##### ** **

##### **UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended October 31, 2005**

 

**Commission file number 0-15266**

 

**BIO-REFERENCE LABORATORIES, INC.**

**481 Edward H. Ross Drive, Elmwood Park, NewJersey  07407**

**201-791-2600**

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

 

Securities registered pursuant to Section 12(b) of the Act:   **None**

 

Securities registered pursuant to Section 12(g) of the Act:   **Common Stock, $.01 par value**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes  o   No  ý.

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes  ý   No  o.

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orin any amendment to this Form 10-K.     o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).   Yes  ý  No  o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý

 

As of the last day of the quarter ended April 30, 2005, theaggregate market 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 $142,000,000 based upon the last sale price forthe Common Stock on said date as reported on the NASDAQ National Market System.On January 9, 2006, there were 12,981,367 shares of Common Stock issuedand outstanding

 

 

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**PART I**

 

Item. 1. - Business

 

Overview

 

We believe that we are the largest independent regional clinicallaboratory servicing the greater New York metropolitan area. We offer acomprehensive list of laboratory testing services utilized by healthcareproviders in the detection, diagnosis, evaluation, monitoring and treatment ofdiseases.

 

We currently process nearly 2.9 million requisitions each year. Arequisition form accompanies a patient specimen. It indicates the tests to beperformed and the party to be invoiced for the tests. Our clients includedoctors, employers, clinics and governmental units. We have a network of over50 patient service centers for collection of patient specimens.

 

In addition to our clinical testing operations, we operate a clinicalknowledge management service through our PSIMedica business unit.  This system uses customer data fromlaboratory results, pharmaceutical data, claims data and other data sources toprovide administrative and clinical decision support systems which enable ourcustomers to provide quality and efficient healthcare to their populations.

 

We also operate a web-based connectivity portal solution forlaboratories and physicians through our CareEvolve subsidiary. We use thisportal ourselves to provide laboratory ordering and results to our physiciancustomers.  We are also marketing thisconnectivity solution to other laboratories throughout the country.

 

We are a New Jersey corporation. We may at times refer to ourselves andour subsidiary as the “Company”. We are the successor to Med-Mobile, Inc.,a New Jersey corporation that was organized in 1981. Our executive offices arelocated at 481 Edward H. Ross Drive, Elmwood Park, NJ  07407, telephone number: 201-791-2600.

 

The Clinical Laboratory Testing Market in the United States

 

We believe that the U.S. market for clinical laboratory testinggenerates approximately $40 billion in annual revenue.  Nearly all laboratory tests are performed byone of three types of laboratories: hospital laboratories, physician officelaboratories or independent clinical laboratories. We believe approximately 54%of the clinical laboratory tests done in the United States are currently performedin a hospital laboratory, approximately 32% performed by an independentclinical laboratory and the balance in a physician office or other laboratory.

 

During the last few years, the economic fundamentals of the industryhave been improving. In the cost containment era of the 1990s, the industry wasnegatively impacted by the rapid growth of managed care, stringent governmentregulation and investigations into fraud and abuse. These factors led torevenue and profit declines and industry consolidations, especially amongcommercial clinical laboratories. As a result, fewer but larger clinicallaboratories have emerged with greater economies of scale, more effectivecompliance with government billing regulation and other laws and a betterapproach to pricing their services. These changes resulted in improvedprofitability.  In addition, new andemerging technologies continue to provide greater testing opportunities forclinical laboratories.

 

We believe the industry will continue to experience growth in testingvolume due to the following:

 
| • | Aging of the population of the United States;                                                              |
|--------|------------------------------------------------------------------------------------------------------------|
| • | Awareness by patients of the value of laboratory tests;                                                    |
| • | Decrease in the cost of tests;                                                                             |
| • | Decrease in the influence of managed care organizations on the  ordering patterns of their physicians.     |
| • | Development of sophisticated and specialized tests for early  detection of disease and disease management; |
| • | Diagnosis and monitoring of infectious diseases such as AIDS and  Hepatitis C;                             |
| • | Early detection and prevention as a means of reducing healthcare  costs;                                   |

 

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| • | Employer sponsored wellness programs; |
|--------|---------------------------------------|
| • | Research and development in genomics. |

 

Business Strategy

 

We are a regional clinical laboratory with subspecialty testingcapabilities. As a regional laboratory, we service the New York metropolitanarea, and currently conduct business in most New York State counties, as wellas in most of New Jersey and some parts of Pennsylvania and Connecticut. We primarilyoffer laboratory services to physician offices in these areas with aninfrastructure that includes a comprehensive logistical department, extensivephlebotomy services and phlebotomy draw stations scattered around ourgeographic area. We have also developed expertise in certain testing areas withspecific emphasis in cancer pathology and diagnostics as well as moleculardiagnostics. These services are marketed as a business unit, called GenPath,which services customers outside of routine physician office testing. We havedeveloped certain specialized markets, such as in the areas of correctionalhealth, substance abuse testing, fertility testing and molecular diagnostics.Testing in these areas also may be supported outside of physician offices.

