##### **UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM10-K**

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

**For thefiscal year ended October31, 2006**

**Commissionfile number 0-15266**

**BIO-REFERENCELABORATORIES, INC.**

| **New Jersey**            | ** ** | **22-2405059**       |
|---------------------------|------------|----------------------|
| (State of  incorporation) |       | (I.R.S. Employer     |
|                      |       | Identification  No.) |

 

**481Edward H. Ross Drive, Elmwood Park, New Jersey 07407**(Address of principal executive offices)

Registrant’stelephone number **201-791-2600**

Securitiesregistered pursuant to Section 12(b) of the Act:    **None**
| Securities registered  pursuant to Section 12(g) of the Act: |       | Name of Exchange  on Which Registered |
|--------------------------------------------------------------|------------|---------------------------------------|
| **Common  Stock, $.01 par value**                            | ** ** | **None**                              |

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.    Yes o No x.

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act.    Yes o No x.

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    Yes x No o.

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | o | Accelerated filer | x | Non-Accelerated filer | o |
|-------------------------|---|-------------------|---|-----------------------|---|

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of theregistrant=s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or in any amendment tothis Form 10-K.                 o

Indicate bycheckmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes o  No x.

The aggregatemarket value of the voting stock of Bio-Reference Laboratories, Inc.(consisting of Common Stock, $.01 par value held by non-affiliates of theregistrant) was approximately $203,800,000 based upon the last sale price forthe Common Stock on April 28, 2006, the last trading date of the quarter endedApril 30, 2006, as reported on the NASDAQ National Market System.

On January 9,2007, there were 13,577,814 shares of Common Stock issued and outstanding

 

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**PARTI**

Item. 1. -Business

Overview

We believe that weare the largest independent regional clinical laboratory servicing the greaterNew York metropolitan area. We offer a comprehensive list of laboratory testingservices utilized by healthcare providers in the detection, diagnosis,evaluation, monitoring and treatment of diseases.

We currentlyprocess nearly 3.1 million requisitions each year. A requisition formaccompanies a patient specimen. It indicates the tests to be performed and theparty to be invoiced for the tests. Our clients include doctors, employers,clinics and governmental units. We have a network of over 50 patient servicecenters for collection of patient specimens.

In the fourthquarter of the 2006 fiscal year, we acquired the operating assets of Gene Dx,Inc. (“GeneDx”), a leading DNA sequencing laboratory that specializes in thediagnosis of rare genetic diseases. We believe that there is exceptional growthopportunity in genetic testing. We intend to leverage the expertise of GeneDxin DNA sequencing to expand genetic testing into the genetic diagnosis of morecommon diseases and conditions.

In addition to ourclinical testing operations, we operate a clinical knowledge management servicethrough our PSIMedica business unit. This system uses customer data from laboratory results, pharmaceuticaldata, claims data and other data sources to provide administrative and clinicaldecision support systems which enable our customers to provide quality andefficient healthcare to their populations.

We also operate aweb-based connectivity portal solution for laboratories and physicians throughour CareEvolve subsidiary. We use this portal ourselves to provide laboratoryordering and results to our physician customers.  We are also marketing this connectivitysolution to other laboratories throughout the country.

We are a NewJersey corporation. We may at times refer to ourselves and our subsidiaries asthe ACompany.@ We are the successor to Med-Mobile, Inc., a New Jerseycorporation that was organized in 1981. Our executive offices are located at481 Edward H. Ross Drive, Elmwood Park, NJ 07407, telephone number: 201-791-2600.

The ClinicalLaboratory Testing Market in the United States

We believe thatthe U.S. market for clinical laboratory testing generates approximately $40billion in annual revenue.  Nearly alllaboratory tests are performed by one of three types of laboratories: hospitallaboratories, physician office laboratories or independent clinical laboratories.We believe approximately 54% of the clinical laboratory tests done in theUnited States are currently performed in a hospital laboratory, approximately40% performed by an independent clinical laboratory and the balance in aphysician office or other laboratory.

During the last few years, the economic fundamentalsof the industry have been improving. In the cost containment era of the 1990s,the industry was negatively impacted by the rapid growth of managed care,stringent government regulation and investigations into fraud and abuse. Thesefactors  led to revenue and profitdeclines and industry consolidations, especially among commercial clinicallaboratories. As a result, fewer but larger clinical laboratories have emergedwith greater economies of scale, more effective compliance with governmentbilling regulation and other laws and a better approach to pricing theirservices. These changes resulted in improved profitability.  In addition, new and emerging technologiescontinue to provide greater testing opportunities for clinical laboratories.

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We believe theindustry will continue to experience growth in testing volume due to thefollowing:

·                                          Agingof the population of the United States;

·                                          Awarenessby patients of the value of laboratory tests;

·                                          Decreasein the cost of tests;

·                                          Decreasein the influence of managed care organizations on the ordering patterns oftheir physicians;

·                                          Developmentof sophisticated and specialized tests for early detection of disease anddisease management;

·                                          Diagnosisand monitoring of infectious diseases such as AIDS and Hepatitis C;

·                                          Earlydetection and prevention as a means of reducing healthcare costs;

·                                          Employersponsored wellness programs;

·                                          Researchand development in genomics.

Business Strategy

We are a regionalclinical laboratory with subspecialty testing capabilities. As a regionallaboratory, we service the New York metropolitan area, and currently conductbusiness in most New York State counties, as well as in most of New Jersey andsome parts of Pennsylvania and Connecticut. We primarily offer laboratoryservices to physician offices in these areas with an infrastructure thatincludes a comprehensive logistical department, extensive phlebotomy servicesand phlebotomy draw stations scattered around our geographic area. We have alsodeveloped expertise in certain testing areas with specific emphasis in cancerpathology and diagnostics as well as molecular diagnostics. Through theacquisition of the operating assets of GeneDx, we have acquired expertise andcredibility in the area of genetic diagnostic testing and we intend to leveragethat resource in the development of expanded genetic diagnostic testing. Theseservices are marketed as a business unit, called GenPath, which servicescustomers outside of routine physician office testing. We have developedcertain specialized markets, such as in the areas of correctional health,substance abuse testing, fertility testing and molecular diagnostics. Testingin these areas also may be supported outside of physician offices.

We have one of the largest regional marketing staffsof any laboratory in the country, some of whom are trained specifically inOncology and call on Oncology practices and hospitals.

We believe that our large marketing staff and stronginfrastructure within our designated area can be leveraged to bring newtechnologies to physicians and healthcare providers. Over the past year, ourvolume of testing in the area of molecular diagnostics has increased.  We believe that laboratory data has greatvalue in managing the healthcare of a population, but can only be properlyutilized when combined with medical claims and pharmacy data. Our medicalinformation unit, PSIMedica, seeks to combine laboratory data with these otherdata elements in order to provide information analytics that will help toimprove the quality and efficiency of healthcare. We seek to continue ourstrong growth not only through our marketing organization, new technologies andsuperior service, but by providing value added analytics in conjunction withlaboratory results.

Our mission is to be recognized by our clients as thebest provider of clinical laboratory testing, information and related services.The principal components of our strategy to achieve our mission are as follows:

·                                    Capitalizeon our position within the clinical market

·                                    Leadin the providing of medical information

·                                    Providethe highest quality service

·                                    Pursuestrategic growth opportunities

Services

The clinical laboratory testing business consists ofroutine testing and esoteric testing. Routine testing generates approximately62% and esoteric testing generates approximately 38% of

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our net revenues. The netrevenue generated by our PSIMedica business unit and our CareEvolve and GeneDxsubsidiaries have been minimal to date.

Routine Testing

Routine tests measure various health parameters suchas the functions of the heart, kidney, liver, thyroid and other organs. Belowis an abbreviated list of some commonly ordered tests:

·                                          BloodCell Counts

·                                          Cholesterollevels

·                                          HIV-relatedtests

·                                          PapSmears

·                                          Pregnancy

·                                          SubstanceAbuse

·                                          Urinalysis

We perform these tests at our two processingfacilities (Elmwood Park, New Jersey and Valley Cottage, New York).

We operate 24 hours a day, 365 days a year. We performand report most routine tests within 24 hours. Tests results are delivered viadriver or electronically.

Esoteric Tests

We also perform esoteric tests that requiresophisticated equipment and materials, highly skilled personnel, professionalattention and are ordered less frequently than routine tests. These tests aregenerally priced higher than routine tests. Esoteric tests are usually in thesemedical fields:

·                                          Endocrinology(the study of glands and their hormone secretions)

·                                          Genetics(the study of chromosomes, genes and their protein products)

·                                          Immunology(the study of the immune system)

·                                          Microbiology(the study of microscopic forms of life)

·                                          Oncology(the study of abnormal cell growth)

·                                          Serology(the study of body fluids)

·                                          Toxicology(the study of chemicals and drugs and their effects on the body)

We perform cancer cytogenetics testing at our leasedfacilities in Elmwood Park, NJ and Milford, Massachusetts and genetic testingat our facility in Gaithersburg, Maryland.

MedicalInformation

Our PSIMedica business unit is based on a ClinicalKnowledge Management (ACKM@) System that uses data derived from variousdisparate sources to provide both administrative and clinical analysis of apopulation. The source data consists of enrollment (demographic) data, claimsdata, pharmacy data, laboratory results data, and any other data that may beavailable. The system uses sophisticated algorithms to cleanse and configurethe data so that analysis can be comprehensive and meaningful. The data ismaintained on multiple levels of analysis enabling review of data from theglobal level to the granular transactional detail.  The system includes a base set of queriesthat provide basic functionality and allows on-line real-time ad hoc querycapability enabling the user to customize analysis to the best needs of theorganization using the system. In addition to the basic queries provided by thesystem, PSIMedica Quality Indicators (APQI@) provide comprehensive, diseasestate oriented queries that disclose the quality and efficiency of the care andservice. These indicators have been designed to provide the customer withstandards and outcome predictors based on a medical standards basis.  We are using PSIMedica to market value-addedclinical laboratory services to bulk purchasers of clinical laboratorysolutions, as well as marketing our PSIMedica programs to businesses such asHealth Plans, Integrated Delivery Networks, Disease Management Companies,Insurers, Clinical Trial Companies and other healthcare providers that mostbenefit from the ability of the system to combine both clinical andadministrative analysis.

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Other Products

CareEvolve, ourwholly owned subsidiary, is a physician-based connectivity portal.  This system provides a complex, sophisticatedsystem for ordering laboratory services and delivering laboratory results.  The system is designed to bephysician-centric and to provide a highly flexible, scalable, comprehensivedesktop solution for physicians to manage their day-to-day practice andpersonal needs, as well as to handle their clinical laboratory ordering andreporting.  This product has beendesigned to work as a platform with plug and play capability that can easily beused by other laboratories that also need a web-based solution for theirphysician customers. We executed a Strategic Marketing Agreement (the “SMA”) inDecember 2001 with Roche Diagnostics (“Roche”) to operate a Joint Venture forthe sale and distribution of the CareEvolve Services to laboratories throughoutthe country. In December 2004, we executed an Addendum to the SMA with Roche.Pursuant to the Addendum, Roche’s rights to share in CareEvolve’s net after taxincome and to purchase up to a 50% equity interest in CareEvolve were canceled.Roche did retain a right of first refusal to purchase CareEvolve in the eventwe were willing to accept such a purchase offer from a third party. Although weretained the rights to market the CareEvolve Services in all markets includingthe laboratory market, Roche was the sole Diagnostic Company (manufacturer ofdiagnostic equipment and supplies) granted the right to market the CareEvolveServices to laboratories. As a result of the execution of the Addendum, we tooka one-time charge to fiscal 2004 earnings of approximately $400,000 to reflectthe change in terms of our relationship with Roche. The charge was associatedwith one-time technology development expenses which had been assessed toCareEvolve and are now our responsibility. The Joint Venture was terminated bymutual consent in the fourth quarter of fiscal 2005 and we are now marketingthe CareEvolve services on our own.

Payors and Clients

We provide laboratory services to a range ofhealthcare providers. A Apayor@ is the party who pays for the tests while theAclient@ is the party that refers the tests to us. We may consider anorganization that has a contract with us, such as a clinic or governmentalagency, both a payor and a client. Some states, such as New York and NewJersey, prohibit us from billing physician clients. During fiscal year 2006, nosingle client accounted for more than 10% of our net revenues.

The following table reflects the current estimates ofthe breakdown of net revenue by payor for the twelve  months ended October 31, 2004, 2005, and2006.
|                         | ** ** | **Years Ended October 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Direct Patient  Billing |       | 7                                          | %          | 6 | % | 4 | % |
| Commercial  Insurance   |       | 48                                         | %          | 46 | % | 44 | % |
| Professional  Billing   |       | 17                                         | %          | 18 | % | 24 | % |
| Medicare                |       | 25                                         | %          | 26 | % | 26 | % |
| Medicaid                |       | 3                                          | %          | 4 | % | 2 | % |
|                    |       | 100                                        | %          | 100 | % | 100 | % |

 

Clients

Physicians who order clinical tests for their patientsrepresent one of the primary sources of our testing volume. Fees invoiced topatients and third parties are based on our fee schedule, which may be subjectto limitations on fees imposed by third-party payors. Medicare and Medicaidreimbursements are based on fee schedules set by governmental authorities.

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Employers, GovernmentalAgencies

We provide laboratory services to governmentalagencies and large employer groups. We believe that we are the largest regionallaboratory providing laboratory testing services to correctional facilities inthe Northeastern United States. All of these clients are charged on acontractual basis.

Sales and Marketing

We employ full and part-time sales and marketingrepresentatives. All of our sales and marketing personnel operate in a dualcapacity, as both marketing and client support representatives. This ensuresthat all of our salespersons are intimately involved with the client. Webelieve that this is unique in the industry and is extremely helpful in clientretention, since it provides a strong connection between the physician and ourstaff.

Client ServiceCoordinators

We utilize the services of full and part-time clientservice coordinators at our Elmwood Park, Valley Cottage, Clarksburg andGaithersburg facilities, all of whom are trained in medical and laboratoryterminology. This staff is used as an interface with physicians and nurses andaugments the client support provided by our sales force. They also reporthighly abnormal and life threatening results to the ordering physician immediatelyvia telephone in order to provide speedy medical resolution to any patientproblem.

Logistical Support

We employ full and part-time couriers. They pick uppatient specimens from and deliver printed reports to physician offices,nursing homes, clinics and correctional facilities.

Strategic GrowthOpportunities

Over the last several years, we have experiencedsubstantial growth and have expanded our operational capabilities. In September2006, we acquired certain assets and liabilities of two Maryland laboratories,a pathology laboratory and a genetics laboratory for $1,500,000 and$10,000,000, respectively. The genetics laboratory purchase agreement containscertain provisions, which, if achieved in the next three years could result inan increase in the purchase price from $10,000,000 to a maximum $17,000,000. Weretained the staffs of these laboratories and continue to operate at the samelocations. We intend to develop further and expand both our core laboratorybusiness and other products. This growth and expansion has placed, and willcontinue to place, a significant strain on our resources. We cannot assure thatwe will be able to successfully manage a continuation of the rate of growthsimilar to that which we have experienced in the past, should it occur.

Billing

Billing for laboratory services is extremelycomplicated. We must bill various payors, such as patients, Medicare, Medicaid,insurance companies and employer groups, all of which have different billingrequirements. Compliance with applicable laws and regulations as well asinternal compliance procedures adds complexity to this process.

Our bad debt expense is the result of issues that arenot credit-related as is the case in most industries. It is due in most part tomissing or incorrect billing information on our requisitions; this occursbecause we depend on the healthcare provider to supply us with the information.We perform the tests and report the test results as requested on therequisition regardless of whether the demographic information is correct oreven missing altogether. We then attempt to obtain any missing information andcorrect the billing information received from the healthcare provider. Thisadds to the complexity, slows the invoicing process, and generally increases theaging of our

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accounts receivable. Whenall issues are not resolved in a timely manner, the item is written-off to baddebt expense through the allowance for doubtful accounts. Other items such aspricing differences and payor disputes also complicate billing. Adjustments toreceivables as a result of these types of matters are accounted for as revenueadjustments and are not written-off to bad debt expense.

Competition

We compete with three types of providers in a highlyfragmented and competitive industry: hospital laboratories, physician-officelaboratories and other independent clinical laboratories. Our major competitorsin the New York metropolitan area are Quest Diagnostics and LaboratoryCorporation of America. Although we are much smaller than these nationallaboratories, we believe that we compete successfully with them in our regionbecause of the following factors:

·                                          Fewer layersof staff

·                                          A moreresponsive business atmosphere

·                                          Customizedservice

We believe ourresponses to medical consultation are faster and more personalized than thoseof  the national laboratories. Our clientservice staff only deals with basic technical questions and those that havemedical or scientific significance are referred directly to our seniorscientists and medical staff.

Quality Assurance

Medical testing is essentially a process ofcommunication and data transfer. In order to provide accurate and preciseinformation to the physician, it is essential that we maintain a wellstructured and vigorous quality assurance program. Our goal is to continuallyimprove this process. We hold the required Federal and State licenses necessaryto permit our operation of a clinical laboratory at our facilities in NewJersey, New York, Maryland and Massachusetts. We submit to vigorous proficiencytests (or surveys) in all tests that we perform. We are also subject tounannounced inspections from the various state licensing agencies.

Our laboratories are accredited by the College ofAmerican Pathologists (ACAP@). This accreditation includes on-site inspectionsand participation in the CAP proficiency testing program or an equivalent. CAPis an independent organization of board certified pathologists approved by theCenter for Medicare  and MedicaidServices (ACMS@) to inspect clinical laboratories in order to determinecompliance with the standards required by the Clinical Laboratory ImprovementAmendments of 1988 (ACLIA-88”).

Our Quality Assurance Committee, headed by a QualityAssurance Coordinator and composed of supervisors from all departments, meetsdaily to assess and evaluate the laboratory’s quality.  Based on the information received from theCommittee, recommendations are made to correct conditions which have led toerrors.  Management, departmentsupervisors and members of the Committee continually monitor the laboratory’squality.  Depending on the test, two orthree levels of Quality Control materials are run in each analytical assay toassure precision and accuracy.  Patientpopulation statistics are evaluated each day. Testing of highly abnormalsamples is repeated to assure accuracy.

We believe that all of these procedures are necessary,not only in assuring a quality product, but also in maintaining Federal andstate licensing.  These high standards ofquality are an important factor in what we regard as our excellent rate ofclient retention.

Regulation of ClinicalLaboratory Operations

The clinical laboratory industry is highly regulatedand subjected to significant Federal and state regulation. This includesinspections and audits by governmental agencies. These agencies may imposefines, criminal penalties, or other enforcement actions to enforce laws andregulations.

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These penalties caninclude revocation of a clinical laboratory=s license. Changes in regulationsmay increase the cost of testing or processing claims.

Waste management is subject to Federal and stateregulations governing the transportation and disposal of medical wasteincluding bodily fluids.  Federalregulations require licensure of interstate transporters of medical waste. InNew Jersey, we are subject to the Comprehensive Medical Waste Management Act, (“CMWMA”),which requires us to register as a generator of special medical waste. All ofour medical waste is disposed of by a licensed interstate hauler.  The hauler provides a manifest of thedisposition of the waste products as well as a certificate of incinerationwhich is retained by us. These records are audited by the State of New Jerseyon a yearly basis. We are also subject to Federal requirements. The FederalHazardous materials transportation law, 49 U.S.C. 5101 et seq., and theHazardous Materials Regulations (HMR), 49 CFR parts 171-180. The Federalgovernment has classified hazardous medical waste as hazardous materials forthe purpose of regulation. These regulations preempt State regulation whichmust be “substantively the same,” “the non-Federal requirement must conform “inevery significant respect to the Federal requirement. Editorial and othersimilar de minimis changes are permitted.” 49 CFR 107.202(d). The amendments toprovisions in 49 U.S.C., 5125 reaffirmed the need to achieve greater uniformityand to promote the public health, welfare, and safety at all levels, Federalstandards for regulating the transportation of hazardous materials inintrastate, interstate, and foreign commerce are necessary and desirable. Webelieve we are in compliance with all Federal and State medical wasteregulations.

Regulation ofReimbursement for Laboratory Services

Containment of health-care costs, includingreimbursement for clinical laboratory services, has been a focus of ongoinggovernmental activity.  Omnibus budgetreconciliation legislation, designed to “reconcile” existing laws withreductions and reimbursements required by enactment of a Congressional budgetcan adversely affect clinical laboratories by reducing Medicare reimbursementfor laboratory services. For most of the tests performed for Medicarebeneficiaries or Medicaid recipients, laboratories are required to billMedicare or Medicaid directly, and to accept Medicare or Medicaid reimbursementas payment in full.

The current administration, Congress and variousFederal agencies have examined the rapid growth of Federal expenditures forclinical laboratory services, and the use by the major clinical laboratories ofdual fee schedules (“client” fees charged to physicians, hospitals,institutions and companies with whom a laboratory deals on a bulk basis andwhich involve relatively low administrative costs, and “patient” fees chargedto individual patients and third party payors, including Medicare, whogenerally require separate bills or claims for each patient encounter and whichinvolve relatively high administrative costs). The permitted Medicare reimbursement rate for clinical laboratoryservices has been reduced by the Federal government in a number of instancesover the past several years to a present level equal to 74% of the nationalmedian of laboratory charges. Next year marks the third year of a five-yearfreeze (through 2008) on Laboratory fee updates, as required by the MedicareModernization Act of 2003. A number of proposals for legislation or regulationare under discussion which could have the effect of substantially reducingMedicare reimbursements to clinical laboratories through reduction of thepresent allowable percentage or through other means.  In addition, the structure and nature ofMedicare reimbursement for laboratory services is also under discussion and weare unable to predict the outcome of these discussions. Depending upon thenature of congressional and/or regulatory action, if any, which is taken andthe content of legislation, if any, which is adopted, we could experience asignificant decrease in revenues from Medicare and Medicaid, which could have amaterial adverse effect on us.

CLIA-88

CLIA-88 extended Federal licensing requirements to allclinical laboratories (regardless of the location, size or type of laboratory),including those operated by physicians in their offices, based on thecomplexity of the tests they perform. The legislation also substantially increased regulation of cytologyscreening, most notably by requiring the Secretary of Health and Human

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Services, (“HHS”) toimplement regulations placing a limit on the number of slides that a cytotechnologistmay review in a twenty-four hour period. CLIA-88 also established a more stringent proficiency testing programfor laboratories and increased the range and severity of sanctions forviolating Federal licensing requirements. A number of these provisions, including those that imposed strictercytology standards and increased proficiency testing, have been implemented byregulations applicable only to laboratories subject to Medicare certification.On February 28, 1992, HHS published three sets of regulations implementingCLIA-88, including  quality standardregulations establishing Federal quality standards for all clinicallaboratories; application and user fee regulations applicable to mostlaboratories in the United States which became effective on March 30 1993; andenforcement procedure regulations applicable to laboratories that are found notto meet CLIA-88 requirements.  Thequality standard regulations establish varying levels of regulatory scrutinydepending upon the complexity of testing performed.  Under these regulations, a laboratory thatperforms only one or more of seventy eight routine “waived” tests may apply for a waiver from most requirements ofCLIA-88.  We believe that most testsperformed by physician office laboratories will fall into either the “waived”or the “moderately complex” category. The latter category applies to simple or automated tests and generallypermits existing personnel in physicians’ offices to continue to performtesting under the implementation of systems that insure the integrity andaccurate reporting of results, establishment of quality control systems,proficiency testing by approved agencies, and biannual inspection.  Our testing is often much more complex and asa result, we are subject to full compliance with CLIA-88. The quality standardand enforcement procedure regulations became effective on September 1,1992, most personnel, quality control and proficiency testing requirements havebeen implemented; the remainder will be phased in over a number of years.  Our laboratory completed its first CLIAinspection under CLIA-88 guidelines and received its certificate of complianceeffective February 7, 1996 and has been reinspected on a bi-annual basis.

Compliance Program

The Office ofInspector General has published a Model Compliance Program for the clinicallaboratory industry. This is a voluntary program for laboratories todemonstrate to the Federal government that they are responsible providers. Wehave implemented a voluntary compliance program adhering to the standards setforth in the Model Compliance Program.

Confidentiality of HealthInformation

Pursuant to theHealth Insurance Portability and Accountability Act of 1996 (AHIPAA@), onDecember 28, 2000, the Secretary of HHS issued final regulations that wouldestablish comprehensive federal standards with respect to the use anddisclosure of protected health information by a health plan, healthcareprovider or healthcare data clearinghouse. The regulations establish aregulatory framework on various subject matter, including:

·                                          Thecircumstances under which disclosures and uses of protected health informationrequire the patient=s consent, or authorization or no patient consent orauthorization.

·                                          Thecontent of notices of privacy practices for protected health data.

·                                          Patients=rights to access, amend and receive an accounting of the disclosures and usesof protected health information.

·                                          Administrative,technical and physical safeguards required for that use or for disclosure ofprotected health data.

These regulations establish a Aminimum@ and woulddefault to more stringent state laws. Therefore, we are required to comply withboth sets of standards. Laboratories were required to submit a compliance planto HHS by October 16, 2003.  We filed ourapplication for a one year extension for compliance with the Transaction DataSet Regulations and filed our compliance plan during the extension period inaccordance with the model form provided by HHS. HIPAA provides for significantfines as well as substantial criminal penalties for violations of the Act.

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Fraud and AbuseRegulations

Medicare and Medicaid anti-kickback laws prohibitclinical laboratories from making payments or furnishing other benefits toinfluence the referral of tests billed to federal programs. Federal enforcementagencies (including both the Federal Bureau of Investigation and the Office ofthe Inspector General) liberally interpret and aggressively enforce statutoryfraud and abuse provisions of these anti-kickback statutes. According to publicstatements made by the Department of Justice, healthcare fraud has become oneof  its highest priorities. Many of theanti-fraud statutes are vague or indefinite and have not been interpreted inthe courts.  We believe we operatelawfully within these statutes; however, we cannot predict if some of ourpractices may be interpreted as violating these statutes and regulations.

Insurance

We maintain professional liability insurance of$1,000,000 per occurrence, $3,000,000 in the aggregate. In addition, wemaintain excess commercial insurance of $5,000,000 per occurrence and$5,000,000 in the aggregate. We believe that our present insurance coverage issufficient to cover currently estimated exposures, but we cannot assure that wewill not incur liabilities in excess of the policy limits.  In addition, although we believe that we willbe able to continue to obtain adequate insurance coverage, we cannot assurethat we will be able to do so at acceptable costs.

Employees

At October 31, 2006, we had 1,156 full-time and 395part-time employees serving in executive positions, as technicians andtechnologists (including physicians, pathologists and PhDs), in marketing andas drivers and in bookkeeping, clerical and administrative positions. None ofour employees are represented by a labor union. We regard relations with ouremployees as satisfactory.

Special Note RegardingForward-Looking Statements

This Annual Report on Form 10-K includesAforward-looking statements@ within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. All statements other than statements of historicalfact included in this Report, including without limitation, statementsregarding our financial position, business strategy, products, products underdevelopment, markets, budgets and plans and objectives of management for futureoperations, are forward-looking statements. Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to have been correct.Important factors that could cause actual results to differ materially from ourexpectations are disclosed in statements set forth under ACautionary Statements@herein and elsewhere in this Report, including, without limitation, inconjunction with the forward-looking statements included in this Report. Allsubsequent written and oral forward-looking statements attributable to us, orpersons on our behalf, are expressly qualified in their entirety by theCautionary Statements and such other statements.

Cautionary Statements

In addition to the other information in this AnnualReport on Form 10-K, the following factors should be considered carefully inevaluating us. See also ASpecial Note Regarding Forward-Looking Statements.@

Risks Associated withGrowth:

Over the last several years, we have experiencedsubstantial growth and have expanded our operational capabilities. In September2006, we acquired certain assets and liabilities of two Maryland laboratories,a pathology laboratory and a genetics laboratory for $1,500,000 and$17,000,000, respectively. The genetics laboratory purchase agreement containscertain provisions, which, if achieved in the next three years could result inan increase in the purchase price from $10,000,000 to a maximum $17,000,000. Weretained the staffs of these laboratories

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and continue to operateat the same locations. We intend to develop further and expand both our corelaboratory business and other products. This growth and expansion has placed,and will continue to place, a significant strain on our resources. We cannotassure that we will be able to successfully manage a continuation of the rateof growth similar to that which we have experienced in the past, should itoccur.

Fluctuations in OperatingResults:

Our quarterly and annual operating results can beaffected by a wide variety of factors, many of which are outside of our controland which have in the past and could in the future materially and adverselyaffect our operating results. These factors include the quantities and timingof specimens received, pricing pressures, reimbursement changes, availabilityand cost of diagnostic supplies, cost of logistic and delivery systems, changesin product mix, retention and expansion of our marketing staff, timing ofpayments from governmental agencies and third-party payors and the effect ofadverse weather conditions. We rely principally upon our internal logisticgroup for pick-up and delivery of specimens. However, as we shift our productmix we have begun to rely on Federal Express, UPS and other such providers forthis service. Any disruption in this service, as occurred on September 11, 2001when the National Airspace System (ANAS@) was shut down for a week, could havea material adverse effect on our operating results. As a result of thesefactors, our operating results may continue to fluctuate in the future.

