LOAN AND SECURITY AGREEMENT

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (the “ Agreement ”) is entered into as of September 1, 2009 (the “ Closing Date ”) by and between TERRY M. GILES, an individual residing in the State of Texas (“ Lender ”), and PACIFIC BIOMETRICS, INC., a Delaware corporation with its principal place of business at 220 West Harrison Street, Seattle, Washington 98119 (“ Borrower ”).

For good and valuable consideration, intending to be legally bound, the parties hereto agree as follows:

ARTICLE 1: AMOUNTS AND TERMS OF LOAN

1.1 Principal Amount of Loan . Subject to the terms and conditions of this Agreement, on the Closing Date, Lender shall loan to Borrower an aggregate principal amount of $4,000,000 in the form of a term loan (the “ Loan ”). All amounts owed with respect to the Loan shall be paid as set forth below, and no later than the Maturity Date (defined below). Amounts borrowed under the Loan and subsequently repaid or prepaid may not be reborrowed.

1.2 Maturity of Loan . The Loan shall be for a term of 48 months, unless earlier repaid (the “ Term ”), and Borrower hereby promises to pay to Lender all remaining unpaid principal, accrued and unpaid interest, and any other amounts due with respect to the Loan on or before September 1, 2013 (the “ Maturity Date ”).

1.3 Interest Rate . All principal outstanding from time to time under the Loan shall bear interest at an interest rate of 12.0% per annum, calculated on a 365/6-day basis and the actual number of days elapsed (the “ Interest Rate ”). Upon and during the occurrence of an Event of Default, the outstanding principal shall bear interest at a default rate of interest of 1- 1/2 % per month (the “ Default Rate ”). In no event shall Borrower be obligated to pay Lender interest, charges or fees at a rate in excess of the highest rate permitted by applicable law from time to time in effect.

1.4 Payments .

(a)  Loan Payment Schedule . Borrower shall make payments to Lender on the Loan on the following schedule:

(b)  Application of Payments . All payments received by Lender pursuant to the terms hereof shall be applied first to the payment of accrued and unpaid interest on the Loan, and the balance, if any, to the payment of Loan principal.

1.5 No Prepayment Penalties . The Loan may be prepaid, in full or in part, at any time prior to the Maturity Date without premium or penalty.

1.6 Promissory Note . The Loan shall be evidenced by a promissory note (the “ Note ”) payable to the order of Lender, in the total principal amount of the Loan.

1.7 Loan Fees . In connection with this Agreement and the Loan, Borrower shall pay to Lender a quarterly finance fee in an amount equal to $12,000. The foregoing fee shall be payable on the last business day of each calendar quarter during the Term.

1.8 Use of Proceeds . The proceeds of the Loan shall be applied by Borrower (a) to repurchase up to a maximum of 2,400,000 shares of Borrower common stock of held by certain stockholders of Borrower, as designated by Lender, pursuant to the terms of a stock repurchase agreement to be entered into with such stockholders (the “ Stock Repurchase ”), and (b) otherwise for Borrower’s working capital and other general corporate purposes. The Stock Repurchase shall be at a repurchase price equal to $0.70. Lender acknowledges and agrees that, other than the Stock Repurchase, it is making the Loan to Borrower without conditions or requirements on Borrower’s use of the Loan proceeds, and that unless otherwise provided for herein, Borrower shall have full discretion and right to use the Loan for any purpose or purposes as Borrower shall deem necessary and useful in Borrower’s sole discretion.

1.9 Option for Additional Loan .

(a) During the first 12 months of the Term, provided that no Event of Default has occurred and is continuing, Borrower shall have the right, exercisable in its sole discretion, to obtain an additional loan from Lender in an aggregate principal amount of $500,000 (the “ Additional Loan ”). The Additional Loan will be at the Interest Rate, and otherwise on the same terms as the Loan, other than the payment schedule as described below, and will be evidenced by a separate promissory note between the parties.

(b) Payments on the Additional Loan will be as follows:

(c) Borrower shall give Lender at least five business days’ written notice of any request for borrowing under the Additional Loan, stating the requested funding date for such borrowing, and accompanied by such other information and documentation as Lender may reasonably request. Provided that no Event of Default has occurred and is continuing, Lender shall make such requested advance to Borrower in immediately available funds no later than 1:00 p.m. Pacific Time on the requested funding date. Any amounts owing under the Additional Loan will be included as “Obligations” hereunder.

ARTICLE 2: SECURITY

2.1 Grant of Security Interest . In order to secure the payment to Lender of all amounts owing under the Loan (the “ Obligations ”), Borrower hereby grants to Lender, and its successors and assigns, a first priority security interest in the Collateral (defined below). This Agreement shall continue until all Obligations are paid in full.