 

We have one of the largest regional marketing staffs of any laboratoryin the country, some of whom are trained specifically in Oncology and call onOncology practices and hospitals.

 

We believe that our large marketing staff and strong infrastructurewithin our designated area can be leveraged to bring new technologies tophysicians and healthcare providers. Over the past year, our volume of testingin 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 the best provider ofclinical laboratory testing, information and related services. The principalcomponents of our strategy to achieve our mission are as follows:

 
| • | Capitalize on our position within the clinical market |
|--------|-------------------------------------------------------|
| • | Lead in the providing of medical information          |
| • | Provide the highest quality service                   |
| • | Pursue strategic growth opportunities                 |

 

Services

 

The clinical laboratory testing business consists of routine testingand esoteric testing. Routine testing generates approximately 62% and esoterictesting generates approximately 38% of our net revenues. The net revenuegenerated by our PSIMedica business unit and our CareEvolve subsidiary has beenminimal to date.

 

Routine Testing

 

Routine tests measure various health parameters such as the functionsof the heart, kidney, liver, thyroid and other organs. Below is an abbreviatedlist of some commonly ordered tests:

 
| • | Blood Cell Counts  |
|--------|--------------------|
| • | Cholesterol levels |
| • | HIV-related tests  |
| • | Pap Smears         |
| • | Pregnancy          |
| • | Substance Abuse    |
| • | Urinalysis         |

 

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

 

We operate 24 hours a day, 365 days a year. We perform and report mostroutine tests within 24 hours. Tests results are delivered via driver orelectronically.

 

Esoteric Tests

 

We also perform esoteric tests that require sophisticated equipment andmaterials, highly skilled personnel, professional attention and are orderedless frequently than routine tests. These tests are generally priced higherthan routine tests. Esoteric tests are usually in these medical 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 leased facility inMilford, Massachusetts.

 

Medical Information

 

Our PSIMedica business unit is based on a Clinical Knowledge Management(“CKM”) System that uses data derived from various disparate sources to provideboth administrative and clinical analysis of a population. The source dataconsists of enrollment (demographic) data, claims data, pharmacy data,laboratory results data, and any other data that may be available. The systemuses sophisticated algorithms to cleanse and configure the data so thatanalysis can be comprehensive and meaningful. The data is maintained onmultiple levels of analysis enabling review of data from the global level tothe granular transactional detail.  Thesystem includes a base set of queries that provide basic functionality andallows on-line real-time ad hoc query capability enabling the user to customizeanalysis to the best needs of the organization using the system. In addition tothe basic queries provided by the system, PSIMedica Quality Indicators (“PQI”)provide comprehensive, disease state oriented queries that disclose the qualityand efficiency of the care and service. These indicators have been designed toprovide the customer with standards and outcome predictors based on a medicalstandards basis.  We are using PSIMedicato market value-added clinical laboratory services to bulk purchasers ofclinical laboratory solutions, as well as marketing our PSIMedica programs tobusinesses such as Health Plans, Integrated Delivery Networks, DiseaseManagement Companies, Insurers, Clinical Trial Companies and other healthcareproviders that most benefit from the ability of the system to combine bothclinical and administrative analysis.