Uncertainties Related toGovernment Regulation and Enforcement

We are a provider of healthcare services. As such, weare subject to extensive and rapidly changing federal, state and local laws andregulations governing licensure, billing practices, financial relationships,referrals, conduct of operations, purchase of existing businesses and otheraspects of our business. We cannot predict the timing or impact of any changesin these laws and regulations or their interpretations by regulatory bodies,and we cannot assure that these changes will not have a material adverse effecton us.

Current federal laws governing federal healthcareprograms, as well as some state laws, regulate certain aspects of therelationship between healthcare providers, including us, and their referralsources. The Federal Anti-Kickback Law and the Stark Law generally prohibitproviders and others from soliciting, offering, receiving or paying, directlyor indirectly, any monies in return for either making a referral for a serviceor item or purchasing, ordering or leasing a service or item, and prohibitsphysicians from making such referrals to entities in which they have aninvestment interest or with which they have a compensation arrangement.Exceptions to these laws are limited. Violations are punishable by disallowanceof claims, civil monetary or criminal penalties and or exclusion from Medicare.Government authorities (both federal and state) have become more aggressive inexamining laboratory billing practices, and in seeking repayments and evenpenalties based on how the services were billed, regardless of whether thecarriers had furnished clear guidance.

In addition, our laboratory operations are required tobe licensed or certified under CLIA-88, CMS and various State and local laws.We are also subject to federal and state laws relating to the handling anddisposal of medical waste and radioactive materials, as well as the safety andhealth of laboratory employees. Although we seek to structure our practices tocomply with these laws and regulations, no assurances can be given regarding compliancein any given situation. The possible sanctions for failure to comply with theselaws and regulations may include the denial to conduct business, significantfines and criminal penalties. Any significant fine or criminal penalty couldhave a material adverse effect on our financial condition. Any exclusion orsuspension from participation in a CMS program, any loss of licensure oraccreditation or the inability to obtain the required license would have amaterial adverse effect on our business.

Uncertainties Related toThird-Party Payors

We typically bill third party payors such as Medicare,Medicaid, Governmental programs and private insurers for our services. Suchthird party payors are constantly negotiating prices with

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the goal of loweringtheir costs, which may result in lower profit margins for us. Reimbursementrates have been established for most, but not every service. We cannot collectfrom third party payors for services that these payors have not approved forreimbursement. As is common with all laboratories, there is a certain amount ofvariability with respect to reimbursement among third party payors.Furthermore, third party payors have, on occasion ceased reimbursements whencertain tests are ordered for patients with certain diagnoses while maintainingreimbursement when those tests are ordered for other diagnoses deemedappropriate by the carrier. In addition, Medicare or Medicaid may retroactivelyaudit its payments to us and may determine that certain payments must bereturned.

Potential HealthcareReform Including Decreasing Reimbursement Rates

The public and the federal government continue tofocus attention on reforming the healthcare system in the United States. At thebeginning of calendar year 2005, CMS announced significant cuts to Medicarereimbursement rates for flow cytometry testing. We anticipate a partial  restoration of the former reimbursement ratesin fiscal 2007. Furthermore, several legislative proposals have been introducedin Congress and state legislatures in recent years that would effect majorreforms of the healthcare systems. In addition, CMS has made a number ofproposals regarding the payment and coverage of laboratory services includingthe development of national coverage policies. Because of the uncertainties inregard to the nature, timing and extent of any such reimbursement changes,audits and reform initiatives, we are unable to predict the effect of thesechanges on us.

Insurance

Although we believe that our present insurancecoverage is sufficient to cover currently estimated exposures, we cannot assurethat we will not incur liabilities in excess of the policy limits.  In addition, although we believe that we willbe able to continue to obtain adequate insurance coverage, we cannot assurethat we will be able to do so at acceptable cost.

Uncertainties Related toAccounts Receivable

All of our services are rendered based upon a fee forservices list. We assume the financial risk related to collection of thesereceivables such as:

·                                          Delaysattendant to reimbursement by third party payors

·                                          Difficultiesin gathering complete and accurate billing information

·                                          Inabilityto collect accounts

·                                          Longcollection cycles

There have been times when our accounts receivablehave increased at a greater rate than revenue growth and, therefore, hasadversely affected our cash from operations. We have taken steps to implementsystems and processing changes intended to improve billing procedures andrelated collection results. We believe that we have made progress by reorganizingour accounts receivable and billing functions and that our allowance fordoubtful accounts is adequate. However, we cannot assure that our ongoingassessment of accounts receivable will not result in the need for additionalprovisions. Such additional provisions, if implemented, could have a materialadverse effect on our operating results.

Competition

We operate in a business which is characterized byintense competition. Our major competitors in the New York metropolitan area,Quest Diagnostics and Laboratory Corporation of America, are large nationallaboratories which possess greater name recognition, larger customer bases,significantly greater financial resources and employ substantially morepersonnel than we do. Many of our competitors have long establishedrelationships. We cannot give assurances that we will be able to competesuccessfully with such entities in the future. Our ability to attract andretain sales representatives and management may also affect our ability tocompete in this marketplace.

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### Dependence on Bank Financing

In October 2004, we entered into an Amended andRestated Loan and Security Agreement (the “Loan Agreement”) with PNC Bank,National Association (“PNC Bank”) as Lender. Pursuant to the Loan Agreement,our credit facility from PNC Bank was extended to October 31, 2007 and themaximum permitted amount of our credit line (not to exceed 50% of our “eligiblereceivables” as defined in the Loan Agreement) was increased from $25,000,000to $30,000,000. The Loan Agreement also provides us with an “AcquisitionSubline” under the maximum $30,000,000 credit facility of up to $10,000,000which can be repaid in 36 equal monthly installments thereafter. Interest onadvances under this credit facility are subject at our option, to PNC Bank’sprime rate or the Eurodollar rate of interest plus, in certain instances, anadditional interest percentage. Effective as of October 31, 2006, we executed afourth amendment to the Loan Agreement formalizing the repayment terms of the$5 million term loan from PNC Bank used by our wholly-owned BRLI No. 2Acquisition Corp. subsidiary to fund the $5 million acquisition cash payment inconnection with its purchase of the operating assets of GeneDx. The term loanis evidenced by a secured promissory note payable over a six year term in equalmonthly principal payments of $69,444.44 plus interest at 6.85% per annum.

Dependence on our ChiefExecutive Officer

Our success is substantially dependent on the effortsand abilities of Marc D.  Grodman, M.D.,our founder, president and chief executive officer. The unavailability of Dr.Grodman, whether as a result of his death, disability or otherwise, could havea material adverse effect upon our business.

Possible Volatility ofStock Price

There is a history of volatility in the market pricefor shares of companies in the healthcare marketplace. Factors such asfluctuations in our quarterly revenues and operating results, announcements ofnew innovations or services by us or our competitors, changes in third partypayment policies and government regulations may have a material effect on themarket price of our Common Stock. In addition, any announcement of a materialpending legal action could have a negative impact on the market price of ourCommon Stock regardless of the outcome of any such matter.

Factors In Place ToDiscourage Takeover Attempts

The substantial percentage ownership of ouroutstanding Common Stock by our executive officers and directors; our charterprovision providing for a staggered board of directors so that only one-thirdof the board is elected each year to serve a three year term; our Rights Planwhich was adopted to discourage hostile acquisitions of control of the Company;and the requirement that the holders of not less than 80% of our outstandingCommon Stock must approve any merger, consolidation, asset sale or acquisitionof the Company not approved by the board may discourage attempts by thirdparties to tender for or otherwise obtain control of the Company, even if suchan attempt might be deemed beneficial to the Company and its shareholders. SeeItem 11 – “Employment Agreements with Executive Officers” and “SeverancePayments for Other Employees” as to employment agreements signed by the Companywhich provide for substantial Severance Payments upon termination of employmentin the event of a Change in Control of the Company. These Severance Paymentprovisions may also discourage attempts by third parties to tender for orotherwise obtain control of the Company.

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Item 2. - Properties

We operate through a regional network of laboratories.The table below summarizes certain information as to our principal facilitiesas of October 31, 2006.
| Location            | ** ** | **Purpose**            | ** ** | **Type of  Occupance** |
|---------------------|------------|------------------------|------------|------------------------|
| Clarksburg, MD      |       | Pathology Laboratory   |       | Leased                 |
| Elmwood Park, NJ    |       | Main Laboratory        |       | Leased                 |
| Elmwood Park, NJ    |       | Corporate Headquarters |       | Leased                 |
| Gaithersburg, MD    |       | Genetics Laboratory    |       | Leased                 |
| Milford, MA         |       | Oncology Laboratory    |       | Leased                 |
| Poughkeepsie, NY    |       | Pathology Laboratory   |       | Leased                 |
| Valley Cottage,  NY |       | Clinical Laboratory    |       | Leased                 |

 

We believe that these facilities as presently equippedhave the production capacity for its currently foreseeable level of operations.We also lease additional relatively small draw stations throughout the New Yorkmetropolitan area to collect specimens from physician-referred patients fortesting at our processing facilities.

Item 3. - LegalProceedings

At October 31, 2006 and at the date of this Report, wewere not involved in any material legal proceedings.

Item 4. - Submissionof Matters to a Vote of Security Holders

No matter was submitted to a vote of our securityholders during the fourth quarter of fiscal 2006.

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**PART II**

Item 5. - Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity

 

Our Common Stock is listed for trading on The NASDAQNational Market System under the symbol “BRLI”. It traded on the NASDAQ SmallCap System from November 24, 1993 until March 26, 2002 when our application tolist our Common Stock on the NASDAQ National Market System was approved.

The following table sets forth the range of high andlow closing bid prices for our Common Stock for the periods indicated, asderived from reports furnished by Pink Sheets LLC. Such quotations representprices between dealers, do not include mark-ups, mark-downs or commissions andmay not necessarily represent actual transactions.
|                      | ** ** | **Bid Prices** | ** ** |
|----------------------|------------|---------------------|------------|
| **Fiscal Year** | ** ** | **High**            | ** ** | **Low** | ** ** |
| ** **           |       |                |       |   |   |
| **2005**             |       |                |       |   |   |
| First Quarter        |       | $                   | 17.48      |   | $ | 13.25 |   |
| Second Quarter       |       | 15.30               |       | 12.93 |   |
| Third Quarter        |       | 15.04               |       | 13.55 |   |
| Fourth Quarter       |       | 18.91               |       | 14.32 |   |
|                 |       |                |       |   |   |
| **2006**             |       |                |       |   |   |
| First Quarter        |       | $                   | 19.14      |   | $ | 15.98 |   |
| Second Quarter       |       | 18.97               |       | 16.03 |   |
| Third Quarter        |       | 23.51               |       | 17.89 |   |
| Fourth Quarter       |       | 24.59               |       | 19.98 |   |

 

On January 9, 2007the last sale price for the Common Stock on NASDAQ was $22.39 per share.

AtOctober 31, 2006, the number of record owners of the Common Stock was 363. Suchnumber of record owners was determined from our shareholder records and doesnot include beneficial owners whose shares are held in nominee accounts withbrokers, dealers, banks and clearing agencies.

Dividends

We have not paidany dividends on our Common Stock since our inception and, do not contemplateor anticipate paying any dividends in the foreseeable future. Furthermore, ourloan agreement with PNC Bank prohibits us from paying any cash dividends ormaking any cash distributions with respect to shares of our Common Stock.

Recent Sales ofUnregistered Securities

On September 26,2006 we issued 230,947 shares of our common stock in connection with theacquisition of the operating assets of GeneDx. These shares were valued for thepurpose of this acquisition at $21.65 per share, the average closing price forthe common stock on NASDAQ on the ten trading days immediately preceding theAugust 29, 2006 signing of the purchase agreement.

A restrictivelegend was placed on the certificate for the 230,947 shares and stop transferinstructions were issued against the shares. The sellers represented that theywere acquiring the stock for investment and not with a view to distribution.Theshares were issued in reliance upon the exemption from the registrationrequirements of the Securities Act of 1933 in accordance with Section 4(2) ofthe Act on the basis that the transaction did not involve  a public offering.

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Equity Compensation PlanInformation

The informationrequired under this item is disclosed in item 12 of this Annual Report on Form10-K and is incorporated herein by reference.

Issuer Purchases ofEquity Securities

On June 1, 2005,the Board of Directors authorized the repurchase of up to 500,000 shares of ourcommon stock from time to time at prevailing market prices in theover-the-counter market over the period ending October 31, 2007. As of October31, 2006, no shares had been repurchased under this plan.

Item 6. - SelectedFinancial Data
| ** **                            | ** ** | **[In thousands, except per share data]** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Years ended**                                               | ** ** |
| ** **                            | ** ** | **October 31,**                                               | ** ** |
| ** **                            | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Operating Data:**                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net Revenues                          |       | $                                                                  | 193,134    |   | $ | 163,896 |   | $ | 136,184 |   | $ | 109,034 |   | $ | 96,631 |   |
| Cost of Services                      |       | $                                                                  | 96,079     |   | $ | 83,352 |   | $ | 68,201 |   | $ | 56,216 |   | $ | 51,706 |   |
| Gross Profit                          |       | $                                                                  | 97,055     |   | $ | 80,544 |   | $ | 67,983 |   | $ | 52,818 |   | $ | 44,925 |   |
| General and  Administrative Expenses  |       | $                                                                  | 79,074     |   | $ | 67,937 |   | $ | 55,163 |   | $ | 43,533 |   | $ | 38,853 |   |
| Income from  Operations               |       | $                                                                  | 17,981     |   | $ | 12,607 |   | $ | 12,820 |   | $ | 9,285 |   | $ | 6,072 |   |
| Other Expenses -  Net                 |       | $                                                                  | 1,239      |   | $ | 1,118 |   | $ | 634 |   | $ | 681 |   | $ | 849 |   |
| Provision for  Income Tax Expense     |       | $                                                                  | 5,451      |   | $ | 3,868 |   | $ | 3,670 |   | $ | 2,064 |   | $ | 301 |   |
| Net Income                            |       | $                                                                  | 11,291     |   | $ | 7,621 |   | $ | 8,516 |   | $ | 6,540 |   | $ | 4,922 |   |
| Net Income Per  Common Share          |       | $                                                                  | .86        |   | $ | .60 |   | $ | .71 |   | $ | .57 |   | $ | .43 |   |
| Net Income Per  Share - Diluted       |       | $                                                                  | .85        |   | $ | .58 |   | $ | .67 |   | $ | .51 |   | $ | .39 |   |
| Cash Dividends  Per Common Share      |       | $                                                                  | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Balance Sheet Data:**               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Total Assets                          |       | $                                                                  | 120,473    |   | $ | 88,373 |   | $ | 72,151 |   | $ | 53,219 |   | $ | 47,442 |   |
| Total Long-Term  Liabilities          |       | $                                                                  | 7,112      |   | $ | 4,934 |   | $ | 4,520 |   | $ | 2,833 |   | $ | 1,519 |   |
| Total  Liabilities                    |       | $                                                                  | 51,694     |   | $ | 37,658 |   | $ | 31,478 |   | $ | 23,261 |   | $ | 23,235 |   |
| Working Capital                       |       | $                                                                  | 39,994     |   | $ | 30,515 |   | $ | 23,815 |   | $ | 18,302 |   | $ | 12,651 |   |
| Shareholders’  Equity            |       | $                                                                  | 68,779     |   | $ | 50,715 |   | $ | 40,673 |   | $ | 29,958 |   | $ | 24,207 |   |
| **Other Data:**                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net Cash –  Operating Activities |       | $                                                                  | 5,200      |   | $ | 2,899 |   | $ | 5,026 |   | $ | 5,593 |   | $ | 4,682 |   |
| Net Cash –  Investing Activities |       | $                                                                  | (4,676     | ) | $ | (4,990 | ) | $ | (6,762 | ) | $ | (1,105 | ) | $ | (634 | ) |
| Net Cash – Financing  Activities |       | $                                                                  | 4,127      |   | $ | 287 |   | $ | 4,451 |   | $ | (3,925 | ) | $ | (3,000 | ) |

 

Item 7. -  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

OVERVIEW

We are a clinicallaboratory located in northeastern New Jersey. Our regional footprint lieswithin the New York City metropolitan area and the surrounding areas of NewJersey and southern New York State as well eastern Pennsylvania and some areasof western Connecticut; under certain circumstances, we provide servicesfurther into New York State, Pennsylvania, Delaware and Maryland. As a regionalprovider, we are a full-service laboratory that primarily services physician officepractices; our drivers pick up samples and deliver reports and supplies, weprovide sophisticated technical support, phlebotomy services or patient servicecenters where appropriate, and electronic communication services in many cases.We have also developed a national reputation for our expertise in certainfocused areas of clinical testing. GenPath, our cancer and oncology laboratory,is one of the premier hematopathology laboratories in the country. Physiciansoutside of our regional footprint send samples to our laboratory in order totake advantage of the expertise that we are able to provide in blood-basedcancer pathology and associated diagnostics. Our correctional

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healthcare services areused throughout the country at prisons and jails. The focused markets we serveon a national basis outside of our regional footprint do not require many ofthe logistical and other ancillary support services required within the region.Even within our regional footprint, we provide the same services that we provideon a national basis as well as some regional focused diagnostic services, suchas histology and pathology support services, substance abuse testing, fertilitytesting, hemostasis testing, women’s health testing, and molecular diagnosticsthat are unavailable from many of the smaller regional competitors; testing insome of these areas may be provided outside of physician offices.

Overthe last few years, there have been fundamental changes in the laboratoryservices industry. In the 1990s, the industry was negatively impacted by thegrowth of managed care, increased government regulation, and investigationsinto fraud and abuse. These factors led to revenue and profit declines andindustry consolidations, especially among commercial laboratories. There arecurrently only four publicly-traded laboratories, and one of those is beingacquired by a private corporation and will be leaving the public markets in thenear future. While that will leave the two national mega-laboratories andBioReference Laboratories as the only remaining publicly traded commerciallaboratories, there are numerous hospital outreach programs and smallerreference laboratories that compete for the commercial clinical laboratorybusiness scattered throughout the country. Clinical laboratories have had toimprove efficiency, leverage economies of scale, comply with governmentregulations and other laws and develop more profitable approaches to pricing.Moreover, there has been a proliferation of technology advancements in clinicaldiagnostics over the last decade that has created significant opportunities fornew testing and growth.

Asa full service clinical laboratory, we are constantly looking for newtechnologies and new methodologies that will help us to grow. Since the turn ofthe century, our size alone has made us attractive to companies that aredriving the advances in technology. We represent a significant opportunity forthese companies to market their products in one of the major population centersof the world—the New York Metropolitan area. We have had several successfulstrategic relationships with such technology opportunities. In addition to newtechnology opportunities, we have an extremely seasoned and talented managementstaff that has been able to identify emerging laboratory markets that areunder-served or under-utilized. We are currently developing programs forhistology and women’s health to go along with our existing hemostasis,hematopathology and correctional healthcare initiatives which have already beenestablished and in which we have been increasing our market share for the pastseveral years. We will continue to vigilantly seek focused diagnostic marketingopportunities where we can provide information, technology, service or supportthat expand and grow our clinical laboratory.

Duringthe fourth quarter of fiscal 2006, the Company acquired the operating assets ofGeneDx, a leading DNA sequencing laboratory. As molecular testing in general becomes a more significant element inthe diagnostic testing industry, the Company believes that genetic testing willbecome an essential diagnostic tool of the future.  GeneDx was started by two geneticists fromthe NIH in 2000.  Over the next sixyears, based on the reputation and expertise of the founders and the outstandingteam they built around themselves, along with a very focused and dedicatedunderstanding of the science of genetics, GeneDx became known as one of thepremier genetic testing laboratories for the diagnosis of rare geneticdiseases.  The Company believes that thepromise of genetic testing is in the diagnosis of the genetic variants ofcommon diseases.  It is the Company’sintention to leverage the expertise and reputation of GeneDx in order to take aleadership role in the expanding area of genetic testing.  The Company is seeking cutting edge methodsof testing that will be commercially viable diagnostic tools for theadvancement of genetic testing.  TheCompany is already expanding the menu of tests offered and employing marketingtechniques that were extremely successful in building GenPath, our oncologylaboratory.  In addition to scientistsand technicians to manage testing, GeneDx employs several genetic counselors tohelp patients and referring physicians and geneticists understand the meaningof the test results.  Prior to theacquisition, GeneDx ‘s revenues and profits were increasing  at an accelerating  rate. The Company hopes to be able tocontinue this growth in revenues and profits of our newest subsidiary.

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While we recognize that we are a clinical laboratorythat processes samples, we also understand that we are an information companythat needs to effectively communicate the results of our efforts back tohealthcare providers. Laboratory results play a major role in theimplementation of physician healthcare. Laboratory results are used todiagnose, monitor and classify health concerns. In many cases, laboratoryresults represent the confirming data in diagnosing complicated health issues.Since laboratory results play such an important role in routine physician care,we have developed informatics solutions that leverage our role in healthcare.We needed to build a web-based solution to quickly, accurately, convenientlyand competitively collect ordering information and deliver results, so we builtan internal solution that we call CareEvolve. That solution has been essentialto our own operations. We license the technology to other laboratoriesthroughout the country which they utilize to more effectively compete againstthe national laboratories. These other laboratories licensing our technologyare not out competitors since they are outside our regional footprint. In 2001,we entered into a strategic marketing agreement with Roche Diagnostics toco-market CareEvolve to laboratories throughout the country. Thanks to therelationship with Roche, CareEvolve received funding during its early years andbuilt a solid infrastructure for growth and marketing. However, over thesubsequent years, it became apparent that the relationship had served itspurpose and it was terminated by mutual consent. We own all right, title andinterest to CareEvolve and the informatics solution that has been built. We useit for our own customers. Other smaller labs utilize CareEvolve effectivelycompete against our common competition.

Wehave also created our PSIMedica business unit which has developed a ClinicalKnowledge Management (CKM) System that takes data from enrollment, claims,pharmacy, laboratory results and any other available electronic source toprovide both administrative and clinical analysis of a population. The systemuses proprietary algorithms to cleanse and configure the data and transfer theresulting information into a healthcare data repository. Using advanced cubetechnology methodologies, the data can be analyzed from a myriad of views andfrom highly granular transactional detail to global trended overview. Eventssuch as the Katrina disaster in Louisiana this past summer and generalpressures from the government have made development of an electronic medicalrecord system and Pay-for Performance reimbursement priority goals in thehealthcare industry. A large portion of an individual’s medical record consistsof laboratory data and a key performance indicator in any Pay-for-Performanceinitiative is laboratory result data. Our CKM system is a mature, fullfunctioning solution that will allow us to play a role in these importantnational initiatives.

Todate, neither our PSIMedica business unit nor CareEvolve has producedsignificant revenues.

Resultsof Operations (In thousands, except per patient data)

FiscalYear 2006 Compared to 2005

NETREVENUES:

NetRevenues for the year ended October 31, 2006 were $193,134 as compared to$163,896 for the year ended October 31, 2005; this represents an 18% increasein net revenues. This increase is due to an 8% increase in patients servicedand a 10% increase in net revenue per patient. Our laboratory operations hadnet revenues of $192,136, in fiscal 2006.

Thenumber of patients serviced during the year ended October 31, 2006 was 3,082,which was 8% greater when compared to the prior fiscal year.  Net revenue per patient for the year endedOctober 31, 2006 was $61.95 compared to net revenue per patient for the yearended October 31, 2005 of $56.48, an increase of $5.47, or 10% as a result ofincreases in esoteric testing.

COSTOF SERVICES:

Costof Services for the year ended October 31, 2006 was $96,079 as compared to$83,352 for the year ended October 31, 2005, an increase of 15%. This increaseis related to the increase in net revenues of 18%. However, reagent, laboratoryand medical supplies increased at a year over year rate of only 8%.

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GROSSPROFIT:

Grossprofit on net revenues increased to $97,055 for the year ended October 31, 2006from $80,544 for the year ended October 31, 2005; an increase of $16,511 (20%),primarily attributable to the increase in net revenues. Gross profit marginsincreased to 50% from 49%, primarily due to the decrease in direct operatingexpenses.

GENERALAND ADMINISTRATIVE EXPENSES:

Generaland administrative expenses for the year ended October 31, 2006 were $79,074 ascompared to $67,937 for the year ended October 31, 2005, an increase of $11,137or 16%. This increase is related to the increase in net revenues of 18%.Marketing expenses as a percent of net revenues decreased from 10% in theperiod ended October 31, 2005 to 9% in the period ended October 31, 2006.

INTERESTEXPENSE:

Interestexpense increased from $1,226 during the year ended October 31, 2005 to $1,412during the year ended October 31, 2006; an increase of $186. This increase isdue to an increase in the variable interest rates associated with and theincreased utilization of our line of credit. Management believes that thistrend may continue in the future due to the continued use of our revolving lineof credit to fund our growth and the increase in interest rates that maycontinue to occur during fiscal year 2007.

NETINCOME:

Werealized net income of $11,291 for the twelve month period ended October 31,2006 as compared to $7,621 for the twelve month period ended October 31, 2005,an increase of 48%.

Pre-taxincome for the period ended October 31, 2006 was $16,742, as compared to$11,489 for the period ended October 31, 2005, an increase of $5,253 (46%) andwas caused primarily by a decrease in expenses in relation to an increase innet revenues.  The provision for incometaxes increased from $3,868 for the period ended October 31, 2005, to $5,451for the current twelve month period.

FiscalYear 2005 Compared to 2004

NETREVENUES:

NetRevenues for the year ended October 31, 2005 were $163,896 as compared to$136,184 for the year ended October 31, 2004; this represents a 20% increase innet revenues. This increase is due to a 15% increase in patients serviced and a5% increase in net revenue per patient. Our laboratory operations had netrevenues of $161,856 in fiscal 2005.

Thenumber of patients serviced during the year ended October 31, 2005 was 2,865which was 14% greater when compared to the prior fiscal year.  Net revenue per patient for the year endedOctober 31, 2005 was $56.48 compared to net revenue per patient for the yearended October 31, 2004 of $53.71, an increase of $2.77, or 5% as a result ofincreases in esoteric testing.

COSTOF SERVICES:

Costof Services for the year ended October 31, 2005 was $83,352 as compared to$68,201 for the year ended October 31, 2004, an increase of 22%. Employeerelated expenses increased by $7,031 (23%) and is attributable to the hiring ofadditional technical and professional personnel dedicated to the expansion ofthe Company’s cancer and esoteric testing business. Depreciation increased from$1,764 for the period ended October 31, 2004 to $2,946 for the period endedOctober 31, 2005, an increase of $1,182, or 67% and is consistent with ourinvestment in infrastructure and capacity. Total depreciation and amortizationincreased from $2,602 for the period ended October 31, 2004 to $4,206 for theperiod ended October 31, 2005 an increase of $1,604, or 62%.

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GROSSPROFIT:

Grossprofit on net revenues increased to $80,544 for the year ended October 31, 2005from $67,983 for the year ended October 31, 2004; an increase of $12,561 (18%),primarily attributable to the increase in net revenues. Gross profit marginsdecreased to 49% from 50%, primarily due to the increase in direct operatingexpenses.

GENERALAND ADMINISTRATIVE EXPENSES:

Generaland administrative expenses for the year ended October 31, 2005 were $67,937 ascompared to $55,163 for the year ended October 31, 2004, an increase of $12,774or 23%. This is 3% greater than the increase in net revenues and isattributable to an increase in bad debt expense to just over 13% of netrevenues as compared to just under 13% for the twelve month period endedOctober 31, 2004. Management believes that this expense category may remain atthis level in the immediate future. Marketing expenses as a percent of netrevenues remained relatively constant over the two year period at 10% andmanagement believes that it may remain at this level in the future.

INTERESTEXPENSE:

Interestexpense increased from $667 during the year ended October 31, 2004 to $1,226during the year ended October 31, 2005; an increase of $559. This increase isdue to an increase in the variable interest rates associated with and theincreased utilization of our line of credit. Management believes that thistrend may continue in the future due to the continued use of our revolving lineof credit to fund our growth and the increase in interest rates that maycontinue to occur during fiscal year 2006.

NETINCOME:

Werealized net income of $7,621 for the twelve month period ended October 31,2005 as compared to $8,516 for the twelve month period ended October 31, 2004,a decrease of 11%. At the beginning of calendar year 2005, CMS announcedsignificant cuts to Medicare reimbursement rates for flow cytometry testing.These cuts adversely affected both our net revenues and operating income infiscal 2005. We do not anticipate any restoration of the former reimbursementrates in fiscal 2006.

Pre-taxincome for the period ended October 31, 2005 was $11,489, as compared to$12,186 for the period ended October 31, 2004, a decrease of $697 (6%) and wascaused primarily by an increase in expenses in relation to an increase in netrevenues.  The provision for income taxesincreased from $3,670 for the period ended October 31, 2004, to $3,868 for thecurrent twelve month period.