2.2 Collateral . For purposes of the foregoing grant of security interest to Lender, “ Collateral ” means all of Borrower’s right, title and interest in, to and under all of its assets, whether now owned or existing or hereafter acquired or arising, and wherever located including, but not limited to the following: all cash and cash equivalents, accounts, deposit accounts, inventory, equipment, goods, documents, instruments, contract rights, general intangibles, chattel paper, investment property (including, without limitation, all equity interests owned by Borrower), letter-of-credit rights, trademarks, trademark applications, tradestyles, patents, patent applications, copyrights, copyright applications and other intellectual property in which Borrower now has or hereafter may acquire any right, title or interest, all proceeds and products thereof (including, without limitation, proceeds of insurance) and all additions, accessions and substitutions thereto or therefor. Unless otherwise defined herein, terms that are defined in Article 9 of the Uniform Commercial Code as in effect, from time to time, in the State of Washington (the “ Uniform Commercial Code ”) and used herein shall have the meanings given to them in the Uniform Commercial Code. Notwithstanding the foregoing, the Collateral shall not include any of such property that is subject on the date hereof to certain outstanding security interests (and the related UCC-1 financing statements relating thereto) granted by Borrower to third parties in connection with certain equipment financings.

2.3 Subsidiary Guaranty . Each of Borrower’s subsidiaries (the “ Subsidiaries ”) shall enter into a Subsidiary Guaranty, pursuant to which each such Subsidiary shall guarantee Borrower’s Obligations and shall secure their guaranties by granting to Lender a security interest in all of their Collateral.

2.4 Stock Pledge . As collateral security for the payment and performance in full of the Obligations, Borrower also pledges and grants to Lender a security interest in all of its right, title and interest in the shares of capital stock in each of the Subsidiaries, as listed on Schedule A to this Agreement (the “ Pledged Stock ”). All certificates representing or evidencing the Pledged Stock shall be delivered to and held by or on behalf of Lender, accompanied by duly executed instruments of transfer or assignment in blank. Lender may not transfer any of the Pledged Stock except in realization on its security interests in the Collateral after the occurrence, and during the continuance beyond any applicable grace or cure period, of an Event of Default. At all times prior to an Event of Default (and the expiration of any applicable grace or cure period pertaining thereto), Borrower shall (i) be entitled to vote the Pledged Stock, (ii) be entitled to give consents, waivers and ratification in respect of the Pledged Stock, and (iii) be entitled to collect and receive for its own use cash dividends legally declared available for distribution, on the Pledged Stock.

2.5. Perfection; Recordation . The security interests granted herein shall be perfected by Lender’s filing of appropriate Uniform Commercial Code Forms UCC-1 with the appropriate government filing offices (including, as applicable, any required filings with the United States Patent and Trademark Office). In connection with the foregoing, Borrower authorizes Lender to prepare and file any financing statements describing the Collateral without otherwise obtaining Borrower’s signature or consent with respect to the filing of such financing statements.

2.6 Termination of Security Interests . Upon the payment in full of the Obligations, all security interests granted hereby and under the Subsidiary Guaranty shall terminate and all rights to the Collateral and Pledged Stock shall revert to Borrower. Upon any such termination, the Lender shall, at Borrower’s expense, execute and deliver to Borrower such documents as Borrower shall reasonably request to evidence such termination.

ARTICLE 3: BORROWER’S REPRESENTATIONS AND WARRANTIES

To induce Lender to execute this Agreement and perform its obligations hereunder, Borrower hereby makes the following representations and warranties to Lender.

3.1 Corporate Power . Borrower has all requisite power and authority to execute and deliver this Agreement and the Note and to carry out and perform its obligations hereunder and thereunder.

3.2 Authorization . All corporate action on the part of Borrower, its directors and its stockholders necessary for the authorization, execution, issuance, delivery and performance of this Agreement by Borrower and the performance of Borrower’s obligations hereunder, has been taken. This Agreement constitutes a valid and binding obligation of Borrower, enforceable against it in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and subject to general principles of equity.

3.3 Governmental Consents . All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any governmental authority, required on the part of Borrower in connection with the consummation of the transaction contemplated hereby have been obtained and are effective as of the date hereof.

3.4 No Violations . The execution, delivery and performance by Borrower of this Agreement and the compliance with the provisions hereof by Borrower does not violate, conflict with or constitute or result in a breach or default under (or an event which with notice of passage of time or both would constitute a default) (a) Borrower’s Certificate of Incorporation or bylaws, (b) applicable law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Borrower or any of its properties or assets or (c) any contract or agreement affecting Borrower, except, with respect to clauses (ii) and (iii), in each case, where such violation, conflict, breach or default would not, individually or in the aggregate, have a material adverse effect on Borrower.

3.5 No Litigation, Claims or Proceedings . There is no material litigation, tax claim, proceeding or dispute pending, or, to the knowledge of Borrower, threatened against or affecting Borrower, the Collateral or the conduct of its business.

3.6 Outstanding Debt and Capital Leases . Schedule 3.6 to this Agreement sets forth a list of the Company’s capital leases outstanding as of June 30, 2009. Other than such capital leases, and except for accounts payable and other liabilities incurred in the ordinary course of business, the Company has no outstanding debt or notes payable.

ARTICLE 4: COVENANTS

4.1 Corporate Existence . During the Term, Borrower shall preserve and maintain its existence and good standing in the jurisdiction of its formation, and qualify and remain qualified to do business and remain in good standing in each jurisdiction in which such qualification is required except where the failure to so qualify could not be reasonably expected to have a material adverse effect on Borrower. Borrower shall not change its jurisdiction of organization, relocate its chief executive office, principal place of business or its records, or allow the relocation of any Collateral (other than to another location in Washington after providing advance notice to the Lender) without 30 days’ prior written notice to Lender.

4.2 Access to Facilities and Collateral . During the Term, Lender shall have the right, from time to time, upon rea