIC BIOMETRICS, INC.,
a California corporation a Delaware corporation
/s/ William R. Miller /s/ Paul G. Kanan

By: William R. Miller By: Paul G. Kanan
--------------------- ---------------------
Its: President Its: President and CEO
-------------------- --------------------

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-30-1997
<CASH> 1,282,474
<SECURITIES> 795,976
<RECEIVABLES> 402,530
<ALLOWANCES> (31,256)
<INVENTORY> 114,844
<CURRENT-ASSETS> 2,807,185
<PP&E> 1,124,332
<DEPRECIATION> (255,762)
<TOTAL-ASSETS> 4,268,161
<CURRENT-LIABILITIES> 1,401,712
<BONDS> 0
0
0
<COMMON> 37,055
<OTHER-SE> 2,470,956
<TOTAL-LIABILITY-AND-EQUITY> 4,268,161
<SALES> 871,290
<TOTAL-REVENUES> 871,290
<CGS> 732,635
<TOTAL-COSTS> 1,820,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15,690)
<INCOME-PRETAX> (941,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (941,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (941,055)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)

</TABLE>