Liquidityand Capital Resources (In thousands except for the $5 millionterm loan and its repayment terms)

For the Fiscal Year Ended October 31, 2006

Ourworking capital at October 31, 2006 was approximately $39,994 as compared toapproximately $30,515 at October 31, 2005, an increase of $9,479. Our cashposition increased by approximately $4,651 during the current period. Weincreased our short term borrowing by approximately $5,808 and repaidapproximately $3,300 in existing debt. We had current liabilities ofapproximately $44,582 at October 31, 2006. We generated approximately $5,200 incash from operations, an increase of approximately $2,301 as compared to theyear ended October 31, 2005.

Accounts receivable, netof allowance for doubtful accounts, totaled approximately $67,778 at October31, 2006, an increase of approximately $14,665 from October 31, 2005, or 28%.This increase was primarily attributable to increased revenue.  Cash collected over the twelve month periodended October 31, 2006 increased 18% over the prior twelve month period.

 

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Net service revenues on the statements of operations are as follows:

 
|                                                                       | ** ** | **Years Ended  October 31** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gross Revenues                                                        |       | 522,117                               |       | 430,162 |   | 341,180 |   |
| Contr. Adjustments and  Discounts                                     |       | 328,983                               |       | 266,266 |   | 204,996 |   |
| Net Revenues                                                          |       | 193,134                               |       | 163,896 |   | 136,184 |   |
| Percent of Contractual   Adjustments and Discounts  To Gross Revenues |       | 63.0                                  | %          | 61.9 | % | 60.0 | % |

 

Thetable above illustrates the relationship between contractual adjustments andgross revenues for the fiscal years 2004, 2005, and 2006. Between 2004 and2005, contractual adjustments increased approximately 190 basis points. Themost significant factor in this increase was the decrease in reimbursementrates for flow cytometry. The Company’s growth in flow cytometry testing volumeof approximately 40% contributed significantly to the increase of approximately110 basis points in contractual allowances for fiscal year 2006.

Creditrisk with respect to accounts receivable is generally diversified due to thelarge number of patients comprising our client base.  We have significant receivable balances withgovernment payors and various insurance carriers.  Generally, we do not require collateral orother security to support customer receivables. However, we continually monitorand evaluate our client acceptance and collection procedures to minimize potentialcredit risks associated with our accounts receivable and to establish anallowance for uncollectible accounts. As a consequence, we believe that ouraccounts receivable credit risk exposure beyond such allowance is not materialto the financial statements.

A numberof proposals for legislation continue to be under discussion which couldsubstantially reduce Medicare and Medicaid reimbursements to clinicallaboratories.  Depending upon the natureof regulatory action, and the content of legislation, we could experience asignificant decrease in revenues from Medicare and Medicaid, which could have amaterial adverse effect on us. We are unable to predict, however, the extent towhich such actions will be taken.

LABORATORY GROSSRECEIVABLES BY PAYOR GROUP

FY 2006
|               | ** ** | **30 Days** | ** ** | **%** | ** ** | **60 Days** | ** ** | **%** | ** ** | **90 Days** | ** ** | **%** | ** ** | **>90 Days** | ** ** | **%** | ** ** | **Total** | ** ** | **%** | ** ** |
|---------------|------------|------------------|------------|-------|------------|------------------|------------|-------|------------|------------------|------------|-------|------------|----------------------|------------|-------|------------|-----------|------------|-------|------------|
| Self Pay      |       | 1,267            |       | 9     |       | 1,295            |       | 10    |       | 1,236            |       | 9     |       | 9,578                |       | 72    |       | 13,376    |       | 11    |       |
| Medicare      |       | 11,618           |       | 39    |       | 3,277            |       | 11    |       | 1,568            |       | 5     |       | 13,110               |       | 44    |       | 29,573    |       | 25    |       |
| Medicaid      |       | 2,270            |       | 29    |       | 1,433            |       | 18    |       | 1,018            |       | 13    |       | 3,239                |       | 41    |       | 7,960     |       | 7     |       |
| Prof. Billing |       | 6,773            |       | 62    |       | 1,398            |       | 15    |       | 289              |       | 3     |       | 2,268                |       | 21    |       | 10,928    |       | 9     |       |
| Comm. Ins     |       | 23,824           |       | 42    |       | 9,626            |       | 17    |       | 6,484            |       | 11    |       | 16,998               |       | 30    |       | 56,932    |       | 48    |       |
| Total         |       | 45,752           |       | 39    |       | 17,229           |       | 14    |       | 10,595           |       | 9     |       | 45,193               |       | 38    |       | 118,769   |       | 100   |       |

 

FY 2005
|               | ** ** | **30 Days** | ** ** | **%** | ** ** | **60 Days** | ** ** | **%** | ** ** | **90 Days** | ** ** | **%** | ** ** | **>90 Days** | ** ** | **%** | ** ** | **Total** | ** ** | **%** | ** ** |
|---------------|------------|------------------|------------|-------|------------|------------------|------------|-------|------------|------------------|------------|-------|------------|----------------------|------------|-------|------------|-----------|------------|-------|------------|
| Self Pay      |       | 2,473            |       | 17    |       | 1,448            |       | 10    |       | 1,364            |       | 9     |       | 9,629                |       | 65    |       | 14,914    |       | 15    |       |
| Medicare      |       | 9,090            |       | 38    |       | 4,039            |       | 17    |       | 1,721            |       | 7     |       | 9,251                |       | 38    |       | 24,101    |       | 24    |       |
| Medicaid      |       | 1,680            |       | 20    |       | 1,650            |       | 19    |       | 1,445            |       | 17    |       | 3,697                |       | 44    |       | 8,472     |       | 8     |       |
| Prof. Billing |       | 4,043            |       | 42    |       | 2,244            |       | 23    |       | 946              |       | 10    |       | 2,466                |       | 25    |       | 9,699     |       | 10    |       |
| Comm. Ins     |       | 16,037           |       | 37    |       | 9,209            |       | 21    |       | 4,784            |       | 11    |       | 13,152               |       | 30    |       | 43,182    |       | 43    |       |
| Total         |       | 33,323           |       | 33    |       | 18,590           |       | 19    |       | 10,260           |       | 10    |       | 38,195               |       | 38    |       | 100,368   |       | 100   |       |

 

Billing forlaboratory services is complicated and we must bill various payors, such as theindividual, the insurance company, the government (federal or state), theprivate company or the health clinic. Other factors that may complicate billinginclude:

·                     Differencesbetween fee schedules and reimbursement rates.

·                     Incomplete orinaccurate billing information as provided by the doctor.

·                     Disparity incoverage and information requirements.

·                     Disputes withpayors.

·                     Internal andexternal compliance policies and procedures.

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Significant costsare incurred as a result of our participation in government programs sincebilling and reimbursement for laboratory tests are subject to complexregulations. We perform the requested tests and report the results whether theinformation is correct or not or even missing. This adds to the complexity andslows the collection process and increases the aging of our accounts receivable(“A/R”). When patient invoices are not collected in a timely manner the item iswritten off to the allowance.

Days SalesOutstanding (“DSO”) for fiscal years 2005 and 2006 were 111 and 117,respectively, an increase of approximately 5%. During April of 2005, CMS alongwith other commercial insurers implemented certain changes as required by HIPAAthat caused this increase in our DSO’s. These changes are exaggerated by ourprimary marketplace, the physician office marketplace. However, when youcompare our DSO lag to our collectible net revenues as reported on ourfinancial statements for the periods in question, it varies between 98% to102%, depending on the period.

Overall, thecomponents of A/R as shown above for the two years under review have not variedmuch year over year. The percent of A/R over 90 days has remained constant at38% as of October 31, 2005 and as of October 31, 2006.

In October 2004, theCompany entered into an amended revolving note payable loan agreement with PNCBank as lender.  The maximum amount ofthe credit line available to the Company is the lesser of (i) $30,000 or (ii)50% of the Company’s qualified accounts receivable [as defined in theagreement]. The amended loan agreement provides for an “acquisition subline” ofup to $10,000 which can be repaid in 36 equal monthly installments. Anamendment to the Loan and Security Agreement provided for interest on advancesto be subject to the bank’s prime rate or Eurodollar rate of interest plus, incertain instances, an additional interest percentage.  The additional interest percentage charges onEurodollar borrowings range from 1% to 4% and are determined based upon certainfinancial ratios achieved by the Company. At October 31, 2006, the Company had elected to have $11,000 of thetotal advances outstanding under the Loan Agreement converted into a Eurodollarrate loan with a variable interest rate of 6.75% at October 31, 2006.  The remaining outstanding advances duringthat period were subject to the bank’s prime rate of interest.  At October 31, 2006, advances of $5,696 weresubject to interest at the bank’s prime rate. As of October 31, 2006 and 2005, the bank’s prime rate of interest was8.25% and 6.75%, respectively.  Thecredit line is collateralized by substantially all of the Company’s assets. Theline of credit is available through October 2007 and may be extended for annualperiods by mutual consent, thereafter. The terms of this agreement contain, among other provisions,requirements for maintaining defined levels of capital expenditures, fixedcharge coverage, insurance coverage and the prohibition of the payment by theCompany of cash dividends. As of October 31, 2006, the Company utilized $15,540and had $14,460 of available unused credit under this revolving note payableloan agreement.

Effective as of October31, 2006, we executed a fourth amendment to the loan agreement formalizing therepayment terms of the $5 million term loan from PNC Bank used by ourwholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 millionacquisition Cash Payment in connection with its purchase of the operatingassets of GeneDx. The term loan is evidenced by a secured promissory notepayable over a six year term in equal monthly principal payments of $69,444.44, plus interest at an annual rate of 6.85%.

The weighted averageinterest rate on short-term borrowings outstanding as of October 31, 2006 and2005 was approximately 6.87% and 5.84%, respectively.

Weintend to expand our laboratory operations through aggressive marketing whilealso attempting to diversify into related medical fields throughacquisitions.  These acquisitions mayinvolve cash, notes, Common Stock, and/or combinations thereof.

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Tabular Disclosureof Contractual Obligations

Payments Due ByPeriod

(Dollarsin thousands)

 
| ** **                                                       | ** ** | **Total** | ** ** | **FY  2007** | ** ** | **FY  2008** | ** ** | **FY  2009** | ** ** | **FY  2010** | ** ** | **FY 2011  and  thereafter** | ** ** |
|------------------------------------------------------------------|------------|-----------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|-----------------------------------|------------|
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                              |       |
| Long-Term Debt                                                   |       | $         | 5,020      |         | $          | 839          |       | $            | 839        |         | $          | 839                               |       | $ | 839 |   | $ | 1,664 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                              |       |
| Capital Leases                                                   |       | $         | 5,564      |         | $          | 2,478        |       | $            | 1,659      |         | $          | 974                               |       | $ | 387 |   | $ | 66 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                              |       |
| Operating Leases                                                 |       | $         | 1,998      |         | $          | 1,511        |       | $            | 322        |         | $          | 151                               |       | $ | 13 |   | $ | 1 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                              |       |
| Purchase Obligations                                             |       | $         | 24,651     |         | $          | 6,128        |       | $            | 5,537      |         | $          | 4,696                             |       | $ | 3,530 |   | $ | 4,760 |   |
|                                                             |       |      |       |         |       |         |       |         |       |         |       |                              |       |
| Long-Term Liabilities  under Employment and Consultant Contracts |       | $         | 7,990      |         | $          | 2,680        |       | $            | 2,310      |         | $          | 1,500                             |       | $ | 750 |   | $ | 750 |   |
| Total                                                            |       | $         | 45,223     |         | $          | 13,636       |       | $            | 10,667     |         | $          | 8,160                             |       | $ | 5,519 |   | $ | 7,241 |   |

 

Ourcash balances at October 31, 2006 totaled approximately $8,954 as compared toapproximately $4,303 at October 31, 2005. We believe that our cash position, the anticipated cash generated fromfuture operations,  and the  availability of our credit line with PNCBank, will meet our anticipated cash needs in fiscal 2007.

Wedo not have any off-balance sheet items.

Impactof Inflation

Todate, inflation has not had a material effect on our operations.

New AuthoritativePronouncements

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement ofAPB Opinion No. 20 and FASB Statement No. 3.” This Statement applies to all voluntary changes in accounting principle.It also applies to changes required by an accounting pronouncement, in theunusual instance that the pronouncement does not include specific transitionprovisions. When a pronouncement includes specific transition provisions, thoseprovisions should be followed.  TheCompany will be required to adopt SFAS No. 154 as of November 1, 2006.  The adoption of this standard is not expectedto have a material impact on the Company’s consolidated financial statements.

In April 2006, FASBissued SFAS No. 155 , “Accounting for Certain Hybrid Financial Instruments,” anamendment of FASB Statements 133 and 140. The Statement is effective for allfinancial instruments acquired, issued, or subject to a remeasurement eventoccurring after the beginning of an entity’s first fiscal year that beginsafter September 15, 2006.

SFAS No. 155 does thefollowing:

·                                          Permitsfair value remeasurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation.

·                                          Clarifieswhich interest-only strips and principle-only strips are not subject to therequirements of SFAS No. 133 .

·                                          Establishesa requirement to evaluate interests in securitized financial assets to

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identify interests thatare freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation.

·                                          Clarifiesthat concentrations of credit risk in the form of subordination are notembedded derivatives.

·                                          AmendsSFAS No. 140 to eliminate the prohibition on a qualifying special-purposeentity from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.

SFAS No. 155 is notexpected to have a material impact on the Company’s  consolidated financial statements.

In June 2006 FASB issuedInterpretation No. 48 (FIN 48) “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109. This interpretation is effective forfiscal years beginning after December 15, 2006.

This Interpretationclarifies the accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, Accounting forIncome Taxes. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition.

FIN 48 is not expected tohave a material impact on the Company’s consolidated financial statements.

In September 2006 FASBissued SFAS No. 157 “Fair Value Measurements”. This statement is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years.

This Statement definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any new fairvalue measurements. However, for some entities, the application of thisStatement will change current practice. This statement is not expected to have a material impact on the Company’sconsolidated financial statements.

Critical Accounting Policies

The preparation of financial statementsin conformity with generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reported periods.

Accountingfor Goodwill

Weevaluate the recoverability and measure the possible impairment of goodwillunder SFAS 142, The impairment test is a two-step process that begins with theestimation of the fair value of the reporting unit. The first step screens forpotential impairment and the second step measures the amount of the impairment,if any.  Management’s estimate of fairvalue considers publicly available

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informationregarding our market capitalization as well as (i) publicly availableinformation regarding comparable publicly-traded companies in the clinicallaboratory testing industry, (ii) the financial projections and futureprospects of our business, including its growth opportunities and likelyoperational improvements, and (iii) comparable sales prices, if available. Aspart of the first step to assess potential impairment, management compares theestimate of fair value to book value on a consolidated net assets basis.  If the book value of the consolidated netassets is greater than the estimate of fair value, we then proceed to thesecond step to measure the impairment, if any. The second step compares the implied fair value of goodwill with itscarrying value

Theimplied fair value is determined by allocating the fair value of the reportingunit to all of the assets and liabilities of that unit as if the reporting unithad been acquired in a business combination and the fair value of the reportingunit was the purchase price paid to acquire the reporting unit.  The excess of the fair value of the reportingunit over the amounts assigned to its assets and liabilities is the implied fairvalue of goodwill.  If the carryingamount of the goodwill is greater than its implied fair value, an impairmentloss will be recognized in that period.

Accounting for Intangible and Other Long-LivedAssets

We******evaluate the possible impairment ofour long-lived assets, including intangible assets. We review therecoverability of our long-lived assets when events or changes in circumstancesoccur that indicate that the carrying value of the asset may not berecoverable.  Evaluation of possibleimpairment is based on our ability to recover the asset from the expectedfuture pretax cash flows (undiscounted and without interest charges) of therelated operations. If the expected undiscounted pretax cash flows are lessthan the carrying amount of such asset, an impairment loss is recognized for thedifference between the estimated fair value and carrying amount of the asset.

Accounting for Revenue

Service revenues are principallygenerated from laboratory testing services such as routine and esoteric testing(See pages 3 and 4).  Net service revenuesare recognized at the time the testing services are performed and are reportedat the estimated net realizable amounts from patients, third-party payors andothers for services rendered including prospectively determined adjustmentsunder reimbursement agreements with third-party payors.  These adjustments are accrued on an estimatedbasis in the period the related services are rendered and adjusted in futureperiods as final settlements are determined. The Company has a subsidiary that provides non-clinical laboratoryservices.  Revenues generated from theseservices are not material for each of the years presented.

Accountingfor Contractual Credits and Doubtful Accounts

Anallowance for contractual credits is determined based upon a review of thereimbursement policies and subsequent collections for the different types ofpayors (such as the decrease in flow cytometry reimbursement rates from CMSstarting January 1, 2005). Agings of accounts receivable are monitored bybilling personnel and follow-up activities are conducted as necessary. Bad debtexpense is recorded within selling, general and administrative expenses as apercentage of sales considered necessary to maintain the allowance for doubtfulaccounts at an appropriate level, based on our experience with our accountsreceivable. We write off accounts against the allowance for doubtful accountswhen they are deemed to be uncollectible. For client billing, accounts arewritten off when all reasonable collection efforts prove to be unsuccessful. Patientaccounts are written off after the normal dunning cycle has occurred and theaccount has been transferred to a third party collection agency. Third partyaccounts are written off when they exceed the payer’s timely filing limits.

Accountingfor Employment Benefit Plan

TheCompany sponsors a 401(k) Profit-Sharing Plan [the “Plan”].  Employees become eligible for participationafter attaining the age of eighteen and completing one year of service.  Participants may elect to contribute up toten percent of their compensation, as defined in the Plan Adoption Agreement,to a maximum allowed by the Internal Revenue Service.  The Company may choose to

25

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makea matching contribution to the plan for each participant who has elected tomake tax-deferred contributions for the plan year, at a percentage determinedeach year by the Company. The Company elected to make a matching contributionwhich amounted to $225,971 for 2006, $182,739 for 2005 and $78,000 for 2004.The Employer contribution will be fully vested after the third year of service.

Accountingfor Income Taxes

Weaccount for income taxes utilizing the asset and liability method. Under thismethod deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and for tax loss carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.Future tax benefits, such as net operating loss carryforwards, are recognizedto the extent that realization of such benefits is more likely than not.

Forward Looking Statements

ThisAnnual Report on Form 10-K contains historical information as well asforward-looking statements. Statements looking forward in time are included inthis Annual Report pursuant to the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995. Such statements involve known andunknown risks and uncertainties that may cause our actual results in futureperiods to be materially different from any future performance suggestedherein.

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions that affect the reported amounts of revenues and expenses duringthe reporting period. While many aspects of our business are subject to complexfederal, state and local regulations, the accounting for our business isgenerally straightforward.  Our revenuesare primarily comprised of a high volume of relatively low dollar transactions,and about 42% of all our costs consist of employee compensation andbenefits.  Revenues are recognized at thetime the services are performed and are reported at the estimated netrealizable amounts from patients, third-party payors and others for servicesrendered including prospectively determined adjustments under reimbursementagreements with third-party payors. These adjustments are accrued on an estimated basis in the period theservices are rendered and adjusted in future periods as final settlements aredetermined.  These estimates are reviewedand adjusted, if warranted, by senior management on a monthly basis.  We believe that our estimates and assumptionsare correct; however, several factors could cause actual results to differmaterially from those currently anticipated due to a number of factors inaddition to those discussed under ACautionary Statements@ as well as elsewhereherein including:

·                                          ourfailure to integrate newly acquired businesses (if any) and the costs relatedto such integration.

·                                          ourfailure to obtain and retain new customers and alliance partners, or areduction in tests ordered or specimens submitted by existing customers.

·                                          adverseresults from investigations of clinical laboratories by the government, whichmay include significant monetary damages and/or exclusion from the Medicare andMedicaid programs.

·                                          lossor suspension of a license or imposition of a fine or penalties under, orfuture changes in, the law or regulations of CLIA-88, or those of Medicare,Medicaid or other federal, state or local agencies.

·                                          changesin federal, state, local and third party payor regulations or policies (or inthe interpretation of current regulations) affecting governmental andthird-party reimbursement for clinical laboratory testing (such as the decreasein Medicare reimbursement for Flow Cytometry testing at the beginning ofcalendar year 2005 described above under Cautionary Statements).

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·                                          failureto comply with the Federal Occupational Safety and Health Administrationrequirements and the recently passed Needlestick Safety and Prevention Act.

·                                          failureto comply with HIPAA, which could result in significant fines as well assubstantial criminal penalties.

·                                          changesin payor mix.

·                                          failureto maintain our days sales outstanding levels.

·                                          increasedcompetition, including price competition.

·                                          ourability to attract and retain experienced and qualified personnel.

·              adverse litigation results.

·              liabilities that result from our inability to complywith new corporate governance requirements.

·              failure to comply with theSarbanes-Oxley Act of 2002.

Item7A. - Quantitative and Qualitative Disclosures about Market Risk

We do not invest in or trade market risk sensitiveinstruments. We also do not have any foreign operations or foreign sales sothat our exposure to foreign currency exchange rate risk is non-existent.

We do have exposure to both rising and fallinginterest rates. At October 31, 2006, advances of approximately $5,696 under ourLoan Agreement with PNC Bank were subject to interest charges at the Bank’sthen prime rate of 8.25 %. In addition, we elected to have the remaining$11,000 of advances outstanding at said date converted into a Eurodollar rateloan with a variable interest rate of 6.75%.

We estimate that our monthly cash interest expense atOctober 31, 2006 was approximately $111 and that a one percentage pointincrease or decrease in short-term rates would increase or decrease our monthlyinterest expense by approximately $13.

See Note 5  to the Consolidated FinancialStatements contained herein.

Item8. -  Financial Statements andSupplementary Data

Financial Statements are annexed hereto

Item9. -  Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure

None

Item 9A. -  Controls and Procedures

An evaluation wascarried out under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under theExchange Act as of the end of the period covered by this report. Based uponthat evaluation, our principal executive officer and principal financialofficer concluded that those disclosure controls and procedures were effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms.

**Management’s Report on InternalControl over Financial Reporting**

The management ofBio-Reference Laboratories, Inc. (the “Company”), including its Chief ExecutiveOfficer and Chief Financial Officer, is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. TheCompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith accounting principles generally accepted in the United States of America.Internal control over financial reporting includes policies and proceduresthat:

·                                          pertainto the maintenance of records that, in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the Company;

27

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·                                          providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that receipts andexpenditures of the Company are being made only in accordance withauthorization of management and directors of the Company; and

·                                          providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of assets that could have a material effect onthe consolidated financial statements.

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of October 31, 2006. Management based this assessment on criteriafor effective internal control over financial reporting described in “InternalControl — Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Management’s assessmentincluded an evaluation of the design of the Company’s internal control overfinancial reporting and testing of the operating effectiveness of its internalcontrol over financial reporting.

Based on thisassessment, management has determined that the Company’s internal control overfinancial reporting as of October 31, 2006 is effective. Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Management’s assessment of the effectiveness of theCompany’s internal control over financial reporting as of October 31, 2006 hasbeen audited by Moore Stephens, P.C., an independent registered publicaccounting firm, as stated in their report attached to this filing, whichexpresses unqualified opinions on management’s assessment and on theeffectiveness of the Company’s internal control over financial reporting as ofOctober 31, 2006.

Item 9B. -  Other Information

None.

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**PARTIII**

Item 10.- Directorsand Executive Officers of the Registrant

The followingtable sets forth certain information with respect to each of the directors andexecutive officers of the Company.
| **Name**                      | ** ** | **Age** | ** ** | **Position**                                                                    |
|-------------------------------|------------|---------|------------|---------------------------------------------------------------------------------|
|                          |       |    |       |                                                                            |
| Marc D. Grodman, M.D.         |       | 55      |       | Chairman of the Board, President, Chief Executive  Officer and Director         |
|                          |       |    |       |                                                                            |
| Howard Dubinett               |       | 55      |       | Executive Vice President, Chief Operating Officer  and Director                 |
|                          |       |    |       |                                                                            |
| Sam Singer                    |       | 63      |       | Vice President, Chief Financial Officer, Chief  Accounting Officer and Director |
|                          |       |    |       |                                                                            |
| Joseph Benincasa(a)(c)(e)     |       | 57      |       | Director                                                                        |
|                          |       |    |       |                                                                            |
| Harry Elias(a)(c)(e)          |       | 76      |       | Director                                                                        |
|                          |       |    |       |                                                                            |
| Gary Lederman, Esq. (b)(c)(e) |       | 72      |       | Director                                                                        |
|                          |       |    |       |                                                                            |
| John Roglieri, M.D. (a)(d)(e) |       | 67      |       | Director                                                                        |

 

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(a)          Member ofthe Audit Committee

(b)         Chairman ofthe Audit Committee

(c)          Member ofthe Compensation Committee

(d)         Chairman ofthe Compensation Committee

(e)          Member of NominatingCommittee

The Audit Committee is comprised of the fournon-employee members of the Board of Directors, Gary Lederman (Chairman), JosephBenincasa, John Roglieri and Harry Elias. The Board of Directors deems eachsuch individual as “independent” as defined by the rules of the NationalAssociation of Securities Dealers. The Audit Committee met three times duringfiscal year 2006. The Audit Committee confers with the Company’s auditors andreviews, evaluates and advises the Board of Directors concerning the adequacyof the Company’s accounting systems, its financial reporting practices, themaintenance of its books and records and its internal controls. In addition,the Audit Committee reviews the scope of the audit of the Company’s financialstatements and the results thereof. The Board of Directors has determined thatGary Lederman is qualified to serve as the Company’s “audit committee financialexpert” as defined in Item 401 (h) of Regulation S-K promulgated by the SEC.

The Compensation Committee is comprised of fournon-employee members of the Board of Directors, John Roglieri (Chairman),Joseph Benincasa, Harry Elias and Gary Lederman. The Compensation Committee metonce during fiscal year 2006. The Compensation Committee reviews salaries, cashbonuses and compensation plans for the Company’s executive officers andeligible employees and makes recommendations concerning same to the Board ofDirectors.

The Company does not have an Executive Committee.Officers are elected by and hold office at the discretion of the Board ofDirectors.

The Nominating Committee is comprised of the fournon-employee members of the Board of Directors, Harry Elias, Joseph Benincasa,Gary Lederman and John Roglieri. Pursuant to its charter, the NominatingCommittee’s role is to establish criteria for the selection of directors; toidentify individuals qualified to be directors; to evaluate director candidatesproposed by stockholders; to recommend individuals to fill vacancies on theBoard and to recommend nominees for director at each annual stockholdermeeting.

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**Codeof Ethics**

The Company has adopted a Code of Ethics that appliesto its executive officers and to key financial and accounting personnel. TheCompany will, upon a stockholder’s written request to Investor Relations, c/othe Company, furnish a paper copy of the Code of Ethics.

The following is a brief account of the businessexperience of each director and executive officer of the Company.

Marc D. Grodman, M.D. founded the Company in December1981 and has been its Chairman of the Board, President, Chief Executive Officerand a Director since its formation. Dr. Grodman is an Assistant Professor ofClinical Medicine at Columbia University’s College of Physicians and Surgeonsand Assistant Attending Physician at Presbyterian Hospital, New York City. From1980 to 1983, Dr. Grodman attended the Kennedy School of Government at HarvardUniversity and was a Primary Care Clinical Fellow at Massachusetts GeneralHospital. From 1982 to 1984, he was a medical consultant to the Metal TradesDepartment of the AFL-CIO. Dr. Grodman received a B.A. degree from theUniversity of Pennsylvania in 1973 and an M.D. degree from Columbia University’sCollege of Physicians and Surgeons in 1977. Except for his part time duties as Assistant Professor of ClinicalMedicine and Assistant Attending Physician at Columbia University andPresbyterian Hospital, Dr. Grodman devotes all of his working time to thebusiness of the Company.

Since January 2005, Dr. Grodman has been a member ofthe Board of Directors of the American Clinical Laboratory Association, anindustry organization comprised of the largest and most significant commercialclinical laboratories in the United States. Other Board members include thechief executive officers of Quest Diagnostics and Laboratory Corporation ofAmerica.

Howard Dubinett has been the Executive Vice-Presidentand Chief Operating Officer of the Company since its formation in 1981. Hebecame a Director of the Company in April 1986. Mr. Dubinett attended RutgersUniversity. Mr. Dubinett devotes all of his working time to the business of theCompany.

Sam Singer has been the Company’s Vice President andChief Financial Officer since October 1987 and a Director since November1989.  He is responsible for all of theCompany’s financial activities. Mr. Singer was the Controller for SycommSystems Corporation, a data processing and management consulting company, from1981 to 1987, prior to joining the Company. He received a B.A. degree from Strayer University and an M.B.A. fromRutgers University.  Mr. Singer devotesall of his working time to the business of the Company.

Joseph Benincasa became a Director of the Company inJune 2005. Mr. Benincasa currently serves as the Executive Director of TheActors’ Fund of America, a position he has held since 1989. The Actors’ Fund isthe leading national, non-profit human services organization providingcomprehensive social and health care services, employment, training and housingsupport to the entertainment profession. It is headquartered in New York Citywith regional offices in Chicago and Los Angeles. Mr. Benincasa also sits onthe Board of Directors of The Greater New York Blood Program where hepreviously served as Director of Public Education and Public Relations. He is adirector of St. Peter’s University Medical Center and also sits on the board ofdirectors of Broadway Cares/Equity Fights AIDS; the National Theatre Workshopof the Handicapped; Career Transition for Dancers; the Times Square Alliance;the New York Society of Association Executives and the Somerset Patriots, aminor league baseball team. Mr. Benincasa holds a B.A. degree from St. Joseph’sUniversity and an M. Ed. Degree from Rutgers University. He also attendedFordham University Graduate School of Business.

Harry Elias became a Director of the Company in March2004. Mr. Elias commenced his employment in sales and marketing with JVCCompany of America (“JVC”) in 1967, subsequently being appointed as JVC’sSenior Vice President of Sales and Marketing in 1983 and as Executive VicePresident of Sales and Marketing in 1990. In 1995, Mr. Elias was named as JVC’sChief Operating Officer, a position he occupied until April 2003 when heresigned his positions upon his

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appointment as JVC’s “HonorableChairman.” JVC, a distributor of audio and video products headquartered inWayne, New Jersey is the wholly owned United States subsidiary of VictorCompany of Japan, a manufacturer of audio and video products headquartered inJapan. In January 2005, after retiring from JVC, Mr. Elias was appointedChairman of the Board of and commenced to serve as a consultant to AKAI USA,the sole distributor in the United States of electronic products produced byAKAI, a Chinese manufacturer.

Gary Lederman, Esq. became a Director of the Companyin May 1997. He received his B.A. degree from Brooklyn College in 1954 and hisJ.D. degree from NYU Law School in 1957. He was manager of Locals 370, 491 and 662 of the U.F.C.W. InternationalUnion from 1961 to 1985. He is retired from the unions and has been a lecturerat Queensboro Community College in the field of insurance. He currently serveson an institutional review board for RTL, a pharmaceutical drug testinglaboratory.

John Roglieri, M.D. became a Director of the Companyin September 1995.  He is an AssistantProfessor of Clinical Medicine at Columbia University’s College of Physiciansand Surgeons and an Assistant Attending Physician at Presbyterian Hospital, NewYork City.  Dr. Roglieri received a B.S.degree in Chemical Engineering and a B.A. degree in Applied Sciences fromLehigh University in 1960, an M.D. degree from Harvard Medical School in 1966,and a Masters degree from Columbia University’s School of Business in1978.  From 1969 until 1971, he was aSenior Assistant Surgeon in the U.S. Public Health Service in Washington.  From 1971 until 1973 he was a Clinical andResearch Fellow at Massachusetts General Hospital.  From 1973 until 1975, he was Director of theRobert Wood Johnson Clinical Scholars program at Columbia University.  In 1975 he was appointed Vice-President,Ambulatory Services at Presbyterian Hospital, a position which he held until1980.  Since 1980, he has maintained aprivate practice of internal medicine at Columbia-Presbyterian MedicalCenter.  From 1988 until 1992, he wasalso Director of the Employee Health Service at Presbyterian Hospital. From1992 through 1999, Dr. Roglieri was the Corporate Medical Director of NYLCare,a managed care subsidiary of New York Life Insurance Company (“New York Life”).Dr. Roglieri was chief medical officer of Physician WebLink, a nationalphysician practice management company, from 1999 to 2000. Since 2001, he hasbeen Medical Director for New York Life in Manhattan. He is a member ofadvisory boards to several pharmaceutical companies, a member of the EditorialAdvisory Board of the journals Managed Care and Seminars in Medical Practice,and is a subject of biographical record in Who’s Who in America.

Thereare no family relationships between or among any directors or executiveofficers of Bio-Reference Laboratories. The Company’s Certificate ofIncorporation provides for a staggered Board of Directors pursuant to which theBoard is divided into three classes of directors and the members of only oneclass are elected each year to serve a three-year term. Dr. Grodman and Mr.Dubinett are the Class I directors whose term expires in fiscal 2007. Mr.Singer and Mr. Elias are the Class II directors whose term expires in fiscal2008. Mr. Benincasa, Mr. Lederman and Dr. Roglieri are the Class III directorswhose term expires in fiscal 2009.

Key Personnel andConsultants

The following keypersonnel and consultants make significant contributions to the Company’soperations.

James Weisberger,M.D. (Age 51) joined the Company in September 2003 as Vice President, AssistantChief Medical Officer and Director of Hematopathology. He is currently employedas the Company’s Chief Medical Officer. Prior to joining the Company, he wasDirector of Hematopathology at IMPATH, Inc. (1999-2003). He is board certified in internal medicine, anatomic andclinical pathology, and hematopathology. He has a New York State Department ofHealth Certificate of Qualification as a Laboratory Director. He is a ClinicalAssistant Professor of Pathology at New York Medical College, Valhalla, NewYork.  Prior to joining IMPATH,  he was an Assistant Professor of Medicine andPathology at New York Medical College (1995-1999).  He has a B.S. degree from Stanford University(1977); an M.S. degree from Stanford University (1978); and an M.D. degree fromthe University of Pennsylvania (1983).

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Charles T. Todd, Jr.  (Age 55) is a SeniorVice President engaged in  Sales. Mr.  Todd was the founder and CEO of GenCareBiomedical Research Corporation, a specialty oncology laboratory that waspurchased by the Company in 1995.  Heattended Seton Hall University from where he received a B.S. degree in Financein 1974.

JohnW.  Littleton (Age 45) joined the Companyin September 2002 as a Vice President engaged in Sales.  Prior to joining the Company, Mr.  Littleton was Vice President of Sales forSpecialty Laboratories and the Northeast Regional Vice President of Sales forQuest Diagnostics.  He received a B.A..degree from Seton Hall University in 1983.

JohnBennett, M.D., (Age 73) Scientific Advisory Board Chairman, is ProfessorEmeritus at the University of Rochester Medical Center, Rochester, NewYork.  Dr.  Bennett has long been recognized as anintellectual force in the treatment and understanding of leukemias, lymphomasand other cancer-related diseases.  Heestablished the French-American-British (FAB) Leukemia Working Group and is oneof the world’s leading authorities on Myelodysplasia.  He is founder and Chairman of the MDSFoundation, as well as Editor of the Journal of Leukemia Research. Dr.  Bennett is currently Professor Emeritus andformer Head of the Medical Oncology Unit at the University of Rochester MedicalCenter and formerly was a Professor of Oncology in Medicine, Pathology andLaboratory Medicine at the University of Rochester Medical School.  For nearly four decades, Dr.  Bennett has been honored by the medicalcommunity as an expert in the field of oncology as evidenced by the numerouschairs he has held in prestigious societies and committees and his authorshipof more than 400 publications in peer review journals, the majority of whichare in the area of hematologic malignancies. Dr. Bennett earned his B.A. from Harvard University and his M.D. fromBoston University. He served his residency in medicine at Beth-Israel Hospital,Boston, Massachusetts and completed a fellowship in hematology at Boston CityHospital. He headed the Morphology and Cytochemistry Section of the ClinicalCenter at the National Institute of Health (“NIH”) before joining the facultyat the University of Rochester. Dr. Bennett serves the Company in an advisorycapacity as chairman of our Scientific Advisory Board.

SherriBale, Ph.D., FACMG (Age 51) joined the Company in September 2006, whenBioReference Laboratories acquired the operating assets of GeneDx. She receivedher M.S. and Ph.D. degrees from the University of Pittsburgh, and herpost-doctoral training in medical genetics at the NIH. She is an ABMGBoard-Certified Ph.D. - Medical Geneticist and Founding Member of the AmericanCollege of Medical Genetics. She founded GeneDx with Dr. John Compton, also along-time NIH scientist, after 16 years at the NIH. For the past six years, shehas served as President and Clinical Director of GeneDx, which specializes indeveloping and providing molecular diagnostics tests for rare hereditarydisorders. She has authored more than 100 peer-reviewed papers, book chapters,and books in the field. She serves on numerous Boards of patient advocacy andnon-profit organizations, and is a member of the Faculty of the MetropolitanMedical Genetics Training Program of the NHGRI, NIH, in Bethesda, MD. She holdsa second degree black belt in judo.

JohnCompton, Ph.D., (Age 58) serves as Scientific Director and Co-President ofGeneDx Inc., the operating assets of which were acquired by BioReferenceLaboratories in September 2006. He has 25 years experience in the developmentand application of molecular biological techniques to answer questions aboutgenetics and epidermal differentiation, and has authored more than 60publications in the field. He holds B.S. degrees in Physics and Biology fromMIT, received his Ph.D. from the University of California, Berkeley in Biophysics,and did his post-doctoral training in protein-DNA interactions at the BaylorCollege of Medicine. Following six years as an independent investigator at theJackson Laboratory, he joined the Laboratory of Skin Biology in the NIAMS atthe NIH in 1991 where he was Staff Scientist in the Genetic Studies Sectionuntil 2000, when he and NIH colleague Sherri Bale formed GeneDx to develop andprovide molecular genetic testing in rare hereditary disorders. In 2003 theywere jointly awarded the Entrepreneur of the Year award by the TechnologyCouncil of Maryland. John is also in his eighth year as Mayor of the Town ofWashington Grove, MD.

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Compliance withSection 16(a) of the Exchange Act

Based solely on areview of Forms 3 and 4 and any amendments thereto furnished to the Companypursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, orrepresentations that no Forms 5 were required, we believe that with respect tofiscal 2006, our officers, directors and beneficial owners of more than 10% ofour equity timely complied with all applicable Section 16(a) filingrequirements.

Item 11. - ExecutiveCompensation

The followingtable sets forth information concerning the compensation paid or accrued by usduring the year ended October 31, 2006 to our Chief Executive Officer and ourother executive officers who were serving as our executive officers at October31, 2006. All of our group life, health, hospitalization or medicalreimbursement plans, if any, do not discriminate in scope, terms or operation,in favor of the executive officers or directors and are generally available toall salaried employees.

SUMMARYCOMPENSATION TABLE
|                                                | ** ** | ** **           | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** |
|------------------------------------------------|------------|----------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Year**             | ** ** | ** **                   | ** ** | ** **                  | ** ** | **Other** | ** ** | **Restricted** | ** ** | ** ** | ** ** | ** ** | ** ** | **All** | ** ** |
| ** **                                     | ** ** | **Ended**            | ** ** | ** **                   | ** ** | ** **                  | ** ** | **Annual** | ** ** | **Stock** | ** ** | **Options** | ** ** | **LTIP** | ** ** | **Other** | ** ** |
| **Name and Principal Position** | ** ** | **October 31,** | ** ** | **Salary**                   | ** ** | **Bonus(a)**                | ** ** | **Compensation(b)** | ** ** | **Awards** | ** ** | **(SARs)** | ** ** | **Payouts** | ** ** | **Compensation** | ** ** |
|                                           |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Marc D. Grodman M.D.                           |       | 2006                 |       | $                            | 806,000    |                        | $          | — |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| President and Chief                            |       | 2005                 |       | $                            | 750,000    |                        | $          | — |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| Executive Officer                              |       | 2004                 |       | $                            | 554,625    |                        | $          | 125,000 |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
|                                           |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Howard Dubinett                                |       | 2006                 |       | $                            | 306,000    |                        | $          | — |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| Executive Vice                                 |       | 2005                 |       | $                            | 285,000    |                        | $          | 14,600 |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| President and Chief                            |       | 2004                 |       | $                            | 272,200    |                        | $          | 60,000 |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| Operating Officer                              |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
|                                           |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Sam Singer                                     |       |                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Vice President and                             |       | 2006                 |       | $                            | 306,000    |                        | $          | — |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| Chief Financial and                            |       | 2005                 |       | $                            | 285,000    |                        | $          | 14,600 |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |
| Accounting Officer                             |       | 2004                 |       | $                            | 259,004    |                        | $          | 60,000 |   | $ | -0- |   | -0- |   | -0- |   | $ | -0- |   | $ | -0- |   |

 

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(a) The Compensation Committee adopted an Incentive Bonus Plan forSenior Management with respect to fiscal 2006. The Plan entitled eachparticipant to earn a bonus equal to a percentage of his or her annual grosswages to the extent that the Company’s operating income in fiscal 2006 wasequal to or greater than certain percentages of its Net Revenues. No bonuseswere earned for fiscal 2006 pursuant to the Plan. An aggregate $94,400 inbonuses were earned for fiscal 2005 pursuant to the Plan adopted by theCompensation Committee for fiscal 2005.

(b) See “Split-Dollar Life Insurance” herein concerning our payment oflife insurance premiums pursuant to Asplit-dollar@ life insurance programs forour three executive officers.

EmploymentAgreements with Executive Officers

Dr.Grodman serves as our President and Chief Executive Officer pursuant to aseven-year employment agreement which expires on October 31, 2011. Dr. Grodmanhas the right to elect to cancel the employment agreement effective at the endof any calendar month commencing October 31, 2008 on not less than 90 daysprior written notice, subject to a six month non-competition restriction. Theemployment agreement is automatically renewable for additional two year periodssubject to the right of either party to elect not to renew at least six monthsprior thereto. The employment agreement provides Dr. Grodman with minimumannual base compensation of $750,000 subject to annual percentage increases tothe extent of annual percentage increases in the Consumer Price Index. TheCompensation Committee can but is not required to increase Dr. Grodman’s compensationat the end of any fiscal year based upon his and the Company’s

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performance. Theemployment agreement also provides Dr. Grodman with business use of anautomobile leased by the Company and participation in any fringe benefit andbonus plans available to the Company’s employees to the extent determined bythe Compensation Committee. The employment agreement contains provisionsgoverning in the event of Dr. Grodman’s partial or total disability andprovides for termination for cause or in the event of Dr. Grodman’s death. Dr.Grodman has the right to terminate the employment agreement in the event of amaterial change in his duties and responsibilities, the relocation of theCompany’s principal executive offices from Elmwood Park, New Jersey to a locationmore than fifty miles distant or a material breach of the employment agreementby the Company (including a reduction in Dr. Grodman’s benefits under theagreement). In the event of a Change in Control of the Company, Dr. Grodman canelect to terminate the agreement. In that event, he will be entitled to be paida lump sum Severance Payment equal to 2.99 times the average of his annualcompensation paid by the Company for the five calendar years preceding theearlier of the calendar year in which the Change of Control occurred or thecalendar year of the Date of Termination. See “Split-Dollar Life Insurance”herein as to the Endorsement Split-Dollar Life Insurance Agreement between theCompany and Dr. Grodman.

Mr. Dubinettserves as Executive Vice President and Chief Operating Officer pursuant to anemployment agreement which has been extended for three additional years beyondits initial October 31, 2004 termination date. Mr. Dubinett’s minimum annual compensation under the extended agreementis equal to his annual compensation in fiscal 2002 and is subject to increasesbased on increases in the Consumer Price Index as well as to increases(including bonuses) at the discretion of the Compensation Committee.  The agreement provides (i) typical healthinsurance coverage; (ii) the leasing of an automobile for his use; (iii)participation in fringe benefit, bonus, pension, profit sharing, and similarplans maintained for the Company’s employees; (iv) disability benefits; (v)certain termination benefits; and (vi) in the event of termination due to aChange in Control of the Company, a Severance Payment equal to 2.99 times Mr.Dubinett’s average annual compensation during the preceding five years. See “SplitDollar Life Insurance” herein as to the Endorsement Split Dollar Life InsuranceAgreement between the Company and Mr. Dubinett.

Mr. Singer servesas Vice President and Chief Financial Officer pursuant to an employmentagreement which has been  extended forthree additional years beyond its October 31, 2004 termination date. Mr. Singer’sminimum annual compensation under the extended agreement is equal to his annualcompensation in fiscal 2002 and is subject to increases based on increases inthe Consumer Price Index as well as to increases (including bonuses) at thediscretion of the Compensation Committee. The agreement provides (i) typicalhealth insurance coverage; (ii) the leasing of an automobile for his use; (iii)participation in fringe benefit, bonus, pension, profit sharing, and similarplans maintained for the Company’s employees; (iv) disability benefits; (v)certain termination benefits; and (vi) in the event of termination due to aChange in Control of the Company, a Severance Payment equal to 2.99 times Mr.Singer’s average annual compensation during the preceding five years. See “Split-DollarLife Insurance” herein as to the Endorsement Split-Dollar Life InsuranceAgreement between the Company and Mr. Singer.

TheCompensation Committee increased Dr. Grodman’s, Mr. Dubinett’s and Mr. Singer’sminimum annual base compensation with respect to fiscal 2006 by 7.5% in eachcase over his fiscal 2005 annual base salary.

Severance Payments forOther Employees

The Company signedemployment agreements with three other employees effective November 1, 2005providing in each case for a Severance Payment equal to 2.99 times the employee’saverage annual compensation during the preceding five years in the event oftermination of the employee’s employment upon a Change in Control of theCompany. The Severance Payment provisions for these three employees wereapproved by the Compensation Committee. Two of the employees including CharlesT. Todd, Jr. are engaged in Sales and the third employee is the Company’sDirector of Information Services.

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**Split-Dollar****Life Insurance**

Pursuantto the terms of their 1997 employment agreements, the Company had established split-dollarlife insurance programs for each of its three Executive Officers. As a resultof the passage of the Sarbanes Oxley Act of 2002 (signed into law on July 30,2002), these three programs were modified. Pursuant to the modification, eachof the three Executive Officers assigned ownership of his policies to theCompany and new policies were issued to replace the prior policies with annualpremiums under the new policies ($70,000 under Dr. Grodman’s policy and $25,000each under Messrs. Dubinett’s and Singer’s policies) being equal to thepremiums paid under the replaced policies. The Company has now executed new “EndorsementSplit-Dollar Life Insurance Agreements” with each of its three ExecutiveOfficers. Pursuant to the new agreements, the Company has agreed to continue topay the annual premium on the policy on each officer’s life during the periodof his full-time employment by the Company. The Company is the sole owner ofthe policy and of its net cash surrender value, and in the event of the officer’sdeath while serving as a full-time employee of the Company, the Company will beentitled to receive that amount of the death proceeds equal to its interest inthe policy (the aggregate amount of premiums paid by the Company with respectto the policy less the amount of any loans, if any, from the Insurer to theCompany against the cash value or policy proceeds, and less the aggregateamount of any premiums paid by the officer to the Company in reimbursement ofpremiums paid by the Company) and the balance of the death proceeds will bepaid to the officer’s designated beneficiaries. The premiums paid by theCompany on the current policies and the prior policies aggregated approximately$1,304 and $1,114 at October 31, 2006 and October 31, 2005, respectively. Atthat date, the net cash surrender value of the three current policiesaggregated approximately $934 and $690, respectively and is recorded on thebooks of the Company at these values.

**Stock Options**

Employee StockOption Plans****

###### The 1989 Plan

In July 1989, theCompany’s Board of Directors adopted the 1989 Employees Stock Option Plan (the “1989Plan”) which was approved by shareholders in November 1989.  The 1989 Plan provided for the grant ofoptions to purchase up to 666,667 shares of Common Stock.  Under the terms of the 1989 Plan, optionsgranted thereunder could be designated as options which qualify for incentivestock option treatment (“ISOs”) under Section 422 of the Internal Revenue Codeof 1986 (“the Code”), or options which do not so qualify (“NQOs”).

Underthe 1989 Plan, the exercise price of an option designated as an ISO could notbe less than the fair market value of the Common Stock on the date the optionwas granted.  However, in the event anoption designated as an ISO was granted to a 10% shareholder (as defined in the1989 Plan) such exercise price was required to be at least 110% of such fairmarket value.  Exercise prices of NQOscould be less than such fair market value. The aggregate fair market value of shares subject to options granted toa participant which are designated as ISOs which first become exercisable inany calendar year could not exceed $100,000. All options under the 1989 Plan wererequired to be granted before the Plan’s July 1999 Termination Date so that nofurther options can be granted under the 1989 Plan.

Duringfiscal 2006, one employee exercised ISOs under the 1989 plan and purchased anaggregate 5,000 shares at an exercise price of $.71875 per share. As a result,at October 31, 2006, there were outstanding ISOs under the 1989 Planexercisable to purchase an aggregate 1,000 shares at an exercise price of$.71875 per share.

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**The 2000 Plan**

OnAugust 25, 2000, the Board of Directors adopted the 2000 Employee IncentiveStock Option Plan (the “2000 Plan”) reserving an aggregate 800,000 shares ofBio-Reference Common Stock for issuance upon exercise of ISOs which may begranted under the 2000 Plan. Stockholders ratified the adoption of the 2000 Plan at our December 14,2000 Annual Meeting of Stockholders. During fiscal 2006, eight employeesexercised ISOs issued under the 2000 Plan and purchased an aggregate 245,500shares at exercise prices ranging from $1.688 to $8.40 per share and noemployees holding ISOs granted under the 2000 plan terminated their employmentwith the Company. As a result, at October 31, 2006, there were outstanding ISOsunder the 2000 Plan exercisable to purchase an aggregate 230,100 shares atexercise prices ranging from $5.52 to $15.34 per share.

The2000 Plan authorizes the grant of options which qualify for ISO treatment underSection 422 of the Code, to purchase up to a maximum aggregate 800,000 sharesof the Company’s Common Stock. Options may only be granted under the 2000 Planto employees of the Company and its subsidiaries (including officers anddirectors who are also employees).

The2000 Plan will be administered by the Board of Directors or by a Stock OptionCommittee designated by the Board of Directors. The Board or the Stock OptionCommittee, as the case may be, has the discretion to determine the eligibleemployees to whom, and the price (not less than the fair market value on thedate of grant) at which options will be granted; the periods during which eachoption is exercisable; and the number of shares subject to each option. TheBoard or the Stock Option Committee has the authority to interpret the 2000Plan and to establish and amend rules and regulations relating thereto.

The2000 Plan provides that the exercise price of an option granted thereundershall not be less than the fair market value of the Common Stock on the datethe option is granted. However, in the event an option is granted under the2000 Plan to a holder of 10% or more of the Company’s outstanding Common Stock,the exercise price must be at least 110% of such fair market value. Under the2000 Plan, options must be granted before the August 24, 2010 Termination Date.No option may have a term longer than ten years (limited to five years in thecase of an option granted to a 10% or greater stockholder of the Company). Theaggregate fair market value of the Company’s Common Stock with respect to whichoptions are exercisable for the first time by a grantee under the 2000 Plan duringany calendar year cannot exceed $100,000. Options granted under the 2000 Planare non-transferable and must be exercised by an optionee, if at all, whileemployed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death. The Board or the StockOption Committee, as the case may be, may, in its sole discretion, cause theCompany to lend money to or guaranty any obligation of an employee for thepurpose of enabling such employee to exercise an option granted under the 2000Plan provided that such loan or obligation cannot exceed fifty percent (50%) ofthe exercise price of such option.

**The2003 Plan**

On June 3, 2003, the Board of Directors adopted the 2003 EmployeeIncentive Stock Option Plan (the “2003 Plan”) reserving an aggregate 800,000shares of Bio-Reference Common Stock for issuance upon exercise of  ISOs which may be granted under the 2003Plan. Stockholders ratified the adoption of the 2003 Plan at our July 31, 2003Annual Meeting of Stockholders. During fiscal 2006, noISOs were granted under the 2003 Plan, eleven employees exercised their ISOs and purchased an aggregate 56,500 sharesat exercise prices ranging from $12.22 to $18.25 per share and no employeesholding ISOs granted under the 2003 Plan terminated their employment with theCompany. As a result, at October 31, 2006, there were outstanding ISOs underthe 2003 Plan exercisable to purchase an aggregate 357,958 shares at exerciseprices ranging from $12.22 to $21.46 per share.

The 2003 Plan authorizes the grant of options whichqualify for ISO treatment under Section 422 of the Code to purchase up to aminimum aggregate 800,000 shares of the

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Company’s CommonStock.  Options may only be granted underthe 2003 Plan to employees of the Company and its subsidiaries (including thoseofficers and directors who are also employees).

The 2003 Plan will be administered by the Board ofDirectors or by a Stock Option Committee designated by the Board ofDirectors.  The Board or the Stock OptionCommittee, as the case may be, has the discretion to determine the eligibleemployees to whom, and the prices (not less than the fair market value on thedate of grant) at which options will be granted; the periods during which eachoption is exercisable; and the number of shares subject to each option.  The Board or the Stock Option Committee hasthe authority to interpret the 2003 Plan and to establish and amend rules andregulations relating thereto.

The2003 Plan provides that the exercise price of an option granted thereundershall not be less than the fair market value of the Common Stock on the datethe option is granted.  However, in theevent an option is granted under the 2003 Plan to a holder of 10% or more ofthe Company’s outstanding Common Stock, the exercise price must be at least110% of such fair market value.

Underthe 2003 Plan, options must be granted before the June 2, 2013 TerminationDate.  No option may have a term longerthan ten years (limited to five years in the case of an option granted to a 10%or greater stockholder of the Company). The aggregate fair market value of the Company’s Common Stock withrespect to which options are exercisable for the first time by a grantee underall of the Company’s Stock Option Plans during any calendar year cannot exceed$100,000.  Options granted under the 2003Plan are non-transferable and must be exercised by an optionee, if at all,while employed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death.  The Board or the Stock Option Committee, asthe case may be, may, in its sole discretion, cause the Company to lend moneyto or guaranty any obligation of an employee for the purpose of enabling suchemployee to exercise an option granted under the 2003 Plan provided that suchloan or obligation cannot exceed fifty percent (50%) of the exercise price ofsuch option.

Non-QualifiedOptions (NQOs) and Warrants

At October 31,2005, there were outstanding NQOs and Warrants owned by directors andconsultants including members of the Scientific Advisory Board exercisable topurchase an aggregate 93,500 shares at exercise prices ranging from $3.14 to$13.70 per share. During fiscal 2006, NQOs exercisable to purchase 33,500shares were exercised by four individuals. As a result, at October 31, 2006,there were outstanding NQOs and Warrants owned by directors and members of theScientific Advisory Board exercisable to purchase an aggregate 60,000 shares atexercise prices ranging from $6.80 to $13.70 per share.

See Note 11 of Notes tothe Consolidated Financial Statements.

**Option Grants to Our Three Named ExecutiveOfficers in Last Fiscal Year**

No options topurchase shares of our Common Stock were granted to any of our three NamedExecutive Officers in fiscal 2006.

37

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**Aggregated Option Exercises byOur Three Named Executive Officers in Last Fiscal Year And Fiscal Year-EndOption Values**
| ** **      | ** ** | **Shares of Common**     | ** ** | ** **   | ** ** | **Shares of Common Stock** | ** ** | **Value of Unexercised** | ** ** |
|-----------------|------------|------------------------------------|------------|--------------|------------|-------------------------------------------|------------|------------------------------------|------------|
| ** **      | ** ** | **Stock Acquired**            | ** ** | ** **   | ** ** | **Underlying Unexercised**           | ** ** | **In-The-Money**                   | ** ** |
| ** **      | ** ** | **Upon Option Exercise** | ** ** | **Value**    | ** ** | **Options at 2006**             | ** ** | **Options at 2006**      | ** ** |
| **Name**        | ** ** | **in Fiscal 2006**       | ** ** | **Realized** | ** ** | **Fiscal Year End (a)**    | ** ** | **Fiscal Year-End (b)**  | ** ** |
| Marc D. Grodman |       | —                             |       | —       |       | 4,000                                     |       | $                                  | 67,320     |   |
| Howard Dubinett |       | —                             |       | —       |       | 4,000                                     |       | 67,320                             |       |
| Sam Singer      |       | —                             |       | —       |       | 4,000                                     |       | 67,320                             |       |
|                 |            |                                    |            |              |            |                                           |            |                                    |            |  |

 

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(a) All of these options are currently exercisable.

(b) Based upon thedifference between the last sales price for the Common Stock on NASDAQ onTuesday, October 31, 2006 and the exercise price.

##### **Directors’ Compensation**

Directors who arenot our employees were each paid a $13,750 per quarter director’s fee duringfiscal year 2006. Directors who chair a committee received an additional $2,750per quarter during fiscal year 2006.

Item 12. - SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

 

The following table setsforth information as of January 9, 2006 with respect to the ownership of CommonStock by (i) each person known to us to be the beneficial owner of more than 5%of our outstanding Common Stock, (ii) each of our directors, (iii) each of ourexecutive officers, and (iv) all directors and executive officers as agroup.  The percentages have beencalculated on the basis of treating as outstanding for a particular holder, allshares of Common Stock outstanding on said date owned by such holder and allshares of Common Stock issuable to such holder in the event of exercise orconversion of outstanding options, owned by such holder at said date which areexercisable within 60 days of such date.
| Name and Address of                                          | ** ** | ** **                                | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
| **Beneficial Owner**                                                   | ** ** | ** **                                | ** ** | ** **     | ** ** |
| **Directors and**                                                      | ** ** | **Shares of Common Stock** | ** ** | **Percentage** | ** ** |
| **Executive Officers***                                                | ** ** | **Beneficially Owned(1)**            | ** ** | **Ownership**  | ** ** |
|                                                                        |       |                                      |       |           |       |
| Marc D. Grodman(2)                                                          |       | 1,647,846                                 |       | 12.1           | %          |
| Howard Dubinett(3)                                                          |       | 390,516                                   |       | 2.9            | %          |
| Sam Singer(4)                                                               |       | 264,467                                   |       | 1.9            | %          |
| Joseph Benincasa                                                            |       | -0-                                       |       | 0              | %          |
| Harry Elias                                                                 |       | -0-                                       |       | 0              | %          |
| Gary Lederman(5)                                                            |       | 27,200                                    |       | **             |       |
| John Roglieri(6)                                                            |       | 44,000                                    |       | **             |       |
| Executive Officers and Directors as a  group (seven persons)(2)(3)(4)(5)(6) |       | 2,374,029                                 |       | 17.5           | %          |
| Other Greater than 5%                                                       |       |                                      |       |           |       |
| Beneficial Owner                                                            |       |                                      |       |           |       |
|                                                                        |       |                                      |       |           |       |
| Paradigm Capital  Management(7)  Nine Elk Street  Albany, NY 12207          |       | 805,800                                   |       | 5.9            | %          |

 

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*                 The address ofall of the Company’s directors and executive officers is c/o the Company, 481Edward H. Ross Drive, Elmwood Park, New Jersey 07407.

**          Lessthan one (1%) percent.

(1)          Except as otherwisenoted, each holder named in the table has sole voting and investment power withrespect to all shares of Common Stock shown as beneficially owned.

(2)          Includes 1,419,779shares owned directly and 4,000 shares issuable upon exercise of options. Alsoincludes 176,067 shares owned directly by Dr. Grodman’s wife, Pam Grodman, and48,000 shares owned by their minor children. Dr. Grodman disclaims beneficialownership of these 224,067 shares.

On October 12,2006, Dr. Grodman established a Rule 10b-5-1 Sales Plan (the “Sales Plan”) withBear Stearns & Co., Inc. (“Bear Stearns”) to facilitate sales of a variablenumber of Dr. Grodman’s shares of BRLI Common Stock (up to 200,000 shares) invariable pre-paid forward transactions (“Forward Transactions”) at a minimumper share sale price as specified in the Sales Plan. In connection with thecontemplated Forward Transactions, Dr. Grodman pledged 200,000 shares of hisBRLI Common Stock to secure his obligation to deliver a maximum aggregate200,000 shares of Common Stock to Bear Stearns on the final settlement dates(approximately 23-25 months after each sale). The Sales Plan was terminated onDecember 21, 2006 at which date an aggregate 175,936 shares had been soldpursuant to the Forward Transactions. As prepayment for the pledge of theseshares, Bear Stearns has agreed to pay Dr. Grodman approximately $3,949,000 orapproximately $22.45 per share. The number of shares that Dr. Grodman will beobligated to deliver on the final settlement dates will vary based upon themarket prices of the Common Stock on such settlement dates. Dr. Grodman willbenefit from any excess in the market prices of the Common Stock at the finalsettlement dates to the extent such prices exceed approximately $25.30 up toapproximately $30.38 per share, by being able to deliver fewer shares. Untilthe final settlement dates, Dr. Grodman is deemed the beneficial owner of thepledged shares.

(3)          Includes386,516 shares owned directly and 4,000 shares issuable upon exercise ofoptions. In lieu of an outright sale, on September 30, 2005, Mr. Dubinettentered into a pre-paid variable forward sales contract (“Forward Contract”)with Bear Stearns Bank PLC (“Bear Stearns”). Pursuant to the Forward Contract,Mr. Dubinett pledged 100,000 of his shares of Common Stock to secure hisobligation to deliver a maximum 100,000 shares of Common Stock to Bear Stearnson September 28, 2007 (the “Settlement Date”). Mr. Dubinett received aprepayment from Bear Stearns for his pledge of the 100,000 shares of $1,374,400or $13.74 per share representing approximately 80% of the proceeds from thesale of 100,000 shares on September 28, 2005. On the Settlement Date, Mr.Dubinett will be obligated to deliver a variable number of shares to BearStearns based on the price of the Common Stock on the Settlement Date, up to amaximum of 100,000 shares. Mr. Dubinett will benefit from any excess in theprice of the Common Stock on the Settlement Date be between $17.18 per share upto a maximum $24,052 per share by being able to deliver fewer shares. Until theSettlement Date, Mr. Dubinett is deemed the beneficial owner of the pledgedshares.

38

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(4)          Includes 240,567 sharesowned directly, 4,000 shares issuable upon exercise of options and 19,900shares owned by children who share Mr. Singer’s household. Mr. Singer disclaimsbeneficial ownership of these 19,900 shares.

(5)          Includes 27,200 sharesowned directly.

(6)          Includes 40,000 sharesowned directly and 4,000 shares issuable upon exercise of options.

(7)          Paradigm CapitalManagement, Inc. (“Paradigm”) in its capacity as an investment advisor may bedeemed the beneficial owner of these 805,800 shares which are owned byinvestment advisory clients. In its Schedule 13G filing dated February 14, 2006filed with the Securities and Exchange Commission, Paradigm stated that to thebest of its knowledge, these 805,800 shares were acquired in the ordinarycourse of business; were not acquired for the purpose of and do not have theeffect of changing or influencing the control of the Company; and were notacquired in connection with or as a participant in any transaction having suchpurpose or effect.

**Equity Compensation PlanInformation**

Thefollowing table provides information as of October 31, 2006 regarding shares ofCommon Stock that may be issued pursuant to the Company’s equity compensationplans:
|                     | ** ** | ** **                           | ** ** | ** **                         | ** ** | **(c)**                                     | ** ** |
|---------------------|------------|--------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|
| ** **          | ** ** | ** **                           | ** ** | ** **                         | ** ** | **Number of Shares**              | ** ** |
| ** **          | ** ** | **(a)**                              | ** ** | **(b)**                            | ** ** | **Remaining Available for**       | ** ** |
| ** **          | ** ** | **Number of Shares**       | ** ** | **Weighted-Average**               | ** ** | **Future Issuances Under**        | ** ** |
| ** **          | ** ** | **Issuable upon Exercise** | ** ** | **Exercise Price per**   | ** ** | **Equity Compensation Plans**     | ** ** |
| ** **          | ** ** | **of Outstanding**              | ** ** | **Share of Outstanding** | ** ** | **(Excluding Shares**                  | ** ** |
| ** **          | ** ** | **Options and Warrants**   | ** ** | **Options and Warrants** | ** ** | **Reflected in Column (a))** | ** ** |
| ** **          | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **                                  | ** ** |
| Equity Compensation |       | 589,058                              | (1)        | $                                  | 13.52      |                                        | 370,260    | (2) |
| Plans Approved      |       |                                 |       |                               |       |                                        |       |
| by Stockholders     |       |                                 |       |                               |       |                                        |       |
|                |       |                                 |       |                               |       |                                        |       |
| Equity Compensation |       | 60,000                               | (3)        | $                                  | 8.04       |                                        | -0-        |   |
| Plans Not Approved  |       |                                 |       |                               |       |                                        |       |
| by Stockholders     |       |                                 |       |                               |       |                                        |       |
|                |       |                                 |       |                               |       |                                        |       |
| Totals              |       | 649,058                              |       | $                                  | 13.00      |                                        | 370,260    |   |

 

----

(1) Reflects sharesissuable upon exercise of outstanding ISOs granted pursuant to the Company’s1989, 2000 and 2003 Employee Stock Option Plans.

(2) Reflects sharesreserved for issuance upon the grant of ISOs which may be granted pursuant tothe Company’s 2000 and 2003 Employee Incentive Stock Option Plans.

(3) Includes40,000 shares issuable upon exercise of NQOs held by members of the Company’sScientific Advisory Board; and 20,000 shares issuable upon exercise of NQOsheld by five directors.

39

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Item 13. – CertainRelationships and Related Transactions

Nomaterial transactions occurred between the Company and related parties otherthan reported elsewhere herein during fiscal 2006.

Item 14. -  Principal Accountant Fees and Services

The firm of MooreStephens, P.C. (“Moore Stephens”) certified public accountants, audited ouraccounts and the accounts of our subsidiaries for the fiscal years endedOctober 31, 2006 and 2005. Moore Stephens and its predecessor firm have been ourauditors since 1988.

(1)          Audit Fees

Moore Stephensbilled us approximately $150,800 for professional services rendered inconnection with the audit of our annual financial statements for the fiscalyear ended October 31, 2006 and the review of the financial statements includedin our quarterly reports on Form 10-Q for such fiscal year compared toapproximately $187,600 in billings for such services for the fiscal year endedOctober 31, 2005. In addition, Moore Stephens billed us approximately $9,500 infiscal 2006 for its audit of our 401(k) Plan for calendar year 2005 as comparedto approximately $9,400 of such fees in fiscal 2005 with respect to calendaryear 2004.

(2)           Audit-Related Fees

Moore Stephensbilled us approximately $47,300 for due diligence fees incurred in relation toacquisitions during fiscal 2006 and approximately $52,100 for Sarbanes-Oxley (“SOX”)related audit fees.

(3)           Tax Fees

Moore Stephensbilled us approximately $44,600 for tax services for fiscal 2006 andapproximately $68,500 for tax services for fiscal 2005. The fees were billedfor tax return preparation.

(4)           All Other Fees

No fees werebilled to us by Moore Stephens with respect to fiscal 2006 or fiscal

2005 other thanfor services described in Item 14 (1), (2) and (3) herein.

(5)          Pre-Approval Policiesand Procedures

The engagement ofMoore Stephens to render the above audit and tax services was approved by ouraudit committee prior to the engagement.

40

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**PART IV**

Item 15. – Exhibitsand Financial Statement Schedules 
| (a)1.  |   | Financial Statements                                                               |
|--------|--------|------------------------------------------------------------------------------------|
|   |   |                                                                               |
|   |   | The following financial statements of the Company  are included in Part II, Item 8 |
|   |   |                                                                               |   |   |
|        |   | Report of Independent Registered Public Accounting  Firm                           |   |   |
|   |   |                                                                               |   |   |
|   |   | Consolidated  Balance Sheets - October 31, 2006 and 2005                           |   |   |
|   |   |                                                                               |   |   |
|   |   | Consolidated Statements of Operations-                                             |   |   |
|   |   | Years ended October 31, 2006, 2005 and 2004                                        |   |   |
|   |   |                                                                               |   |   |
|   |   | Consolidated Statements of Shareholders’ Equity                               |   |   |
|   |   | Years ended October 31, 2006, 2005, and 2004                                       |   |   |
|   |   |                                                                               |   |   |
|   |   | Consolidated Statements of Cash Flows -                                            |   |   |
|   |   | Years ended October 31, 2006, 2005 and 2004                                        |   |   |
|   |   |                                                                               |   |   |
|   |   | Notes to Consolidated Financial Statements-                                        |   |   |
|   |   |                                                                               |   |   |
| 2.     |   | Financial Statements Schedule                                                      |   |   |
|   |   |                                                                               |   |   |
|   |   | Schedule II -                                                                      |   |   |
|   |   |                                                                               |   |   |
|   |   | Years ended October 31, 2006, 2005 and 2004                                        |   |   |
|   |   |                                                                               |   |   |
| 3.     |   | Exhibits                                                                           |   |   |

 
| ** **  | ** ** | ** **                                                                                                                               | ** ** | **Incorporated by** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
| Exhibit No. | ** ** | **Item**                                                                                                                                 | ** ** | **Reference to**    |
| 3.1*        |       | Amended and Restated Certificate of Incorporation  dated November 15, 1989                                                               |       | (A)                 |
|        |       |                                                                                                                                     |       |                |
| 3.1.1*      |       | Amendment to Certificate of Incorporation dated October  4, 1991 (authorizing one-for-10 reverse stock split)                            |       | (B)                 |
|        |       |                                                                                                                                     |       |                |
| 3.1.2*      |       | Amendment to Certificate of Incorporation dated August  23, 1993 (authorizing one-for-three reverse stock split)                         |       | (C)                 |
|        |       |                                                                                                                                     |       |                |
| 3.1.3*      |       | Amendment to Certificate of Incorporation dated  March 23, 1998 (creating Series A Senior Preferred Stock)                               |       | (F)                 |
|        |       |                                                                                                                                     |       |                |
| 3.1.4*      |       | Amendment to Certificate of Incorporation dated  March 31, 1998 (creating Series A Junior Participating Preferred Stock)                 |       | (F)                 |
|        |       |                                                                                                                                     |       |                |
| 3.1.5*      |       | Amendment to Certificate of Incorporation dated  September 22, 2003 (increasing authorized shares of Common Stock to  35,000,000 shares) |       | (J)                 |
|        |       |                                                                                                                                     |       |                |
| 3.2*        |       | By-laws                                                                                                                                  |       | (D)                 |
|        |       |                                                                                                                                     |       |                |
| 3.2.1*      |       | Amendments to Article III, Sections 2 and 4 of the  By-laws adopted June 1, 2005                                                         |       | (L)                 |
|        |       |                                                                                                                                     |       |                |
| 4.1*        |       | Form of Common Stock Certificate, $.01 par value                                                                                         |       | (M)                 |

 

41

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| 10.1*   |   | Lease Agreement for Elmwood Park, New Jersey  Premises, expiring in February, 2004                                                                                                                                |   | (F)    |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|    |   |                                                                                                                                                                                                              |   |   |
| 10.1.1* |   | Fifth Amendment dated as of July 16, 2004 to Lease for  Elmwood Park, New Jersey Premises                                                                                                                         |   | (M)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.1.2* |   | Sixth Amendment dated as of October 27, 2004 to  Lease for Elmwood Park, New Jersey Premises                                                                                                                      |   | (M)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.2*   |   | Employment Agreement between the Company and Marc  Grodman expiring in October 2011                                                                                                                               |   | (K)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.3*   |   | Employment Agreement between the Company and Howard  Dubinett as in effect at October 31, 2001                                                                                                                    |   | (F)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.3.1* |   | Extension to Employment Agreement between the  Company and Howard Dubinett effective November 1, 2002                                                                                                             |   | (I)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.3.2* |   | Extension to Employment Agreement between the Company  and Howard Dubinett effective November 1, 2004.                                                                                                            |   | (M)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4*   |   | Employment Agreement between the Company and Sam  Singer as in effect at October 31, 2001                                                                                                                         |   | (F)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4.1* |   | Extension to Employment Agreement between the  Company and Sam Singer effective November 1, 2002                                                                                                                  |   | (I)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4.2* |   | Extension to Employment Agreement between the  Company and Sam Singer effective November 1, 2004                                                                                                                  |   | (M)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4.3  |   | Employment Agreement between the Company and Charles  T. Todd, Jr. effective November 1, 2005.                                                                                                                    |   | (N)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4.4  |   | Employment Agreement between the Company and Scott  Fein effective October 31, 2005.                                                                                                                              |   | (N)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.4.5  |   | Employment Agreement between the Company and Richard  L. Faherty effective November 1, 2005.                                                                                                                      |   | (N)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.5*   |   | The Company’s 1989 Stock Option Plan                                                                                                                                                                         |   | (B)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.5.1* |   | The Company=s 2000 Employee Incentive Stock Option  Plan.                                                                                                                                                         |   | (G)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.5.2* |   | The Company=s 2003 Employee Incentive Stock Option  Plan.                                                                                                                                                         |   | (J)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.5.2  |   | Terms of the Company’s 2005 Senior Management  Incentive Bonus Plan. Marc D. Grodman was one of the three Class I  participants, Howard Dubinett and Sam Singer were two of the eight Class II Participants. |   | (N)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.7*   |   | Rights Agreement dated as of March 31, 1998  including Exhibits thereto between the Company and American Stock Transfer  & Trust Company as Rights Agent                                                      |   | (E)    |
|    |   |                                                                                                                                                                                                              |   |   |
| 10.12*  |   | Strategic Marketing Alliance Agreement dated as of  December 31, 2001 between the Company and CareEvolve.com, Inc.                                                                                                |   | (H)    |

 

42

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|          |   | on the one hand and Roche Diagnostics Corporation on  the other. (terminated in the fourth quarter of fiscal 2005).                                                                                      |   |   |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|     |   |                                                                                                                                                                                                     |   |   |
| 10.12.1* |   | Addendum dated as of December 27, 2004 between the  Company and CareEvolve.com, Inc. on the one hand and Roche Diagnostics  Corporation on the other. (terminated in the fourth quarter of fiscal 2005). |   | (M)    |
|     |   |                                                                                                                                                                                                     |   |   |
| 10.13*   |   | Amended and Restated Loan and Security Agreement as  of September 30, 2004 between the Company and PNC Bank, National Association.                                                                       |   | (M)    |
|     |   |                                                                                                                                                                                                     |   |   |
| 10.13.1  |   | Fourth Amendment as of October 31, 2006 to September  30, 2004 Loan and Security Agreement between the Company and PNC Bank,  National Association                                                       |   |   |
|     |   |                                                                                                                                                                                                     |   |   |
| 21       |   | Subsidiaries of the Company                                                                                                                                                                              |   |   |

 

The following are the Company’s three wholly-ownedsubsidiaries:
| ** **                   | ** ** | ** **                 | ** ** | **Name under which it** |
|------------------------------|------------|----------------------------|------------|-------------------------|
| ** **                   | ** ** | ** **                 | ** ** | **Conducts or**         |
| ** **                   | ** ** | **State of Incorporation** | ** ** | **Conducted Business**  |
|                         |       |                       |       |                    |
| Medilabs, Inc.               | ** ** | **New York**               | ** ** | **Medilabs**            |
| CareEvolve.com, Inc.         | ** ** | **New Jersey**             | ** ** | **CareEvolve**          |
| BRLI No. 2 Acquisition Corp. |       | New Jersey                 |       | GeneDx                  |

###  

| 23.1   | Consent of Independent Registered Public Accounting  Firm                    |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
| 31.1   | Certification of Chief Executive Officer                                     |
|   |                                                                         |
| 31.2   | Certification of Chief Financial Officer                                     |
|   |                                                                         |
| 32.1   | Certification pursuant to 18 U.S.C. Section 1350 of  Chief Executive Officer |
|   |                                                                         |
| 32.2   | Certification pursuant to 18 U.S.C. section 1350 of  Chief Financial Officer |

----

The exhibits designatedabove with an asterisk (*) have previously been filed with the Commission and,pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are incorporated byreference to the documents as indicated below.

(A)          Incorporatedby reference to exhibit filed with the Company’s Registration Statement on FormS-1 (File No. 33-31360).

43

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(B)           Incorporatedby reference to exhibit filed with the Company’s annual report on Form 10KSBfor the year ended October 31, 1992.

(C)           Incorporatedby reference to exhibit filed with the Company’s Registration Statement on FormSB-2 (File No. 33-68678).

(D)          Incorporatedby reference to exhibit filed with the Company’s Registration Statement on FormS-18 (File No. 33-5048-NY).

(E)           Incorporatedby reference to exhibit filed with the Company’s report on Form 8-A datedMarch 31, 1998.

(F)           Incorporatedby reference to exhibit filed with the Company=s annual report on Form 10-K forthe year ended October 31, 1999.

(G)           Incorporatedby reference to exhibit filed with the Company=s annual report on Form 10-K forthe year ended October 31, 2000.

(H)          Incorporatedby reference to exhibit filed with the Company=s annual report on Form 10-K forthe year ended October 31, 2001.

(I)            Incorporatedby reference to exhibit filed with the Company=s annual report on Form 10-K forthe year ended October 31, 2002

(J)            Incorporatedby reference to exhibit filed with the Company=s Registration Statement on FormS-8 (File No.  333-111578).

(K)          Incorporatedby reference to exhibit filed with the Company’s current report on Form 8-K(for December 6, 2004).

(L)           Incorporatedby reference to exhibit filed with the Company’s quarterly report on Form 10-Qfor the quarter ended April 30, 2005

(M)         Incorporatedby reference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 2004.

(N)          Incorporatedby reference to exhibit filed with the Company’s annual report on Form 10-K forthe year ended October 31, 2005.

44

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SIGNATURES

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
| BIO-REFERENCE LABORATORIES, INC.     |
|--------------------------------------|
|                                 |
|                                 |
| By                                   | /S/ Marc D. Grodman |   |
| Marc D. Grodman                      |
| Chairman of the Board, President,    |
| Chief Executive Officer and Director |
| Dated: January12, 2007               |

 

In accordance with the Exchange Act, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| /S/ Marc D. Grodman                      |   |
|------------------------------------------|--------|
| Marc D. Grodman                          |
| Chairman of the Board, President,        |
| Chief Executive Officer and Director     |
| January 12, 2007                         |
|                                     |
| /S/ Howard Dubinett                      |   |
| Howard Dubinett                          |
| Executive Vice President,                |
| Chief Operating Officer and Director     |
| January 12, 2007                         |
|                                     |
| /S/ Sam Singer                           |   |
| Sam Singer                               |
| Vice President, Chief Financial Officer, |
| Chief Accounting Officer and Director    |
| January 12, 2007                         |
|                                     |
| /S/ Joseph Benincasa                     |   |
| Joseph Benincasa                         |
| Director                                 |
| January 12, 2007                         |
|                                     |
| /S/ Harry Elias                          |   |
| Harry Elias                              |
| Director                                 |
| January 12, 2007                         |
|                                     |
| /S/ Gary Lederman                        |   |
| Gary Lederman                            |
| Director                                 |
| January 12, 2007                         |
|                                     |
| /S/ John Roglieri                        |   |
| John Roglieri                            |
| Director                                 |
| January 12, 2007                         |

 

45

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board ofDirectors and Shareholders of

Bio-ReferenceLaboratories, Inc.

Elmwood Park, NewJersey

We have auditedthe accompanying consolidated balance sheets of Bio-Reference Laboratories,Inc. and its subsidiaries as of October 31, 2006 and 2005, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three fiscal years in the period ended October 31, 2006. We alsohave audited management’s assessment, included in the accompanying Report ofManagement’s Internal Control over Financial Reporting, that Bio-ReferenceLaboratories, Inc. maintained effective internal control over financialreporting as of October 31, 2006 based on criteria established in “InternalControl-Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Bio-Reference Laboratories,Inc.’s management is responsible for these consolidated financial statementsfor maintaining effective internal control over financial reporting, and forits assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on these consolidatedfinancial statements, an opinion on management’s assessment, and an opinion onthe effectiveness of the Company’s internal control over financial reportingbased on our audits.

We conducted ouraudits in accordance with auditing standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall consolidated financialstatement presentation. Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchprocedures as we considered necessary in the circumstances. We believe that ouraudits provide a reasonable basis for our opinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles and that receipts and expenditures of the companyare being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assetsthat could have a material effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that control may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Bio-ReferenceLaboratories, Inc. and its subsidiaries as of October 31, 2006 and 2005, andthe consolidated results of their operations and their cash flows for each ofthe three fiscal years in the period ended October 31, 2006, in conformity withaccounting principles generally accepted in the United States of America. Alsoin our opinion, management’s assessment that Bio-Reference Laboratories, Inc.maintained effective internal control over financial reporting as of October31, 2006, is fairly stated, in all material respects, based on criteriaestablished in “Internal Control—Integrated Framework” issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, inour opinion, Bio-Reference Laboratories Inc. maintained, in all materialrespects, effective internal control over financial reporting as of October 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).”
|                  | MOORE STEPHENS, P. C.          |
|-----------------------|--------------------------------|
|                  | Certified Public  Accountants. |
| Cranford, New  Jersey |
| January 5, 2007       |

###  

46

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### **BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**[DollarsIn Thousands, Except Per Share Data]**

 
| ** **                                   | ** ** | **October 31,** | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ***Assets:***                                |       |                 |       |   |   |
| **Current  Assets:**                         |       |                 |       |   |   |
| Cash and Cash Equivalents                    |       | $                    | 8,954      |   | $ | 4,303 |   |
| Accounts Receivable - Net                    |       | 67,778               |       | 53,113 |   |
| Inventory                                    |       | 2,159                |       | 1,339 |   |
| Other Current Assets                         |       | 1,198                |       | 878 |   |
| Deferred Tax Asset                           |       | 4,487                |       | 3,606 |   |
|                                         |       |                 |       |   |   |
| **Total Current Assets**                     |       | 84,576               |       | 63,239 |   |
| ** **                                   |       |                 |       |   |   |
| **Property  and Equipment - At Cost**        |       | 22,246               |       | 18,703 |   |
| ** **                                   |       |                 |       |   |   |
| **Less:**** **Accumulated  Depreciation |       | 10,162               |       | 6,776 |   |
| ** **                                   |       |                 |       |   |   |
| **Property and Equipment - Net**             |       | 12,084               |       | 11,927 |   |
| ** **                                   |       |                 |       |   |   |
| **Other  Assets:**                           |       |                 |       |   |   |
| Deposits                                     |       | 646                  |       | 450 |   |
| Goodwill - Net                               |       | 14,063               |       | 8,919 |   |
| Intangible Assets - Net                      |       | 8,170                |       | 3,079 |   |
| Other Assets                                 |       | 934                  |       | 759 |   |
| ** **                                   |       |                 |       |   |   |
| **Total Other Assets**                       |       | 23,813               |       | 13,207 |   |
| ** **                                   |       |                 |       |   |   |
| **Total  Assets**                            |       | $                    | 120,473    |   | $ | 88,373 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

47

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### **BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**[DollarsIn Thousands, Except Per Share Data]**

 
| ** **                                                                                                                                                                 | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ***Liabilities  and Shareholders’ Equity:***                                                                                                                          |       |                 |       |   |   |
| **Current  Liabilities:**                                                                                                                                                  |       |                 |       |   |   |
| Accounts Payable                                                                                                                                                           |       | $                    | 18,692     |   | $ | 14,346 |   |
| Accrued Salaries and Commissions                                                                                                                                           |       | 4,029                |       | 3,352 |   |
| Accrued Taxes and Expenses                                                                                                                                                 |       | 2,257                |       | 1,028 |   |
| Revolving Note Payable - Bank                                                                                                                                              |       | 16,696               |       | 10,888 |   |
| Current Maturities of Long-Term Debt                                                                                                                                       |       | 839                  |       | 1,061 |   |
| Capitalized Lease Obligation - Short-Term  Portion                                                                                                                         |       | 2,069                |       | 2,049 |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| **Total Current Liabilities**                                                                                                                                              |       | 44,582               |       | 32,724 |   |
| ** **                                                                                                                                                                 |       |                 |       |   |   |
| **Long-Term  Liabilities:**                                                                                                                                                |       |                 |       |   |   |
| Capitalized Lease Obligations - Long-Term  Portion                                                                                                                         |       | 2,913                |       | 3,956 |   |
| Long-Term Debt—Net of Current Portion                                                                                                                                 |       | 4,181                |       | — |   |
| Deferred Tax Liabilities                                                                                                                                                   |       | 18                   |       | 978 |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| **Total Long-Term Liabilities**                                                                                                                                            |       | 7,112                |       | 4,934 |   |
| ** **                                                                                                                                                                 |       |                 |       |   |   |
| **Commitments  and Contingencies**                                                                                                                                         |       | —               |       | — |   |
| ** **                                                                                                                                                                 |       |                 |       |   |   |
| **Shareholders’  Equity:**                                                                                                                                            |       |                 |       |   |   |
| Preferred Stock, Par Value $.10 Per Share, Authorized  1,059,589 Shares; None Issued                                                                                       |       | —               |       | — |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Series A - Senior Preferred Stock, Par Value $.10  Per Share, Authorized 604,078 Shares; None Issued                                                                       |       | —               |       | — |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Series A - Junior Participating Preferred Stock, Par  Value $.10 Per Share, Authorized 3,000 Shares; None Issued                                                           |       | —               |       | — |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Common Stock, Par Value $.01 Per Share, Authorized 35,000,000  Shares; Issued and Outstanding 13,552,814 and 12,981,367 Shares at October  31, 2006 and 2005, Respectively |       | 136                  |       | 130 |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Additional Paid-in Capital                                                                                                                                                 |       | 39,001               |       | 32,348 |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Retained Earnings                                                                                                                                                          |       | 29,743               |       | 18,452 |   |
|                                                                                                                                                                       |       |                 |       |   |   |
| Totals                                                                                                                                                                     |       | 68,880               |       | 50,930 |   |
| Deferred Compensation                                                                                                                                                      |       | (101                 | )          | (215 | ) |
|                                                                                                                                                                       |       |                 |       |   |   |
| **Total Shareholders’ Equity**                                                                                                                                        |       | 68,779               |       | 50,715 |   |
| ** **                                                                                                                                                                 |       |                 |       |   |   |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                       |       | $                    | 120,473    |   | $ | 88,373 |   |

 

The AccompanyingNotes are an Integral Part of These Consolidated Financial Statements.

48

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**BIO-REFERENCE LABORATORIES, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**[Dollars In Thousands, Except Per Share Data]**

 
| ** **                                    | ** ** | **Years ended** | ** ** |
|-----------------------------------------------|------------|----------------------|------------|
| ** **                                    | ** ** | **October 31,** | ** ** |
| ** **                                    | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    |       |                 |       |   |   |   |   |
| **Net  Revenues**                             |       | $                    | 193,134    |   | $ | 163,896 |   | $ | 136,184 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Cost of  Services:**                        |       |                 |       |   |   |   |   |
| Depreciation and Amortization                 |       | 3,427                |       | 2,946 |   | 1,764 |   |
| Employee Related Expenses                     |       | 46,064               |       | 37,849 |   | 30,818 |   |
| Reagents and Laboratory Supplies              |       | 26,637               |       | 24,716 |   | 20,523 |   |
| Other Cost of Services                        |       | 19,951               |       | 17,841 |   | 15,096 |   |
|                                          |       |                 |       |   |   |   |   |
| **Total Cost of Services**                    |       | 96,079               |       | 83,352 |   | 68,201 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Gross Profit**                              |       | 97,055               |       | 80,544 |   | 67,983 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **General  and Administrative Expenses:**     |       |                 |       |   |   |   |   |
| Depreciation and Amortization                 |       | 1,640                |       | 1,260 |   | 838 |   |
| General and Administrative Expenses           |       | 50,550               |       | 44,817 |   | 36,819 |   |
| Provision for Doubtful Accounts               |       | 26,884               |       | 21,860 |   | 17,506 |   |
|                                          |       |                 |       |   |   |   |   |
| **Total General and Administrative Expenses** |       | 79,074               |       | 67,937 |   | 55,163 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Income from Operations**                    |       | 17,981               |       | 12,607 |   | 12,820 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Other  [Income] Expense:**                  |       |                 |       |   |   |   |   |
| Interest Expense                              |       | 1,412                |       | 1,226 |   | 667 |   |
| Interest Income                               |       | (173                 | )          | (108 | ) | (33 | ) |
|                                          |       |                 |       |   |   |   |   |
| **Total Other Expense - Net**                 |       | 1,239                |       | 1,118 |   | 634 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Income Before Income Taxes**                |       | 16,742               |       | 11,489 |   | 12,186 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Provision  for Income Tax Expense**         |       | 5,451                |       | 3,868 |   | 3,670 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Net Income**                                |       | $                    | 11,291     |   | $ | 7,621 |   | $ | 8,516 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Net Income Per Common Share - Basic**       |       | $                    | .86        |   | $ | .60 |   | $ | .71 |   |
| ** **                                    |       |                 |       |   |   |   |   |
| **Net  Income Per Common Share - Diluted**    |       | $                    | .85        |   | $ | .58 |   | $ | .67 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

49

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**BIO REFERENCE LABORATORIES, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS' EQUITY**

** [Dollars InThousands]**

 
| ** **                                     | ** ** | **Series A**                              | ** ** | ** **                                     | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**        | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **Senior Preferred Stock**           | ** ** | **Common Stock**                          | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | **Deferred** | ** ** | **Shareholders’** | ** ** |
| ** **                                     | ** ** | **   Shares   ** | ** ** | **   Amount   ** | ** ** | **Shares**  | ** ** | **Amount**     | ** ** | **Capital**  | ** ** | **Earnings**           | ** ** | **Compensation** | ** ** | **Equity** | ** ** |
| ** **                                     |       |                                           |       |                                           |       |        |       |           |       |         |       |                   |       |             |       |   |   |
| **Balance – October 31, 2003**            |       | 604,078                                        |       | $                                              | 60         |        | 11,451,023 |           | $          | 115          |       | $                      | 27,907     |             | $          | 2,315 |   | $ | (439 | ) | $ | 29,958 |   |
| ** **                                     |       |                                           |       |                                           |       |        |       |           |       |         |       |                   |       |             |       |   |   |
| Warrants Issued  to Advisory Board             |       | —                                         |       | —                                         |       | —      |       | —         |       | 137          |       | —                 |       | (137             | )          | — |   |
| Amortization of  Deferred Compensation         |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | —                 |       | 192              |       | 192 |   |
| Common Stock  Repurchased and Retired          |       | —                                         |       | —                                         |       | (30,000     | )          | —         |       | (350         | )          | —                 |       | —           |       | (350 | ) |
| Exercise of Stock  Options                     |       | —                                         |       | —                                         |       | 632,838     |       | 6              |       | 1,898        |       | —                 |       | —           |       | 1,904 |   |
| Conversion of  Preferred Stock to Common Stock |       | (604,078                                       | )          | (60                                            | )          | 604,078     |       | 6              |       | 507          |       | —                 |       | —           |       | 453 |   |
| Net Income                                     |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | 8,516                  |       | —           |       | 8,516 |   |
| **Balance – October 31, 2004**            |       | —                                         |       | $                                              | —     |        | 12,657,939 |           | $          | 127          |       | $                      | 30,099     |             | $          | 10,831 |   | $ | (384 | ) | $ | 40,673 |   |
| ** **                                     |       |                                           |       |                                           |       |        |       |           |       |         |       |                   |       |             |       |   |   |
| Amortization of  Deferred Compensation         |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | —                 |       | 169              |       | 169 |   |
| Exercise of Stock  Options-Employees           |       | —                                         |       | —                                         |       | 323,428     |       | 3              |       | 1,146        |       | —                 |       | —           |       | 1,149 |   |
| Options Issued to  Consultant                  |       | —                                         |       | —                                         |       | —      |       | —         |       | 1,103        |       | —                 |       | —           |       | 1,103 |   |
| Net Income                                     |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | 7,621                  |       | —           |       | 7,621 |   |
| **Balance – October 31, 2005**            |       | —                                         |       | $                                              | —     |        | 12,981,367 |           | $          | 130          |       | $                      | 32,348     |             | $          | 18,452 |   | $ | (215 | ) | $ | 50,715 |   |
| ** **                                     |       |                                           |       |                                           |       |        |       |           |       |         |       |                   |       |             |       |   |   |
| Amortization of  Deferred Compensation         |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | —                 |       | 114              |       | 114 |   |
| Stock Based  Compensation                      |       | —                                         |       | —                                         |       | —      |       | —         |       | 39           |       | —                 |       | —           |       | 39 |   |
| Exercise of  Options - Employees               |       | —                                         |       | —                                         |       | 307,000     |       | 3              |       | 1,378        |       | —                 |       | —           |       | 1,381 |   |
| Exercise of  Options – Board of Directors |       | —                                         |       | —                                         |       | 16,000      |       | —         |       | 50           |       | —                 |       | —           |       | 50 |   |
| Exercise of  Options – Advisory Board     |       | —                                         |       | —                                         |       | 17,500      |       | 1              |       | 188          |       | —                 |       | —           |       | 189 |   |
| Stock Issued for  Acquisition                  |       | —                                         |       | —                                         |       | 230,947     |       | 2              |       | 4,998        |       | —                 |       | —           |       | 5,000 |   |
| Net Income                                     |       | —                                         |       | —                                         |       | —      |       | —         |       | —       |       | 11,291                 |       | —           |       | 11,291 |   |
|                                           |       |                                           |       |                                           |       |        |       |           |       |         |       |                   |       |             |       |   |   |
| **Balance -  October 31, 2006**                |       | 0                                              |       | $                                              | 0          |        | 13,552,814 |           | $          | 136          |       | $                      | 39,001     |             | $          | 29,743 |   | $ | (101 | ) | $ | 68,779 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

50

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**BIO-REFERENCE LABORATORIES,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**[Dollars In Thousands]**

 
| ** **                                                                                    | ** ** | **Years ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                    | ** ** | **October 31,** | ** ** |
| ** **                                                                                    | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating  Activities:**                                                                    |       |                 |       |   |   |   |   |
| Net Income                                                                                    |       | $                    | 11,291     |   | $ | 7,621 |   | $ | 8,516 |   |
| Adjustments to Reconcile Net Income to Net Cash  Provided by (Used for) Operating Activities: |       |                 |       |   |   |   |   |
| Depreciation and Amortization                                                                 |       | 5,067                |       | 4,206 |   | 2,602 |   |
| Amortization of Deferred Compensation                                                         |       | 114                  |       | 169 |   | 192 |   |
| Deferred Income Tax (Benefit)/Expense                                                         |       | (1,841               | )          | (1,942 | ) | (1,318 | ) |
| (Gain) Loss on Disposal of Property, and Equipment                                            |       | (85                  | )          | 9 |   | — |   |
| Stock-based Compensation Expense                                                              |       | 39                   |       | — |   | — |   |
|                                                                                          |       |                 |       |   |   |   |   |
| Changes in Assets and Liabilities                                                             |       |                 |       |   |   |   |   |
| (Net of Effects from Acquisitions):                                                           |       |                 |       |   |   |   |   |
| (Increase) Decrease in:                                                                       |       |                 |       |   |   |   |   |
| Accounts Receivable                                                                           |       | (11,967              | )          | (12,806 | ) | (9,700 | ) |
| Provision for Doubtful Accounts                                                               |       | (741                 | )          | 940 |   | 1,876 |   |
| Inventory                                                                                     |       | (820                 | )          | (63 | ) | (189 | ) |
| Other Current Assets                                                                          |       | (283                 | )          | (44 | ) | (71 | ) |
| Other Assets                                                                                  |       | (175                 | )          | 289 |   | 222 |   |
| Deposits                                                                                      |       | (196                 | )          | (25 | ) | (112 | ) |
|                                                                                          |       |                 |       |   |   |   |   |
| Increase (Decrease) in:                                                                       |       |                 |       |   |   |   |   |
| Accounts Payable, Accrued Taxes and Expenses                                                  |       | 4,797                |       | 4,545 |   | 3,008 |   |
|                                                                                          |       |                 |       |   |   |   |   |
| Total Adjustments                                                                             |       | (6,091               | )          | (4,722 | ) | (3,490 | ) |
|                                                                                          |       |                 |       |   |   |   |   |
| **Net  Cash - Operating Activities - Forward**                                                |       | 5,200                |       | 2,899 |   | 5,026 |   |
| ** **                                                                                    |       |                 |       |   |   |   |   |
| **Investing  Activities:**                                                                    |       |                 |       |   |   |   |   |
| Business Acquisitions and related costs                                                       |       | (1,951               | )          | (2,174 | ) | (3,146 | ) |
| Acquisition of Property and Equipment                                                         |       | (2,859               | )          | (2,860 | ) | (3,541 | ) |
| Proceeds from Sale of Equipment                                                               |       | 134                  |       | 65 |   | — |   |
| Capitalized Loan Fees                                                                         |       | —               |       | (21 | ) | (75 | ) |
|                                                                                          |       |                 |       |   |   |   |   |
| **Net Cash - Investing Activities - Forward**                                                 |       | (4,676               | )          | (4,990 | ) | (6,762 | ) |
| ** **                                                                                    |       |                 |       |   |   |   |   |
| **Financing  Activities:**                                                                    |       |                 |       |   |   |   |   |
| Proceeds from Long-Term Debt                                                                  |       | —               |       | — |   | 2,546 |   |
| Payments of Long-Term Debt                                                                    |       | (1,061               | )          | (1,298 | ) | (212 | ) |
| Payments of Capital Lease Obligations                                                         |       | (2,240               | )          | (1,796 | ) | (1,505 | ) |
| Increase (Decrease) in Revolving Line of Credit                                               |       | 5,808                |       | 555 |   | 1,615 |   |
| Proceeds from the Exercise of Stock Options                                                   |       | 1,620                |       | 2,252 |   | 1,904 |   |
| Conversion of Preferred Stock                                                                 |       | —               |       | — |   | 453 |   |
| Common Stock Repurchased                                                                      |       | —               |       | — |   | (350 | ) |
| **Net  Cash - Financing Activities - Forward**                                                |       | $                    | 4,127      |   | $ | (287 | ) | $ | 4,451 |   |

 

The AccompanyingNotes are an Integral Part of These Consolidated Financial Statements.

51

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| ** **                                              | ** ** | **Years ended** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **October 31,** | ** ** |
| ** **                                              | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Cash - Operating Activities -  Forwarded**        |       | $                    | 5,200      |   | $ | 2,899 |   | $ | 5,026 |   |
| ** **                                              |       |                 |       |   |   |   |   |
| **Net Cash - Investing Activities - Forwarded**         |       | (4,676               | )          | (4,990 | ) | (6,762 | ) |
| ** **                                              |       |                 |       |   |   |   |   |
| **Net Cash - Financing Activities -  Forwarded**        |       | 4,127                |       | (287 | ) | 4,451 |   |
| ** **                                              |       |                 |       |   |   |   |   |
| **Net Increase in Cash and Cash Equivalents**           |       | 4,651                |       | (2,378 | ) | 2,715 |   |
| ** **                                              |       |                 |       |   |   |   |   |
| **Cash  and Cash Equivalents - Beginning of Years**     |       | 4,303                |       | 6,681 |   | 3,966 |   |
| ** **                                              |       |                 |       |   |   |   |   |
| **Cash and Cash Equivalents - End of Years**            |       | $                    | 8,954      |   | $ | 4,303 |   | $ | 6,681 |   |
| **Supplemental Disclosures of Cash Flow  Information:** |       |                 |       |   |   |   |   |
| Cash paid during the years for:                         |       |                 |       |   |   |   |   |
| Interest                                                |       | $                    | 1,386      |   | $ | 1,160 |   | $ | 646 |   |
| Income Taxes                                            |       | $                    | 7,173      |   | $ | 5,413 |   | $ | 4,590 |   |

 

**SupplementalSchedule of Non-Cash Investing and Financing Activities:**

In October 2006,the Company issued 230,947 shares of its unregistered common stock valued at$5,000, incurred debt of $5,000 and assumed liabilities of $375 in connectionwith the acquisition of GeneDx.

In October 2006,the Company assumed liabilities of $455 in connection with the acquisition ofDiagnostic Pathology Services, Inc.

In October 2005,the Company assumed $160 of liabilities in connection with the acquisition ofPATHCO

In fiscal 2004,the Company issued 15,000 common stock options valued at $137 to a member ofits Scientific Advisory Board as deferred compensation.

During fiscal2006, 2005 and 2004, the Company wrote-off approximately $546, $806 and $617 offurniture and equipment which were fully depreciated.

During fiscal2006, 2005 and 2004, the Company wrote off approximately $200, -0- and $428 ofcapitalized costs related to covenants not-to-compete and employmentagreements, which were fully amortized.

During fiscal2006, 2005, and 2004, the Company incurred capital lease obligations totalingapproximately $1,082, $3,185, and $2,869 in connection with the acquisition ofproperty and equipment.

[See Notes 9, 11and 18 for additional non-cash transactions]

The AccompanyingNotes are an Integral Part of These Consolidated Financial Statements.

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**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[DollarsIn Thousands Except Per Share Data or Unless Otherwise Indicated]**

***[1] Organizationand Business***

Bio-Reference Laboratories, Inc. [“Bio-Reference” orthe “Company”] was incorporated on December 24, 1981.  Bio-Reference is principally engaged inproviding clinical laboratory testing services, primarily to customers in thegreater New York metropolitan area as well as to customers in a number of otherstates.  Bio-Reference offers acomprehensive list of chemical diagnostic tests including blood and urineanalysis, blood chemistry, hematology services, serology, radioimmuno analysis,toxicology (including drug screening), pap smears, tissue pathology (biopsies)and other tissue analysis.  It operatestwo clinical laboratories, one in Elmwood Park, New Jersey and one in ValleyCottage, New York, and an andrology laboratory in New York City, a cytogeneticstesting laboratory located in Milford, MA, a pathology laboratory inPoughkeepsie, NY, a pathology laboratory in Clarksburg, MD and a geneticslaboratory in Gaithersburg, MD. Bio-Reference markets its laboratory testing services directly tophysicians, geneticists, hospitals, clinics, correctional and other healthfacilities.

The Company’s clinical laboratory testing businesscurrently represents its one reportable business segment. The clinicallaboratory testing business accounts for over 95% of consolidated assets, netrevenues and net income in each of the three years ended October 31, 2006. Allother operating segments include the Company’s non-clinical laboratory testingbusinesses and consist of our clinical knowledge management service through ourPSIMedica business unit, a web-based connectivity portal solution forlaboratories and physicians through its CareEvolve subsidiary. Segmentinformation is not presented since it is not reported to or used by the chiefoperating decision maker at the operating segment level.

***[2] Summary ofSignificant Accounting Policies***

***Principles ofConsolidation -*** The consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany accounts andtransactions have been eliminated.

***Cash and CashEquivalents -*** Cash equivalents are comprised ofcertain highly liquid investments with a maturity of three months or less whenpurchased.  The Company had $3,719 and$2,790 in cash equivalents at October 31, 2006 and 2005, respectively.

***Inventory -***Inventory is stated at the lower of cost [on a first-in, first-outbasis] or market.  Inventory consistsprimarily of purchased laboratory supplies, which is used in our varioustesting laboratories.

***Property andEquipment -***Property and equipment are carried atcost.  Depreciation is computed by thestraight-line method over the estimated useful lives of the respectiveassets which range from 2 to 15 years. Leasehold improvements are amortized over the life of the lease, whichis approximately five years.

The statements of operations reflect depreciationexpense related to property and equipment of $4,456, $3,592 and $2,034 for theyears ended October 31, 2006, 2005 and 2004, respectively.

On sale or retirement, the asset cost and relatedaccumulated depreciation or amortization are removed from the accounts, and anyrelated gain or loss is reflected in general and administrative expenses.  Repairs and maintenance are charged toexpense when incurred.

**Goodwill** - EffectiveNovember 1, 2001, the Company evaluates the recoverability and measures thepossible impairment of its goodwill under SFAS 142, “Goodwill and OtherIntangible Assets.”  The impairment testis a two-step process that begins with the estimation of the fair value of thereporting unit. The first step screens for potential impairment and the secondstep measures the amount of the impairment, if any.  Management’s estimate of fair value considerspublicly available information 

53

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regarding the market capitalization of the Company aswell as (i) publicly available information regarding comparable publicly-tradedcompanies in the clinical laboratory testing industry, (ii) the financialprojections and future prospects of the Company’s business, including itsgrowth opportunities and likely operational improvements, and (iii) comparablesales prices, if available. As part of the first step to assess potentialimpairment, management compares the estimate of fair value for the Company to thebook value of the Company’s consolidated net assets.  If the book value of the consolidated netassets is greater than the estimate of fair value, the Company would thenproceed to the second step to measure the impairment, if any.  The second step compares the implied fairvalue of goodwill with its carrying value

The implied fair value is determined by allocating thefair value of the reporting unit to all of the assets and liabilities of thatunit as if the reporting unit had been acquired in a business combination andthe fair value of the reporting unit was the purchase price paid to acquire thereporting unit.  The excess of the fairvalue of the reporting unit over the amounts assigned to its assets andliabilities is the implied fair value of goodwill.  If the carrying amount of the goodwill isgreater than its implied fair value, an impairment loss will be recognized inthat period.  No impairment loss wasrecognized in the years ended October 31, 2006, 2005 and 2004.

The balance sheet reflects accumulated amortization of$2,401 as of October 31, 2006 and 2005, respectively.

***Other IntangibleAssets -*** Intangible assets are amortized using thestraight-line method.  The estimateduseful life of costs capitalized is evaluated for each specific project whencompleted, at which time such costs begin to be amortized. The statements ofoperations reflect amortization expense related to intangible assets of $611,$614, and $568 for the years ended October 31, 2006, 2005 and 2004,respectively.  The balance sheet reflectsaccumulated amortization of $3,819, and $3,409 as of October 31, 2006, and 2005,respectively. During the 2006 fiscal year, the Company wrote off approximately$200 of capitalized costs related to covenants not to compete and employmentagreements which were fully amortized.

***Net Service Revenue-*** Service revenues are principally generated fromlaboratory testing services including chemical diagnostic tests such asblood,urine analysis, and genetics testing among others.  Net service revenues are recognized at thetime the testing services are performed and are reported at the estimated netrealizable amounts from patients, third-party payors and others for servicesrendered including prospectively determined adjustments under reimbursementagreements with third-party payors. These adjustments are accrued on an estimated basis in the period therelated services are rendered and adjusted in future periods as finalsettlements are determined.  The Companyhas a subsidiary that provides non-clinical laboratory services.  Revenues generated from these services arenot material for each of the years presented. The Company has historically not provided any significant amount ofcharity care. Net service revenues on the statements of operations are asfollows:
|                                             | ** ** | **Years ended** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **October 31,** | ** ** |
| ** **                                  | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                 |       |   |   |   |   |
| Gross Revenues                              |       | $                    | 522,117    |   | $ | 430,162 |   | $ | 341,180 |   |
|                                        |       |                 |       |   |   |   |   |
| Contractual  Adjustments and Discounts:     |       |                 |       |   |   |   |   |
| Medicare/Medicaid Portion                   |       | 119,505              |       | 113,650 |   | 92,753 |   |
| Other                                       |       | 209,478              |       | 152,616 |   | 112,243 |   |
| Total Contractual Adjustments and Discounts |       | 328,983              |       | 266,266 |   | 204,996 |   |
|                                        |       |                 |       |   |   |   |   |
| ***Net  Revenues***                         |       | $                    | 193,134    |   | $ | 163,896 |   | $ | 136,184 |   |

 

54

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***Contractual Credits and Provision for Doubtful Accounts -***An allowance for contractual credits is determined based upon a review of thereimbursement policies and subsequent collections for the different types ofpayors.  An allowance for doubtfulaccounts is determined based upon a percentage of total receivables.  The aggregate allowance, which is shown netagainst accounts receivable, was $56,628 and $48,920 as of October 31, 2006 and2005, respectively.

As of October 31,2006 and 2005, accounts receivable is reported net of an allowance for doubtfulaccounts which is comprised of the following items:
|                                | ** ** | **October 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                           |       |                 |       |   |   |
| Contractual  Credits/Discounts |       | $                    | 49,394     |   | $ | 40,945 |   |
| Doubtful  Accounts             |       | 7,234                |       | 7,975 |   |
|                           |       |                 |       |   |   |
| ***Total  Allowance***         |       | $                    | 56,628     |   | $ | 48,920 |   |

 

***Deferred Income Taxes -*** Deferredincome tax assets and liabilities are computed annually for differences betweenthe financial statement and tax bases of assets and liabilities that willresult in taxable or deductible amounts in the future based on enacted tax lawsand rates applicable to the periods in which the differences are expected toaffect taxable income.

Valuationallowances are established when necessary to reduce deferred tax assets to theamount expected to be realized.

***Earnings Per Share -*** Basic earningsper share [“EPS”] reflects the amount of income [loss] attributable to eachshare of common stock based on average common shares outstanding during theperiod.  Diluted EPS reflects Basic EPSwhile giving effect to all potential dilutive common shares that wereoutstanding during the period, such as common shares that could result from theexercise or conversion of securities into common stock.  The computation of Diluted EPS is calculatedby using the treasury stock method, which assumes that any proceeds obtainedfrom the exercise of such dilutive securities would be used to purchase commonstock at the average market price of the common stock during the period.  This reduces the gross number of dilutiveshares by the number of shares purchasable from the proceeds of the securitiesassumed to be exercised.  Securitieswhose conversion would have an anti-dilutive effect on EPS are not assumedconverted.  Securities that couldpotentially dilute earnings in the future are disclosed in Note 10.

***Use of Estimates -*** The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

***Recoverability and Impairment of Intangible Assets and OtherLong-Lived Assets -*** Effective November 1, 2002, theCompany evaluates the possible impairment of its long-lived assets, includingintangible assets (which are amortized pursuant to the provisions of SFAS 142),under SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”(“SFAS 144”). The Company reviews the recoverability of its long-lived assetswhen events or changes in circumstances occur that indicate that the carryingvalue of the asset may not be recoverable. Evaluation of possible impairment is based on the Company’s ability torecover the asset from the expected future pretax cash flows (undiscounted andwithout interest charges) of the related operations. If the expectedundiscounted pretax cash flows are less than the carrying amount of such asset,an impairment loss is recognized for the difference between the estimated fairvalue and carrying amount of the asset. The Company’s adoption of SFAS 144 didnot result in any impairment loss being recorded.  No impairment loss was recognized in thefiscal years ended October 31, 2006, 2005 and 2004.

55

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***StockOptions Issued to Employees*** –Effective November 1, 2005,the Company adopted the fair value method of recording stock-basedcompensation, as defined in SFAS No. 123(R) “Stock-Based Payments”, under themodified prospective transition method for stock options awarded to employeesafter the date of adoption and for previously issued stock options that werenot vested as of November 1, 2005 which were issued under the Company’s threestock based employee compensation plans. Under the modified prospectivetransition method, the Company is required to recognize compensation expensefor options granted commencing November 1, 2005 and thereafter. Additionally,the fair value of existing unvested awards at the date of adoption is recordedin compensation expense over the remaining requisite service period.

Priorto November 1, 2005, the Company applied Accounting Principles Board Opinion(APB) No. 25 “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for stock options and other stock-basedcompensation. APB No. 25 required the use of the intrinsic value method, whichmeasured compensation cost as the excess, if any, of the quoted market price ofthe stock at the measurement date over the amount an employee must pay toacquire the stock.

***Advertising Costs -***Advertising costsare expensed when incurred.  Advertisingcosts amounted to approximately $745, $213 and $272 for the years ended October31, 2006, 2005 and 2004, respectively.

***Reclassification -*** Certain prior yearamounts have been reclassified to conform with the current year presentation.

***[3] Property and Equipment -*** Propertyand equipment - at cost is summarized as follows:
|                                                 | ** ** | **October 31,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                            |       |                 |       |   |   |
| Medical  Equipment                              |       | $                    | 8,576      |   | $ | 7,467 |   |
| Leasehold  Improvements                         |       | 4,290                |       | 3,728 |   |
| Furniture,  Fixtures and Office Equipment       |       | 5,184                |       | 3,815 |   |
| Automobiles                                     |       | 4,196                |       | 3,693 |   |
|                                            |       |                 |       |   |   |
| Totals                                          |       | 22,246               |       | 18,703 |   |
| Less:  Accumulated Depreciation                 |       | 10,162               |       | 6,776 |   |
|                                            |       |                 |       |   |   |
| ***Totals  - Net of Accumulated Depreciation*** |       | $                    | 12,084     |   | $ | 11,927 |   |

 

***[4] Intangible Assets***

Intangible assetsare summarized as follows:

October 31, 2006:
| ** **                     | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net of Accumulated** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------|------------|------------------|------------|----------------------------------|------------|
| **Intangible Asset**      | ** ** | **Amortization Period** | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amortization**                 | ** ** |
|                           |       |                         |       |       |       |             |       |                             |       |
| Software Costs                 |       | 5                            |       | $          | 1,535      |             | $          | 1,494                            |       | $ | 41 |   |
| Customer Lists                 |       | 20                           |       | 3,906      |       | 1,063            |       | 2,843                            |       |
| Covenants Not-to-Compete       |       | 5                            |       | 4,205      |       | 84               |       | 4,121                            |       |
| Employment  Agreement          |       | 7                            |       | 625        |       | 625              |       | 0                                |       |
| Costs Related to  Acquisitions |       | 19                           |       | 1,562      |       | 462              |       | 1,100                            |       |
| Patent                         |       | 17                           |       | 156        |       | 91               |       | 65                               |       |
|                           |       |                         |       |       |       |             |       |                             |       |
| ***Totals***                   |       | 11                           |       | $          | 11,989     |             | $          | 3,819                            |       | $ | 8,170 |   |

 

56

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October 31, 2005:
| ** **                     | ** ** | **Weighted-Average**         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net of Accumulated** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------|------------|------------------|------------|----------------------------------|------------|
| **Intangible Asset**      | ** ** | **Amortization Period** | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amortization**                 | ** ** |
|                           |       |                         |       |       |       |             |       |                             |       |
| Software Costs                 |       | 5                            |       | $          | 1,535      |             | $          | 1,249                            |       | $ | 286 |   |
| Customer Lists                 |       | 20                           |       | 2,456      |       | 946              |       | 1,510                            |       |
| Covenants Not-to-Compete       |       | 5                            |       | 405        |       | 3                |       | 402                              |       |
| Employment  Agreement          |       | 7                            |       | 825        |       | 780              |       | 45                               |       |
| Costs Related to  Acquisitions |       | 19                           |       | 1,111      |       | 348              |       | 763                              |       |
| Patent                         |       | 17                           |       | 156        |       | 83               |       | 73                               |       |
|                           |       |                         |       |       |       |             |       |                             |       |
| ***Totals***                   |       | 11                           |       | $          | 6,488      |             | $          | 3,409                            |       | $ | 3,079 |   |

 

The estimatedamortization expense related to intangible assets for each of the five succeedingfiscal years and thereafter as of October 31, 2006 is as follows:
| Year Ended      | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **October 31,** | ** ** | ** ** | ** ** |
| 2007                 |       | $          | 1,279      |   |
| 2008                 |       | 1,213      |       |
| 2009                 |       | 1,192      |       |
| 2010                 |       | 1,171      |       |
| 2011                 |       | 1,068      |       |
| Thereafter           |       | 2,247      |       |
|                 |       |       |       |
| ***Total***          |       | $          | 8,170      |   |

 

***[5] Revolving Note Payable - Bank***

In October 2004, theCompany entered into an amended revolving note payable loan agreement with abank.  The maximum amount of the creditline available to the Company is the lesser of (i) $30,000 or (ii) 50% of the Company’squalified accounts receivable [as defined in the agreement]. The amended loanagreement provides for an “acquisition subline” of up to $10,000 which can berepaid in 36 equal monthly installments. The amendment to the Loan and SecurityAgreement provides for interest on advances to be subject to the bank’s primerate or Eurodollar rate of interest plus, in certain instances, an additionalinterest percentage.  The additionalinterest percentage charges on Eurodollar borrowings range from 1% to 4% andare determined based upon certain financial ratios achieved by theCompany.  At October 31, 2006, theCompany had elected to have $11,000 of the total advances outstanding convertedinto a Eurodollar rate loan with a variable interest rate of 6.75% at October31, 2006.  The remaining outstandingadvances during that period were subject to the bank’s prime rate ofinterest.  At October 31, 2006, advancesof $5,696 were subject to interest at the prime rate.  As of October 31, 2006 and 2005, the bank’sprime rate of interest was 8.25% and 6.75%, respectively.  The credit line is collateralized bysubstantially all of the Company’s assets. The line of credit is availablethrough October 2007 and may be extended for annual periods by mutual consent,thereafter.  The terms of this agreementcontain, among other provisions, requirements for maintaining defined levels ofcapital expenditures, fixed charge coverage, insurance coverage and theprohibition of the payment by the Company of cash dividends. As of October 31,2006, the Company utilized $16,696 and had $13,304 of available unused creditunder this revolving note payable loan agreement.

Effective as of October31, 2006, we executed a fourth amendment to the Loan Agreement formalizing therepayment terms of the $5 million term loan from PNC Bank used by ourwholly-owned BRLI No. 2 Acquisition Corp. subsidiary to fund the $5 millionacquisition cash payment in

57

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connection with its purchase of the operating assets of GENEDX, Inc. .The term loan is evidenced by a secured promissory note payable over a six yearterm in equal monthly principal payments of $69,444.44, plus interest at anannual rate of 6.85%.

 

The weighted averageinterest rate on short-term borrowings outstanding as of October 31, 2006 and2005 was approximately 6.87% and 5.84%, respectively.

***[6] Long-Term Debt - Bank***

In connection with theCGI acquisition, the Company borrowed $2,546 under the “acquisition subline”available under the revolving note payable agreement (See notes 5 and 18).Principal and

interest are due in 26equal installments of $113 through August 2006. At October 31, 2005 the Companyhad a principal balance of $1,061 outstanding. That balance was paid off duringfiscal 2006. Also during fiscal 2006, the company borrowed an additional $5,000at 6.85% for a 6 year term and approximately an additional $20 at 4.75% for 5year term. At October 31, 2006 the principal long term debt balance outstandingunder the borrowings was $4,181. The current maturity of short term debtbalance was $839.

Principal repayment foreach of the five succeeding fiscal years and thereafter as of October 31, 2006is as follows: 
| Year Ended      | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **October 31,** | ** ** | ** ** | ** ** |
| 2007                 |       | $          | 839        |   |
| 2008                 |       | 839        |       |
| 2009                 |       | 839        |       |
| 2010                 |       | 839        |       |
| 2011                 |       | 840        |       |
| Thereafter           |       | 824        |       |
|                 |       | $          | 5,020      |   |

 

***[7] Related Party Transactions***

In March 2001, theCompany entered into a joint marketing agreement [the “agreement”] with GeneralPrescription Programs, Inc. [“GPP”]. Provisions of the agreement provide that GPP will assist the Company inmarketing its PSIMedica programs to various customers.  In addition, GPP will provide ongoing dataand data support to the PSIMedica program development.  The term of the agreement is for a five yearperiod commencing on October 2001.  Inexchange for obtaining GPP marketing and technical services, the Company issuedGPP 220,000 shares of its common stock with a fair value of approximately $248which is being amortized over the five year term of the agreement. For theyears ended October 31, 2006, 2005 and 2004, the Company recorded an expense of$50, $50 and $50, respectively.  TheChairman of the Board of GPP is the brother of the Company’s Chief ExecutiveOfficer.

See Note 9A as to theconversion by the Company’s Chief Executive Officer and his wife of shares ofSeries A Senior preferred Stock during fiscal 2004.

***[8] Income Taxes***

The reconciliation ofincome tax from continuing operations computed at the U.S. federal statutorytax rate to the Company’s effective income tax rate is as follows:

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| ** **                                                            | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                 |       |   |   |   |   |
| U.S. Federal  Statutory Rate                                          |       | 34                   | %          | 34.0 | % | 34.0 | % |
| State and Local  Income Taxes, Net of U.S. Federal Income Tax Benefit |       | 8.0                  | %          | 7.0 | % | 6.0 | % |
| Permanent  Differences and Other                                      |       | (9.44                | )%         | (7.0 | )% | (10.0 | )% |
|                                                                  |       |                 |       |   |   |   |   |
| ***Actual Rate***                                                |       | 32.56                | %          | 34.0 | % | 30.0 | % |

 

The provision [benefit]for income taxes shown in the consolidated statements of operations consist ofthe following:
|                                     | ** ** | **October 31,** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                            |       |                 |       |   |   |   |   |
| Federal                             |       | $                    | 5,578      |   | $ | 4,577 |   | $ | 3,562 |   |
| State and Local                     |       | 1,714                |       | 1,233 |   | 1,426 |   |
|                                |       |                 |       |   |   |   |   |
| Deferred:                           |       |                 |       |   |   |   |   |
| Federal                             |       | (1,406               | )          | (1,530 | ) | (1,120 | ) |
| State and Local                     |       | (435                 | )          | (412 | ) | (198 | ) |
|                                |       |                 |       |   |   |   |   |
| *Total Provision for Income  Taxes* | ** ** | **$**                | **5,451**  | ** ** | **$** | **3,868** | ** ** | **$** | **3,670** |   |

 

At October 31,2006 and 2005, the Company had a net deferred tax asset [liability] ofapproximately $4,469 and $2,628, respectively. The deferred taxes primarily relate to timing differences associatedwith the deductibility of depreciation, bad debts and certain accrued expensesand deferred costs. For fiscal years ended in 2006 and in 2005, the Company hadno net operating loss carryforwards available to reduce current year taxableincome. For fiscal 2003, the Company utilized approximately $4,378 (federal)and $2,682 (state) of net operating loss carryforwards to reduce current yeartaxable income.
|                                                 | ** ** | **October 31,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Deferred Tax  Asset:                            |       |                 |       |   |   |
| Bad Debt Allowance                              |       | $                    | 3,111      |   | $ | 3,190 |   |
| Property and Equipment                          |       | 722                  |       | — |   |
| Accrued Expenses                                |       | 654                  |       | 502 |   |
|                                            |       |                 |       |   |   |
|                                            |       | 4,487                |       | 3,692 |   |
| Deferred Tax  Liability:                        |       |                 |       |   |   |
| Deferred Costs                                  |       | (18                  | )          | (1,050 | ) |
| Property and Equipment                          |       | 0                    |       | (14 | ) |
|                                            |       |                 |       |   |   |
|                                            |       | (18)                 |       | (1,064 | ) |
|                                            |       |                 |       |   |   |
| ***Deferred Tax Asset [Liability]—  Net*** |       | $                    | 4,469      |   | $ | 2,628 |   |
| *** ***                                    |       |                 |       |   |   |
| ***As Follows:***                               |       |                 |       |   |   |
|                                            |       |                 |       |   |   |
| Net Current Deferred Tax Asset                  |       | $                    | 4,987      |   | $ | 3,606 |   |
| Net Long-Term Deferred Tax Liability            |       | (18                  | )          | (978 | ) |
|                                            |       |                 |       |   |   |
| **Deferred  Tax Asset [Liability] - Net**       |       | $                    | 4,469      |   | $ | 2,628 |   |

 

The company has recorded a deferred tax benefit of$1,841 reflecting the benefit of approximately $(709).

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in allowance forbad debts, $775 in property and equipment and other intangibles, and $1,775 incertain accrued expenses. Although realization is not assured and dependentupon things such as generating sufficient taxable income in future periods,management believes it is more likely than not that all of the deferred taxasset will be realized. The amount of the deferred tax asset consideredrealizable, however, could be reduced in the near term if estimates of futuretaxable income or changes in the accrued expenses during the future periods arereduced.

 

***[9] Capital Transactions***

***[A] Preferred Stock and Common Stock -***The Company is authorized to issue an aggregate of 1,666,667 shares ofpreferred stock, $.10 par value.  AtOctober 31, 2003, there were 604,078 shares of Series A Senior preferred stockissued and outstanding.  The Series ASenior preferred stock is convertible into an aggregate 604,078 shares ofcommon stock on or before May 1, 2007 at a conversion

price of $.75 per shareand has the same voting rights [one vote per share], dividend rights andliquidation rights as each share of common stock. In July 2004, the Series ASenior preferred stock shareholders (the Company’s Chief Executive Officer andhis wife) converted 604,078 shares of preferred stock into an equal number ofcommon shares of the Company. The Company received approximately $453 inproceeds upon conversion.

In July 2003, thestockholders approved an increase in the number of authorized shares of commonstock from 18,333,333 shares to 35,000,000 shares.

Holders of the Company’sCommon Stock are entitled to one vote per share on matters submitted forshareholder vote.  Holders are alsoentitled to receive dividends ratably, if declared.  In the event of dissolution or liquidation,holders are entitled to share ratably in all assets remaining after payment ofliabilities.

On March 31, 1998, theCompany’s Board of Directors adopted a Shareholder Rights Plan and declared adividend distribution of one Right for each outstanding share of Common Stockand each outstanding share of Series A Senior Preferred Stock.  Each Right entitles the registered holder topurchase one one-ten-thousandth of a share of Series A Junior ParticipatingPreferred Stock [the “Junior Preferred Stock”] from the Company at a price of$4.00.  Because of the nature of thedividend, liquidation and voting rights of the Junior Preferred Stock, thevalue of each one-ten-thousandth of a share of Junior Preferred Stock isintended to approximate the value of one share of Common Stock.  Junior Preferred Stock purchasable uponexercise of the Rights will not be redeemable. Each outstanding share of Junior Preferred Stock will be entitled to aminimum preferential quarterly dividend of $.05 per share and will be entitledto an aggregate dividend of 10,000 times the dividend declared per share ofCommon Stock.  In the event ofliquidation, the holders of the Junior Preferred Stock will be entitled to aminimum preferential liquidation payment of $10 per share and will be entitledto an aggregate payment of 10,000 times the payment made per share of CommonStock.  Each share of Junior PreferredStock will have 10,000 votes, voting together with the Common Stock.

In the event of anymerger, consolidation or other transaction in which the Common Stock is exchanged,each share of Junior Preferred Stock will be entitled to receive 10,000 timesthe amount received per share of Common Stock. The Rights are protected by customary anti-dilution provisions.  The Rights are not exercisable unless any oneof certain triggering events occur including the acquisition by an individualor entity and their associates of 25% or more of the outstanding shares ofCommon Stock.  The Shareholder RightsPlan is designed to protect the Company and its shareholders from coercive, unfairand inadequate takeover bids and practices. The Plan is designed to strengthen the Board of Directors’ ability todeter a person or group from attempting to gain control of the Company withoutoffering a fair price and equal treatment to all shareholders.

The Company implemented astock repurchase program to repurchase up to 500,000 shares of its common stockin the over-the-counter market on or before October 31, 2004 provided (1) allsuch repurchases and bids to repurchase effective on any given day shall bemade only through a single broker 

60

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or dealer on that day (2)any such repurchases on a given day shall not be the opening transactionrecorded to the consolidated transaction reporting system and no repurchasesshall be made during the last half hour before the scheduled close of trading(3) the highest price paid to repurchase any shares shall not exceed the higherof the highest independent bid or the last independent reported sale price and(4) the maximum number of shares that can be repurchased on a given day(excluding block repurchases) shall not exceed 25% of the average daily tradingvolume reported for the four calendar weeks preceding the week in which therepurchase is made. Common Stock acquired by the Company under the repurchase programare to be retired and canceled. In fiscal 2004 and 2003, the Companyrepurchased 30,000 and 229,300 shares of the Company’s common stock at a costof $350 and $1,070, respectively.

On June 1, 2005, theBoard of Directors authorized the repurchase of up to 500,000 shares of theCompany’s common stock over the period of ending October 31, 2007.  As ofOctober 31, 2006, no shares were repurchased under this plan.

*** [B] EquityTransactions for Services -*** In fiscal year ended in 2006and 2005, no shares of the Company’s common stock were issued for employment orconsulting services [See Note 11 for common stock options issued for employeeand consulting services].

***[10] Earnings Per Share***

The computation of basicand diluted net earnings per common share was as follows [in thousands, exceptper share data]:
|                                                    | ** ** | **For the years ended October 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                                         |       |   |   |   |   |
| Income Available  to Common Stockholders           |       | $                                                            | 11,291     |   | $ | 7,621 |   | $ | 8,516 |   |
| Weighted Average  Common Shares Outstanding        |       | 13,101                                                       |       | 12,775 |   | 12,078 |   |
|                                               |       |                                                         |       |   |   |   |   |
| Effect of  Dilutive Securities:                    |       |                                                         |       |   |   |   |   |
| Convertible Preferred Stock                        |       | —                                                       |       | — |   | — |   |
| Warrants/Options                                   |       | 227                                                          |       | 374 |   | 637 |   |
|                                               |       |                                                         |       |   |   |   |   |
| Weighted Average Diluted Common Shares Outstanding |       | 13,328                                                       |       | 13,149 |   | 12,715 |   |
|                                               |       |                                                         |       |   |   |   |   |
| Net Income Per Share - Basic                       |       | $                                                            | .86        |   | $ | .60 |   | $ | .71 |   |
| Net Income Per  Share - Diluted                    |       | $                                                            | .85        |   | $ | .58 |   | $ | .67 |   |

 

Forthe year ended October 31, 2006, outstanding options to purchase 7,000 sharesof Company common stock at exercise price of $21.46 per share were not includedin the computation of diluted EPS. For the year ended October 31, 2005,outstanding options to purchase 233,458 shares of company common stock atexercise prices ranging from $15.61 to $18.25 were not included in thecomputation of diluted EPS.  For the yearended October 31, 2004, outstanding options to purchase 77,000 shares ofcompany common stock at exercise price of $14.96 were not included in thecomputation of diluted EPS. The exercise price of these options and warrantswas greater than the average market price of the common shares and they areconsidered anti-dilutive.  Thesesecurities could potentially dilute EPS in the future.

*** [11] Stock Optionsand Warrants***

***[A] Employee Incentive Stock Options -***In June 2003, the Board of Directors adopted, and in July 2003, thestockholders approved, the 2003 Employee Incentive Stock Option Plan [the “2003Plan”].  The 2003 Plan authorizes thegrant of incentive stock options to purchase up to a maximum aggregate 800,000 

61

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shares of Company common stock. The 2003 Plan provides that theexercise price of an option granted there under shall not be less than the fairmarket value of the Common Stock on the date the option is granted.  However, in the event an option is granted underthe 2003 Plan to a holder of 10% or more of the Company’s outstanding CommonStock, the exercise price must be at least 110% of such fair market value.  Under the 2003 Plan, options must be grantedbefore the June 2, 2013 Termination Date. No option may have a term longer than ten years (limited to five yearsin the case of an option granted to a 10% or greater stockholder of theCompany).  The aggregate fair marketvalue of the Company’s Common Stock with respect to which options areexercisable for the first time by a grantee under all of the Company’s StockOption Plans during any calendar year cannot exceed $100.  Options granted under the 2003 Plan arenon-transferable and must be exercised by an optionee, if at all, whileemployed by the Company or a subsidiary or within three months aftertermination of such optionee’s employment due to retirement, or within one yearof such termination if due to disability or death.  The Board (or a Stock Option Committee, ifdesignated), may, in its sole discretion, cause the Company to lend money to orguaranty any obligation of an employee for the purpose of enabling suchemployee to exercise an option granted under the 2003 Plan provided that suchloan or obligation cannot exceed fifty percent (50%) of the exercise price ofsuch option. In fiscal year ended October 31, 2006, 2005 and 2004, -0-, 375,458and 104,000 options were granted under the Plan, respectively. A total of56,500, 23,500 and 2,000 incentive stock options issued under the 2003 Planwere exercised in fiscal years ended in October 31, 2006, 2005 and 2004,respectively. A total of -0-, 39,500 and -0- options were cancelled in fiscalyears ended October 31, 2006, 2005 and 2004.

 

In August 2000, theCompany adopted, and on December 15, 2000, the stockholders approved, the 2000Employee Incentive Stock Option Plan [“2000 Plan”].  The 2000 Plan provides for the granting ofincentive stock options to purchase an aggregate of 800,000 shares of theCompany’s common stock at a price not less than 100% of the fair market valueper share of the common stock at the date of grant.  However, in the event an option is grantedunder the 2000 Plan to a holder of 10% or more of the Company’s outstandingcommon stock, the exercise price must be at least 110% of fair market value atthe date of grant.  Employees of theCompany or its subsidiary, as determined, are eligible for the 2000 Plan.  The term of the options shall not exceed tenyears from the date of grant.  In fiscal2000, 200,000 options were granted under the 2000 Plan which vests in fourequal annual installments commencing January 31, 2002 contingent on the Companyrealizing targeted net revenue levels. In fiscal years ended October 31, 2006, 2005 and 2004, -0- , 2,000 and50,000 options were granted under the Plan, respectively. A total of 245,500,54,094 and 215,088 incentive stock options issued under the 2000 Plan wereexercised in fiscal year ended in October 31, 2006, 2005 and 2004,respectively. A total of -0-, 12,218, and -0- options were cancelled in fiscalyear ended October 31, 2006, 2005 and 2004, respectively.  Options issued under the 2000 Plan must begranted before the August 2010 termination date.

In November 1989, theshareholders approved and the Company adopted the 1989 Employee Stock OptionPlan [“1989 Plan”] which provides for the granting of options to acquire666,667 shares of common stock.  Underthe terms of this stock option plan, incentive stock options to purchase sharesof the Company’s common stock are granted at a price not less than the fairmarket value of the common stock at the date of grant.  A total of 5,000, 13,334, and 205,000incentive stock options issued under the 1989 Plan were exercised in fiscalyears ended October 31, 2006, 2005 and 2004 respectively.  Additionally, -0-, 33,334, and -0- optionswere canceled in fiscal years ended in October 2006, 2005 and 2004respectively.  All options under the 1989Plan were required to be granted before the Plan’s July 1999’s termination dateso that no further options can be granted under the 1989 Plan.

These stock options areexercisable up to ten years from the date of grant.  The following is a summary of EmployeeIncentive Stock Option Plan transactions:

62

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|                                                                | ** ** | **2003 Plan**      | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | ** **              | ** ** | **Weighted Average** | ** ** |
| ** **                                                     | ** ** | **Shares Under**   | ** ** | **Exercise Price** | ** ** |
| ** **                                                     | ** ** | **Options**             | ** ** | **Per Share** | ** ** |
| ** **                                                     | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
| Outstanding and Eligible for Exercise at October 31,  2003     |       | —                  |       | $ | — |   |
| Granted                                                        |       | 104                     |       | 14.24 |   |
| Expired                                                        |       | —                  |       | — |   |
| Exercised                                                      |       | (2                      | )          | 12.09 |   |
| Outstanding and Eligible for Exercise at October 31,  2004     |       | 102                     |       | $ | 14.29 |   |
| Granted                                                        |       | 376                     |       | 16.50 |   |
| Expired                                                        |       | (40                     | )          | 13.24 |   |
| Exercised                                                      |       | (24                     | )          | 12.83 |   |
| Outstanding at October 31, 2005*                               |       | 414                     |       | $ | 16.47 |   |
| Granted                                                        |       | 0                       |       |   |   |
| Expired                                                        |       | —                  |       | — |   |
| Exercised                                                      |       | (56                     | )          | 15.21 |   |
| **Outstanding  and Eligible for Exercise at October 31, 2006** |       | 358                     |       | $ | 16.67 |   |

 
|                                                                | ** ** | **2000 Plan**      | ** ** | **1989 Plan**        | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | ** **              | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted Average** | ** ** |
| ** **                                                     | ** ** | **Shares Under**   | ** ** | **Exercise Price**   | ** ** | **Shares Under** | ** ** | **Exercise Price** | ** ** |
| ** **                                                     | ** ** | **Options**             | ** ** | **Per Share**        | ** ** | **Options** | ** ** | **Per Share** | ** ** |
| ** **                                                     | ** ** | **[In Thousands]** | ** ** | ** **                | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
| Outstanding at October 31, 2003                                |       | 705                     |       | $                         | 4.93       |   | 258 |   | $ | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| Granted                                                        |       | 50                      |       | 14.68                     |       | — |   | — |   |
| Expired                                                        |       | —                  |       | —                    |       | — |   | — |   |
| Exercised                                                      |       | (215                    | )          | 6.20                      |       | (205 | ) | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| Outstanding at October 31, 2004                                |       | 540                     |       | $                         | 5.51       |   | 53 |   | $ | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| Granted                                                        |       | 2                       |       | 5.72                      |       | — |   | — |   |
| Expired                                                        |       | (12                     | )          | 7.79                      |       | (34 | ) | .72 |   |
| Exercised                                                      |       | (54                     | )          | 5.95                      |       | (13 | ) | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| Outstanding at October 31, 2005                                |       | 476                     |       | $                         | 5.40       |   | 6 |   | $ | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| Granted                                                        |       | —                  |       | —                    |       | — |   | — |   |
| Cancelled/Expired                                              |       | —                  |       | —                    |       | — |   | — |   |
| Exercised                                                      |       | (246                    | )          | 2.32                      |       | (5 | ) | .72 |   |
|                                                           |       |                    |       |                      |       |   |   |   |   |
| **Outstanding  and Eligible for Exercise at October 31, 2006** |       | 230                     |       | $                         | 8.69       |   | 1 |   | $ | .72 |   |

 

----

*Eligible for exercise at October 31, 2005 were398 at a weighted average exercise price per share of $16.64

63

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| ** **                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Weighted Average**    | ** ** | ** **                   | ** ** | **Weighted** | ** ** |
| ** **                         | ** ** | **Number of**           | ** ** | **Remaining**                | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                         | ** ** | **Shares Under**        | ** ** | **Contractual**              | ** ** | **Exercise Price** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| **Exercise Price Range** | ** ** | **Option**                   | ** ** | **Life**                     | ** ** | **Per Share** | ** ** | **Options** | ** ** | **Price** | ** ** |
| ** **                         | ** ** | **[In Thousands]**      | ** ** | **[In Years]**          | ** ** | ** ** | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
|                               |       |                         |       |                         |       |   |   |   |   |   |   |
| $0.00 to  $0.71888  Per Share |       | 1                            |       | 1.58                         |       | $ | .72 |   | 1 |   | $ | .72 |   |
| $4.21 to $5.7  Per Share           |       | 24                           |       | 7.58                         |       | $ | 5.54 |   | 24 |   | $ | 5.54 |   |
| $5.94 to $6.82  Per Share          |       | 83                           |       | 6.59                         |       | $ | 6.79 |   | 83 |   | $ | 6.79 |   |
| $7.19 to $8.4  Per Share           |       | 74                           |       | 7.49                         |       | $ | 7.77 |   | 74 |   | $ | 7.77 |   |
| $9.66 to $11.67  Per Share         |       | —                       |       | —-                      |       | $ | — |   | — |   | $ | — |   |
| $12.09 to $14.5  Per share         |       | 75                           |       | 8.71                         |       | $ | 13.32 |   | 75 |   | $ | 13.32 |   |
| $14.51 to $15.61  per share        |       | 126                          |       | 8.81                         |       | $ | 15.09 |   | 126 |   | $ | 15.09 |   |
| $17.75 to $21.46  per share        |       | 206                          |       | 9.93                         |       | $ | 18.35 |   | 206 |   | $ | 18.35 |   |
|                               |       |                         |       |                         |       |   |   |   |   |   |   |
|                               |       | 589                          |       |                         |       |   |   | 589 |   |   |   |

 

Theweighted average grant date fair value of incentive stock options under the2003 plan granted during the years ended October 31, 2006, 2005 and 2004 was$-0-, $16.50, and $14.24 per share, respectively.  These options have weighted average remainingcontractual lives of approximately 9 years.

Theweighted average grant date fair value of incentive stock options under the2000 plan granted during the years ended October 31, 2006, 2005 and 2004 was$-0-, $5.72, and $14.68 per share, respectively.  These options have weighted average remainingcontractual lives of approximately 5years.

EffectiveNovember 1, 2005, the Company adopted the fair value method of recordingstock-based compensation, as defined in SFAS No. 123(R) “Stock-Based Payments”,under the modified prospective transition method for stock options awarded toemployees after the date of adoption and for previously issued stock optionsthat were not vested as of November 1, 2005 which were issued under the Company’sstock based employee compensation plans.

Priorto November 1, 2005, the Company applied Accounting Principles Board Opinion(APB) No. 25 “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for stock options and other stock-basedcompensation.

***[B] Non-Incentive Stock Options and Warrants -***Non-incentive stock options and warrants may be granted to employees ornon-employees at fair market value or at a price less than fair market value ofthe common stock at the date of grant. The following is a summary of transactions:

64

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| ** **                                                     | ** ** | ** **              | ** ** | **Weighted**            | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **Shares Under**   | ** ** | **Average**             | ** ** |
| ** **                                                     | ** ** | **Options**             | ** ** | **Exercise Price** | ** ** |
| ** **                                                     | ** ** | **and Warrants**   | ** ** | **Per Share**      | ** ** |
| ** **                                                     | ** ** | **[In Thousands]** | ** ** | ** **              | ** ** |
|                                                           |       |                    |       |                    |       |
| Outstanding at October 31, 2003                                |       | 534                     |       | $                       | 2.98       |   |
|                                                           |       |                    |       |                    |       |
| Granted                                                        |       | 15                      |       | 13.10                   |       |
| Cancelled/Expired                                              |       | (12                     | )          | 4.36                    |       |
| Exercised                                                      |       | (211                    | )          | 3.10                    |       |
|                                                           |       |                    |       |                    |       |
| Outstanding at October 31, 2004                                |       | 326                     |       | $                       | 3.80       |   |
|                                                           |       |                    |       |                    |       |
| Granted                                                        |       | —                  |       | —                  |       |
| Cancelled/Expired                                              |       | —                  |       | —                  |       |
| Exercised                                                      |       | (232                    | )          | 2.22                    |       |
|                                                           |       |                    |       |                    |       |
| Outstanding at October 31, 2005*                               |       | 94                      |       | $                       | 7.72       |   |
|                                                           |       |                    |       |                    |       |
| Granted                                                        |       |                    |       |                    |       |
| Cancelled/Expired                                              |       |                    |       |                    |       |
| Exercised                                                      |       | (34                     | )          | 7.15                    |       |
|                                                           |       |                    |       |                    |       |
| **Outstanding  and Eligible for Exercise at October 31, 2006** |       | 60                      |       | $                       | 8.04       |   |

 

In fiscal 2004,the Company granted 15,000 options to purchase common stock to an advisoryboard member with an exercise price of $13.10. A total of 5,000 options vestedimmediately with the remaining 10,000 to vest over a two year period. The fairvalue of $134 has been recorded as deferred compensation and is being expensedover the term of the related service agreement.

Duringfiscal 2003, the Company granted 70,000 options to purchase common stock tomembers of a newly formed scientific advisory board.  The exercise prices of these options rangedfrom $6.98 to $7.94 per share. The fair value of each option granted wasestimated on the date of grant using the Black-Scholes option pricing model.  The fair value of those options granted infiscal 2003 was approximately $291 and has been accounted for as deferredcompensation to be expensed over the terms of the agreements.

----

*Eligible for exercise atOctober 31, 2005 were 89 at a weighted average exercise price of $7.38

65

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Effective November 1, 2005, the Company adopted the fair value methodof recording stock-based compensation, as defined in SFAS No. 123(R) “Stock-BasedPayments”, under the modified prospective transition method for stock optionsawarded to employees after the date of adoption and for previously issued stockoptions that were not vested as of November 1, 2005 which were issued under theCompany’s non-incentive stock based employee compensation plans.

 

Priorto November 1, 2005, the Company applied Accounting Principles Board Opinion(APB) No. 25 “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for stock options and other stock-basedcompensation.

Nostock based compensation costs was recognized for employee non-incentive stockoptions and warrants for the years ended October 31, 2006, 2005 and 2004,respectively.
| ** **                         | ** ** | **Options and Warrants Outstanding** | ** ** | **Options and Warrants Exercisable** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **Weighted**                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Number of**                                  | ** ** | **Average**                                         | ** ** | ** ** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| ** **                         | ** ** | **Shares Under**                               | ** ** | **Remaining**                                       | ** ** | **Weighted Average** | ** ** | **Shares Under** | ** ** | **Average** | ** ** |
| ** **                         | ** ** | **Options and**                                | ** ** | **Contractual**                                     | ** ** | **Exercise Price** | ** ** | **Options and** | ** ** | **Exercise Price** | ** ** |
| **Exercise Price Range** | ** ** | **Warrants**                                        | ** ** | **Life**                                            | ** ** | **Per Share** | ** ** | **Warrants** | ** ** | **Per Share** | ** ** |
| ** **                         | ** ** | **[In Thousands]**                             | ** ** | **[In Years]**                                 | ** ** | ** ** | ** ** | **[In Thousands]** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $3.15 to  $6.80Per Share           |       | 20                                                  |       | 1.25                                                |       | $ | 6.80 |   | 20 |   | $ | 6.80 |   |
| $6.81 to $7.94  Per Share          |       | 35                                                  |       | 1.00                                                |       | $ | 7.94 |   | 35 |   | $ | 7.94 |   |
| $7.95 to $13.70  Per Share         |       | 5                                                   |       | 2.17                                                |       | $ | 13.70 |   | 5 |   | $ | 13.70 |   |
|                               |       | 60                                                  |       |                                                |       |   |   | 60 |   |   |   |

 

Theseoptions have weighted average remaining contractual lives of approximately 1 year.  The weighted average grant date fair value ofnon-incentive stock options granted during the years ended October 31,2006, 2005 and 2004 were $-0-, $-0-, and $8.94 per share, respectively.

***[A] and [B] Pro Forma -***

The Company issuedemployee stock options through stock-based employee compensation plans and alsoissued employee non-incentive stock options. Effective November 1, 2005, theCompany adopted the fair value method of recording stock-based compensation, asdefined in SFAS No. 123(R) “Stock-Based Payments”, under the modifiedprospective transition method for stock options awarded to employees after thedate of adoption and for previously issued stock options that were not vestedas of November 1, 2005 which were issued under the Company’s three stock basedemployee compensation plans as well as employee non-incentive stock options.Under the modified prospective transition method, the Company is required torecognize compensation expense for options granted commencing November 1, 2005and thereafter.  Additionally, the fairvalue of existing unvested awards at the date of adoption is recorded incompensation expense over the remaining requisite service period.  Prior to November 1, 2005, the Companyapplied Accounting Principles Board Opinion (APB) No. 25 “Accounting for StockIssued to Employees” and related interpretations in accounting for stockoptions and other stock-based compensation. APB No. 25 required the use of theintrinsic value method, which measured compensation cost as the excess, if any,of the quoted market price of the stock at the measurement date over the amountan employee must pay to acquire the stock.

Compensation costrecognized for the year ended October 31, 2006 was $39, with a related taxbenefit of $15, and is the same as that which would have been recognized hadthe recognition provision of SFAS #123R been applied in previous years. Resultsfor prior periods have not been restated.

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The followingtable illustrates the effect on net income and earnings per share if the Companyhad applied the fair value recognition provisions of FASB Statement No. 123 tostock-based employee compensation.
|                                                                                 | ** ** | **Year ended October 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| Net Income  [Loss]:                                                             |       |                                      |       |   |   |
| As Reported                                                                     |       | $                                         | 7,621      |   | $ | 8,516 |   |
|                                                                            |       |                                      |       |   |   |
| Deduct: Stock  Based Employee                                                   |       |                                      |       |   |   |
| Compensation Expense Determined Under the Fair Value  Based Method - Net of Tax |       | (1,684                                    | )          | (1,310 | ) |
|                                                                            |       |                                      |       |   |   |
| Pro Forma - Net Income                                                          |       | $                                         | 5,937      |   | $ | 7,206 |   |
|                                                                            |       |                                      |       |   |   |
| Basic Earnings  Per Share:                                                      |       |                                      |       |   |   |
| As Reported                                                                     |       | $                                         | .60        |   | $ | .71 |   |
| Pro Forma                                                                       |       | $                                         | .46        |   | $ | .60 |   |
|                                                                            |       |                                      |       |   |   |
| Diluted Earnings  Per Share:                                                    |       |                                      |       |   |   |
| As Reported                                                                     |       | $                                         | .58        |   | $ | .67 |   |
| Pro Forma                                                                       |       | $                                         | .45        |   | $ | .57 |   |

 

Thefair value used in the pro forma data was estimated by using the Black-Scholesoption-pricing model which took into account as of the grant date, the exerciseprice and the expected life of the option, the current price of the underlyingstock and its expected volatility, expected dividends on the stock and therisk-free interest rate for the expected term of the option.  The following is the average of the data usedfor the following items.
|                     | ** ** | **Risk-Free**          | ** ** | ** **             | ** ** | **Expected**   | ** ** | **Expected**  | ** ** |
|---------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|
| **Year Ended** | ** ** | **Interest Rate** | ** ** | **Expected Life** | ** ** | **Volatility** | ** ** | **Dividends** | ** ** |
|                |       |                   |       |                   |       |           |       |          |       |
| October 31, 2005    |       | 4.0                    | %          | 10  Years              |       | 51.65          | %          | None          |       |
| October 31, 2004    |       | 4.0                    | %          | 4 Years                |       | 115.21         | %          | None          |       |

 

***[12] Employment Contracts and Consulting Agreements***

Duringfiscal 2003, the Company established a Scientific Advisory Board [the “Board”]and entered into consulting agreements with members of the Board.  The terms of the agreements range from threeyears and two months to four years and three months.

TheCompany has also entered into various employment contracts and consultingagreements for periods ranging from one to seven years. In January 2004, theEmployment Agreement of the Chief Financial Officer/Vice President and ChiefOperating Officer/Executive Vice President were extended for two additionalyears beyond their October 31, 2004 termination date. Minimum annualcompensation under these extended agreements is equal to Fiscal 2002 AnnualCompensation, subject to increases in the Consumer Price Index as well as tostage increases as defined in the Agreement. Subsequent to October 

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31,2004, the Company entered into a new Employment Agreement with its ChiefExecutive Officer, President which expires on October 31, 2007. At October 31,2006, the approximate aggregate minimum commitment under these employmentcontracts and agreements, excluding commissions or consumer price indexincreases, is as follows:
| October 31, | ** ** | **Employees and Consultants** | ** ** | **Advisory Board** | ** ** |
|------------------|------------|-----------------------------------------|------------|-------------------------|------------|
|             |       |                                    |       |                    |       |
| 2007             |       | $                                       | 2,595      |                    | $          | 85 |   |
| 2008             |       | 2,280                                   |       | 30                      |       |
| 2009             |       | 1,500                                   |       | —                  |       |
| 2010             |       | 750                                     |       | —                  |       |
| 2011             |       | 750                                     |       | —                  |       |
| Thereafter       |       | 0                                       |       | —                  |       |
| ***Total***      |       | $                                       | 7,875      |                    | $          | 115 |   |

 

Someof these agreements provide bonuses and commissions based on a percentage ofcollected revenues ranging from 1% to 10% on accounts referred by or servicedby the employee or consultant.

Inaddition to the above, the Company has entered into seventeen at – willemployment and consulting agreements which together with prior at – willagreements provide for annual aggregate minimum commitments of approximately$11,848 which have no termination dates.

Inaccordance with Section 402 of the Sarbanes-Oxley Act of 2002 [the “Act”],companies are prohibited from making future loans to officers and directors andalso prohibited are any extension of credit after the date of the actsenactment. While the Company had entered into and funded “split-dollar” lifeinsurance agreements of several officer/directors of the Company before passageof the Act, future premiums could be deemed an extension of credit.  Until further clarification of the issue, theCompany suspended paying any additional future premiums. In January 2004, theCompany adopted a new “split-dollar” life insurance program under which theCompany will be the sole owner of the policies (including the cash values ofthe policies) and will pay the premiums on the policies. Prior to termination ofhis employment, the executive will have the right to name the beneficiary ofthe death benefit but will have no access to any policy cash value. The new “split-dollar”insurance program was adopted in consideration of the executives transferringback the ownership of the insurance policies under the original “split-dollar”program of the Company and their reimbursement to the Company of those amounts,if any, by which the premiums paid, exceed the net cash surrender values of thepolicies.

***[13] Capitalized Lease Obligations***

The Company leasesvarious assets under capital leases expiring in fiscal 2010 as follows:
|                                           | ** ** | **October 31,** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**             | ** ** | **2005** | ** ** |
|                                      |       |                 |       |   |   |
| Medical  Equipment                        |       | $                    | 4,194      |   | $ | 4,061 |   |
| Furniture,  Fixtures and Office Equipment |       | 1,425                |       | 1,425 |   |
| Automobiles                               |       | 3,772                |       | 2,316 |   |
|                                      |       |                 |       |   |   |
| Totals                                    |       | 9,391                |       | 7,802 |   |
| Less:  Accumulated Depreciation           |       | 3,871                |       | 2,420 |   |
|                                      |       |                 |       |   |   |
| ***Net***                                 |       | $                    | 5,520      |   | $ | 5,382 |   |

 

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Depreciation expense on assets under capital leases was approximately$1,451, $422, and $364 for the years ended October 31, 2006, 2005 and 2004,respectively.

 

Aggregate futureminimum rentals under capital leases are:
| Years ended                               | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| **October 31,**                           | ** ** | ** ** | ** ** |
| 2007                                           |       | 2,478      |       |
| 2008                                           |       | 1,659      |       |
| 2009                                           |       | 974        |       |
| 2010                                           |       | 66         |       |
| 2011                                           |       | —     |       |
| Thereafter                                     |       | —     |       |
| Total                                          |       | 5,564      |       |
| Less: Interest                                 |       | 582        |       |
| ***Present  Value of Minimum Lease Payments*** |       | $          | 4,982      |   |
|                                                |            |            |            |  |

 

***[14] Commitments and Contingencies***

The Company leasesvarious office and laboratory facilities and equipment under operating leasesexpiring from 2006 to 2011.  Several ofthese leases contain renewal options for one to five year periods.

Total expense forproperty and equipment rental for the years ended October 31, 2006, 2005 and2004 was $4,134 $3,871 and $3,709, respectively.  There were no contingent rental amounts duethrough October 31, 2006.

Aggregate futureminimum rental payments on noncancelable operating leases [exclusive of severalmonth to month leases] are as follows:
| October 31, | ** ** | **Property** | ** ** | **Equipment** | ** ** |
|------------------|------------|--------------|------------|---------------|------------|
| 2007             |       | $            | 1,381      |          | $          | 130 |   |
| 2008             |       | 249          |       | 73            |       |
| 2009             |       | 130          |       | 21            |       |
| 2010             |       | —       |       | 13            |       |
| 2011             |       | —       |       | 1             |       |
| Thereafter       |       | —       |       | —        |       |
|             |       |         |       |          |       |
| ***Totals***     |       | $            | 1,760      |          | $          | 238 |   |

 

The Company hasentered into several purchase agreements for reagent supplies through October16, 2011.

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Minimum purchasecommitments as of October 31, 2006 are as follows:
| 2007       |   | 6,128 |   |
|------------|--------|-------|--------|
| 2008       |   | 5,537 |   |
| 2009       |   | 4,696 |   |
| 2010       |   | 3,530 |   |
| 2011       |   | 1,968 |   |
| Thereafter |   | 2,792 |   |
|       |   | $     | 24,651 |   |
|            |        |       |        |  |

 

Reagent supplies expensed under purchaseagreements amount to $2,241, $3,369 and $1,777 for the years ended October 31,2006, 2005 and 2004, respectively.

In December 2001, a wholly ownedsubsidiary [CareEvolve] of the Company entered into a five year strategicmarketing alliance agreement to operate a joint venture with Roche DiagnosticCorporation [“RDC”].  RDC is engaged inthe business of manufacturing, marketing and selling medical diagnosticequipment and medical supplies to various hospitals and health careproviders.  The terms of the agreementprovided that RDC would provide managerial and sales support to CareEvolve inan effort to further expand the sale of CareEvolve services.  The Company, including CareEvolve, hiredmarketing and management personnel to provide increased selling and marketingefforts.  RDC initially funded CareEvolvethe sum of $1,000 to be used to fund operations and expenses ofCareEvolve.  Only those expenses approvedby a Steering Committee would be authorized to be paid with the proceeds of the$1,000.  During the term of the agreement,CareEvolve  agreed to pay to each of RDCand Bio-Reference, 50% of the net after-tax income generated each quarter.  In addition, the agreement granted RDC anoption to purchase an equity interest in CareEvolve from the Company equal to50% of the ownership in CareEvolve. During fiscal 2004, the Company and RDCwere involved in negotiations to amend the agreement and in December 2004 suchamendment was completed. The Company took a one-time charge of approximately$400 against fiscal 2004 earnings associated with additional expenses incurredas a result of the amendment. The joint venture was terminated by mutualconsent in the fourth quarter of fiscal 2005.

***[15] Litigation***

In the normal course of business, theCompany is exposed to a number of asserted and unasserted potentialclaims.  In the opinion of management,the resolution of these matters will not have a material adverse effect on theCompany’s financial position or results of operations.

***[16] Insurance***

The Companymaintains professional liability insurance of $3,000 in the aggregate, with aper occurrence limit of $1,000 .  Inaddition, the Company maintains excess commercial insurance of $5,000 peroccurrence and $5,000 in aggregate.  TheCompany believes, but cannot assure, that its insurance coverage is adequatefor its current business needs.  Adetermination of Company liability for uninsured or underinsured acts oromissions could have a material adverse affect on the Company’s operations.

***[17] Significant Risks and Uncertainties***

***[A] Concentrations of Credit Risk - Cash -***At October 31, 2006 and 2005, the Company had approximately $5,368 and $2,048 ,respectively, in cash and certificate of deposit balances at financialinstitutions which were in excess of the federally insured limits. 

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***[B] Concentration of Credit Risk - Accounts Receivable -***Credit risk with respect to accounts receivable is generally diversified due tothe large number of patients comprising the client base.  The Company does have significant receivablebalances with government payors and various insurance carriers.  Generally, the Company does not requirecollateral or other security to support customer receivables, however, theCompany continually monitors and evaluates its client acceptance and collectionprocedures to minimize potential credit risks associated with its accountsreceivable and establishes an allowance for uncollectible accounts and as aconsequence, believes that its accounts receivable credit risk exposure beyondsuch allowance is not material to the financial statements.

A number of proposals forlegislation continue to be under discussion which could substantially reduceMedicare and Medicaid reimbursements to clinical laboratories.  Depending upon the nature of regulatoryaction, and the content of legislation, the Company could experience asignificant decrease in revenues from Medicare and Medicaid, which could have amaterial adverse effect on the Company. The Company is unable to predict, however, the extent to which suchactions will be taken.

***[18] Acquisitions***

In October 2006, theCompany completed its acquisition of certain assets of GeneDx, Inc. (GeneDx), aGaithersburg, Maryland gene-based testing laboratory.  In connection with this acquisition theRegistrant issued 230,947 shares of its unregistered common stock (the “Stock”)to GENEDX. GENEDX is a private company beneficially owned by two individualswho were unaffiliated with the Registrant at the time of the purchase. Inaddition to the Stock, the purchase price included a $5 million Cash Paymentand the assumption by the Registrant of certain liabilities. The Sellers mayalso receive an upside Contingent Payment, not to exceed $7 million, dependentupon future performance of GENEDX operations. The 230,947 shares were valuedfor purposes of the purchase at $21.65 per share, the average closing price forthe common stock on NASDAQ on the ten trading days immediately preceding theAugust 29, 2006 signing of the purchase agreement. The acquisition resulted ingoodwill of $4,360 being recorded.

In October 2006, theCompany also completed its acquisition of certain assets of DiagnosticPathology Services, Inc., a Clarksburg, Maryland laboratory for the sum of$1,500 plus the assumption of certain liabilities. The acquisition resulted ingoodwill of $785 being recorded.

In October 2005, theCompany acquired certain assets of Pathco Medical, P.C. a New York Stateprofessional corporation. (“PATHCO”) for $2,174 including assumed liabilitiesnot to exceed $160.  The Company  retained the staff of this practice andcontinue to operate at its premises in Poughkeepsie, New York.  In connection with the acquisition, theCompany received a five year non-compete agreements with the former owner ofPATHCO and Pathco Medical, P.C.  Inaddition the Company entered into an employment agreement with key managementpersonnel of PATHCO.  The acquisitionresulted in goodwill of $729 being recorded.

In February 2004, theCompany acquired certain assets and liabilities of Metropolitan Diagnostic,Inc. (“MDI”) for $500. In connection with the acquisition, the Company receiveda three year non-compete agreement with the former owners of MDI. The purchaseprice was principally allocated to a customer list.

In July 2004, the Companyentered into an agreement to purchase certain operating assets of CGI for thesum of $2,485. The operations of CGI are included in the Company results ofoperations commencing August 1, 2004. In connection with the acquisition, theCompany entered into employment agreements with key management personnel. Inaddition, the Company obtained a three year “non-competition/non-solicitationagreement” with the former owners of CGI. The acquisition resulted in goodwillof $2,347 being recorded.

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***[19] Fair Value of Financial Instruments***

For certain financialinstruments, including cash and cash equivalents, trade receivables, tradepayables, and short-term debt, it was estimated that the carrying amountapproximated fair value for the majority of these items because of their shortmaturities.  The fair value of theCompany’s long-term debt is estimated based on the quoted market prices forsimilar issues or by discounting expected cash flows at the rates currentlyoffered to the Company for debt of the same remaining maturities.

Due to the non-interestbearing nature and unspecified payment terms, it was not practicable toestimate the fair value of amounts due from related parties [See also Note 7].

***[20] Health Insurance Plan***

The Company has alimited self-funded health insurance plan for its employees under whichthe Company pays the initial $150 of covered medical expenses per person eachyear.  The Company has a contract with aninsurance carrier for any excess up to a maximum of $2,000 per person and$3,844 in the aggregate.  Healthinsurance premium expense for the years ended October 31, 2006, 2005 and 2004amounted to approximately $1,122, $887 and $622, respectively.  Uninsured employee medical expenses incurredby the Company amounted to approximately $4,202, $4,084 and $3,283 for theyears ended October 31, 2006, 2005 and 2004, respectively.  During fiscal years ended October 31, 2006,2005 and 2004, employee contributions of $1,129, $929 and $821 offset, theabove health plan costs.

***[21] Employee Benefit Plan (Dollars Not In Thousands)***

The Company sponsors a 401(k)Profit-Sharing Plan [the “Plan”]. Employees become eligible for participation after attaining the age ofeighteen and completing one year of service. Participants may elect to contribute up to ten percent of theircompensation, as defined in the Plan, to a maximum allowed by the InternalRevenue Service.  The Company may chooseto make a matching contribution to the plan for each participant who haselected to make tax-deferred contributions for the plan year, at a percentagedetermined each year by the Company. The Company elected to make a matchingcontribution which amounted to $225,971 for 2006, $182,739 for 2005 and $78,000for 2004.  The Employer contribution willbe fully vested after the third year of service.

***[22] New Authoritative Accounting Pronouncements***

In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No.20 and FASB Statement No. 3.”  ThisStatement applies to all voluntary changes in accounting principle. It also appliesto changes required by an accounting pronouncement, in the unusual instancethat the pronouncement does not include specific transition provisions. When apronouncement includes specific transition provisions, those provisions shouldbe followed.  The Company will berequired to adopt SFAS No. 154 as of November 1, 2006.  The adoption of this standard is not expectedto have a material impact on the Company’s consolidated financial statements.

In April 2006 FASB has issued SFAS No.155 , “Accounting for Certain Hybrid Financial Instruments,” an amendment ofFASB Statements 133 and 140. The Statement is effective for all financialinstruments acquired, issued, or subject to a remeasurement event occurringafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006.

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SFASNo. 155 does the following:

·  Permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation.

·  Clarifies which interest-only strips and principle-only strips arenot subject to the requirements of SFAS No. 133 .

·  Establishes a requirement to evaluate interests in securitizedfinancial assets to identify interests that are freestanding derivatives orthat are hybrid financial instruments that contain an embedded derivativerequiring bifurcation.

·  Clarifies that concentrations of credit risk in the form ofsubordination are not embedded derivatives.

·  Amends SFAS No. 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument.

SFAS No. 155 is not expected to have amaterial impact on the Company’s consolidated financial statements. In June2006 FASB issued Interpretation No. 48 (FIN 48) “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109. This interpretationis effective for fiscal years beginning after December 15, 2006.

This Interpretation clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, Accounting forIncome Taxes. This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition.

FIN 48 is not expected to have a materialimpact on the Company’s consolidated financial statements.

In September 2006 FASB issued SFAS No.157 “Fair Value Measurements”.  Thisstatement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears.

This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any newfair value measurements. However, for some entities, the application of thisStatement will change current practice. This statement is not expected to havea material impact on the Company’s consolidated financial statements.

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***[23] Selected Quarterly Financial Data [Unaudited]***
| ** **                                                          | ** ** | **Three months ended** | ** ** | **Fiscal**  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                                          | ** ** | **1/31/06**                      | ** ** | **4/30/06** | ** ** | **7/31/06** | ** ** | **10/31/06** | ** ** | **Year 2006** | ** ** |
| ** **                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Revenues                                                        |       | $                                | 42,918     |        | $          | 47,189 |   | $ | 49,026 |   | $ | 54,001 |   | $ | 193,134 |   |
| Gross Profit                                                        |       | $                                | 20,334     |        | $          | 23,788 |   | $ | 24,343 |   | $ | 28,590 |   | $ | 97,055 |   |
| Net Income                                                          |       | $                                | 1,153      |        | $          | 2,749 |   | $ | 3,678 |   | $ | 3,711 |   | $ | 11,291 |   |
| Net Income Per Common  Share:                                       |       |                             |       |        |       |   |   |   |   |   |   |
| Basic                                                               |       | $                                | .09        |        | $          | .21 |   | $ | .28 |   | $ | .28 |   | $ | .86 |   |
| Diluted                                                             |       | $                                | .09        |        | $          | .20 |   | $ | .27 |   | $ | .27 |   | $ | .85 |   |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common  Shares Outstanding - Basic [in thousands]  |       | 12,992                           |       | 13,027      |       | 13,056 |   | 13,327 |   | 13,101 |   |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding - Diluted [in thousands] |       | 13,407                           |       | 13,428      |       | 13,512 |   | 13,607 |   | 13,328 |   |

 
| ** **                                                          | ** ** | **Three months ended** | ** ** | **Fiscal**  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                                          | ** ** | **1/31/05**                      | ** ** | **4/30/05** | ** ** | **7/31/05** | ** ** | **10/31/05** | ** ** | **Year 2005** | ** ** |
| ** **                                                          | ** ** | ** **                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Revenues                                                        |       | $                                | 36,835     |        | $          | 40,049 |   | $ | 42,723 |   | $ | 44,289 |   | $ | 163,896 |   |
| Gross Profit                                                        |       | $                                | 17,444     |        | $          | 19,688 |   | $ | 21,170 |   | $ | 22,242 |   | $ | 80,544 |   |
| Net Income                                                          |       | $                                | 925        |        | $          | 1,427 |   | $ | 2,493 |   | $ | 2,776 |   | $ | 7,621 |   |
| Net Income Per Common  Share:                                       |       |                             |       |        |       |   |   |   |   |   |   |
| Basic                                                               |       | $                                | .07        |        | $          | .11 |   | $ | .19 |   | $ | .21 |   | $ | .60 |   |
| Diluted                                                             |       | $                                | .07        |        | $          | .11 |   | $ | .19 |   | $ | .21 |   | $ | .58 |   |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common  Shares Outstanding - Basic [in thousands]  |       | 12,667                           |       | 12,682      |       | 12,787 |   | 12,965 |   | 12,775 |   |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding - Diluted [in thousands] |       | 13,345                           |       | 13,251      |       | 13,162 |   | 13,382 |   | 13,149 |   |

 

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| ** **                                                          | ** ** | **Three months ended** | ** ** | **Fiscal**  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|-------------|------------|
| ** **                                                          | ** ** | **1/31/04**                      | ** ** | **4/30/04** | ** ** | **7/31/04** | ** ** | **10/31/04** | ** ** | **Year 2004** | ** ** |
| Net Revenues                                                        |       | $                                | 28,950     |        | $          | 33,647 |   | $ | 35,843 |   | $ | 37,744 |   | $ | 136,184 |   |
| Gross Profit                                                        |       | 13,905                           |       | 16,549      |       | 18,272 |   | 19,257 |   | 67,983 |   |
| Net Income                                                          |       | 919                              |       | 1,959       |       | 2,325 |   | 3,313 |   | 8,516 |   |
| Net Income Per Common  Share:                                       |       |                             |       |        |       |   |   |   |   |   |   |
| Basic                                                               |       | .08                              |       | . 16        |       | .19 |   | .26 |   | .71 |   |
| Diluted                                                             |       | .07                              |       | .15         |       | .18 |   | .25 |   | .67 |   |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common  Shares Outstanding - Basic [in thousands]  |       | 11,523                           |       | 11,920      |       | 12,227 |   | 12,640 |   | 12,078 |   |
|                                                                |
|                                                                |       |                             |       |        |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding - Diluted [in thousands] |       | 13,124                           |       | 13,188      |       | 12,863 |   | 13,252 |   | 12,715 |   |
|                                                                     |            |                                  |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 

**.   .  ..   .   .   .   .  ..   .   .**

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directorsand Shareholders of

Bio-ReferenceLaboratories, Inc.

ElmwoodPark, New Jersey

Our report on ouraudit of the basic financial statements of Bio-Reference Laboratories,Inc. and its subsidiaries appears on page 47. That audit was conducted for the purpose of forming an opinion on thebasic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying withthe Securities and Exchange Commissions Rules and Regulations under theSecurities Exchange Act of 1934 and is not otherwise a required part of thebasic financial statements.  Suchinformation has been subjected to the auditing procedures applied in the auditof the basic financial  statements, andin our opinion, is fairly stated in all material respects in relation to thebasic financial statements taken as a whole.
|                 | MOORE STEPHENS, P. C.         |
|----------------------|-------------------------------|
|                 | Certified Public Accountants. |
|                 |                          |
| Cranford, New Jersey |
| January 5, 2007      |

 

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**BIO-REFERENCELABORATORIES, INC. AND SUBSIDIARIES**

**SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARSENDED OCTOBER 31, 2006, 2005 AND 2004.**

**[InThousands]**
| **(a)**                          | ** ** | **(b)**             | ** ** | **(c)**             | ** ** | **(d)**               | ** ** | **(e)**            | ** ** |
|----------------------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                       | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | **Deductions**        | ** ** | **Balance**        | ** ** |
| ** **                       | ** ** | **Beginning**       | ** ** | **Cost and**   | ** ** | **To Valuation** | ** ** | **at End**    | ** ** |
| **Description**                  | ** ** | **of Period**  | ** ** | **Expenses**        | ** ** | **Accounts**          | ** ** | **of Period** | ** ** |
|                             |       |                |       |                |       |                  |       |               |       |
| Year Ended October 31,  2006     |       |                |       |                |       |                  |       |               |       |
| Allowance for  Doubtful Accounts |       | $                   | 7,975      |                | $          | 26,884                |       | $                  | (27,625    | ) | $ | 7,234 |   |
| Contractual  Credits/Discounts   |       | 40,945              |       | 328,983             |       | (320,534              | )          | 49,394             |       |
|                             |       |                |       |                |       |                  |       |               |       |
| ***Total  Allowance***           |       | $                   | 48,920     |                | $          | 355,867               |       | $                  | (348,159   | ) | $ | 56,628 |   |
|                             |       |                |       |                |       |                  |       |               |       |
| Year Ended October 31,  2005     |       |                |       |                |       |                  |       |               |       |
| Allowance for  Doubtful Accounts |       | $                   | 7,035      |                | $          | 21,860                |       | $                  | (20,920    | ) | $ | 7,975 |   |
| Contractual Credits/Discounts    |       | 31,067              |       | 266,266             |       | (256,388              | )          | 40,945             |       |
|                             |       |                |       |                |       |                  |       |               |       |
| ***Total  Allowance***           |       | $                   | 38,102     |                | $          | 288,126               |       | $                  | (277,308   | ) | $ | 48,920 |   |
|                             |       |                |       |                |       |                  |       |               |       |
| Year Ended October 31,  2004     |       |                |       |                |       |                  |       |               |       |
| Allowance for  Doubtful Accounts |       | $                   | 5,159      |                | $          | 17,506                |       | $                  | (15,630    | ) | $ | 7,035 |   |
| Contractual  Credits/Discounts   |       | 24,026              |       | 204,996             |       | (197,955              | )          | 31,067             |       |
|                             |       |                |       |                |       |                  |       |               |       |
| ***Total  Allowance***           |       | $                   | 29,185     |                | $          | 222,502               |       | $                  | (213,585   | ) | $ | 38,102 |   |

 

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