 

Other Products

 

CareEvolve, our wholly owned subsidiary, is a physician-basedconnectivity portal.  This systemprovides a complex, sophisticated system for ordering laboratory services anddelivering laboratory results.  Thesystem is designed to be physician-centric and to provide a highly flexible,scalable, comprehensive desktop solution for physicians to manage theirday-to-day practice and personal needs, as well as to handle their clinicallaboratory ordering and reporting.  Thisproduct has been designed to work as a platform with plug and play capabilitythat can easily be used by other laboratories that also need a web-basedsolution for their physician customers. We executed a Strategic MarketingAgreement (the “SMA”) in December 2001 with Roche Diagnostics (“Roche”) tooperate a Joint Venture for the sale and distribution of the CareEvolveServices to laboratories throughout the country. In December 2004, weexecuted an Addendum to the SMA with Roche. Pursuant to the Addendum, Roche’srights to share in CareEvolve’s net after tax income and to purchase up to a50% equity interest in CareEvolve were canceled. Roche did retain a right offirst refusal to purchase CareEvolve in the event we were willing to acceptsuch a purchase offer from a third party. Although we retained the rights

 

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to market the CareEvolve Services in all markets including thelaboratory 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 revised change in terms of our relationship with Roche. The charge wasassociated with one-time technology development expenses which had beenassessed to CareEvolve and are now our responsibility. The Joint Venture wasterminated by mutual consent in the fourth quarter of fiscal 2005 and we arenow marketing the CareEvolve services on our own. CareEvolve’s current monthlyrevenues, although not significant,  nowexceed its current monthly expenses.

 

Payors and Clients

 

We provide laboratory services to a range of healthcare providers. A “payor”is the party who pays for the tests while the “client” is the party that refersthe tests to us. We may consider an organization that has a contract with us,such as a clinic or governmental agency, both a payor and a client. Somestates, such as New York and New Jersey, prohibit us from billing physicianclients. During fiscal year 2005, no single client accounted for more than 10%of our net revenues.

 

The following table reflects the current estimates of the breakdown ofnet revenue by payor for the twelve months ended October 31, 2003, 2004,and 2005.

 
| ** **             | ** ** | **Years Ended October 31,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
|                   |       |                             |       |   |   |   |   |
| Direct Patient Billing |       | 7%                               |       | 7% |   | 6% |   |
| Commercial Insurance   |       | 43%                              |       | 48% |   | 46% |   |
| Professional Billing   |       | 20%                              |       | 17% |   | 18% |   |
| Medicare               |       | 27%                              |       | 25% |   | 26% |   |
| Medicaid               |       | 3%                               |       | 3% |   | 4% |   |
|                   |       | 100%                             |       | 100% |   | 100% |   |

 

Clients

 

Physicians who order clinical tests for their patients represent one ofthe primary sources of our testing volume. Fees invoiced to patients and thirdparties are based on our fee schedule, which may be subject to limitations onfees imposed by third-party payors. Medicare and Medicaid reimbursements arebased on fee schedules set by governmental authorities.

 

Employers, Governmental Agencies

 

We provide laboratory services to governmental agencies and largeemployer groups. We believe we are the largest regional laboratory providingservice to correctional facilities in the Northeastern United States. All ofthese clients are charged on a contractual basis.

 

Sales and Marketing

 

We employ full and part-time sales and marketing representatives. Allof our sales and marketing personnel operate in a dual capacity, as bothmarketing and client support representatives. This ensures that all of oursalespersons are intimately involved with the client. We believe that this isunique in the industry and is extremely helpful in client retention, since itprovides a strong connection between the physician and our staff.

 

Client Service Coordinators

 

We utilize the services of full and part-time client servicecoordinators at our Elmwood Park facility, all of whom are trained in medicaland laboratory terminology. This staff is used as an interface with physiciansand nurses and augments the client support provided by our sales force.

 

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They also report highly abnormal and life threatening results to theordering physician immediately via telephone in order to provide speedy medicalresolution to any patient problem.

 

Logistical Support

 

We employ full and part-time couriers. They pick up patient specimensfrom and deliver printed reports to physician offices, nursing homes, clinicsand correctional facilities.

 

Strategic Growth Opportunities

 

In addition to increasingour core business through internal growth and pursuing our strategy of seekingopportunities with bulk purchasers of laboratory services through our PSIMedicabusiness unit, we intend to target growth opportunities both inside and outsideof our core laboratory business.

 
| • | Selective Acquisitions: The clinical laboratory industry is still  highly fragmented. Historically, acquisition has been one method that has  fueled our growth. In October 2005, we acquired certain assets of a  Poughkeepsie, New York pathology practice for $2,174,000 plus assumed  liabilities not to exceed $160,000. We retained the staff of this practice  and continue to operate at the same three hospital locations that the  practice previously operated at in New York’s mid-Hudson region. We intend to  continue to look for acquisitions that can be integrated into our existing  processing facilities without maintaining duplicate facilities or which will  provide us with entry into new product or geographic areas. This strategy, if  successfully implemented, will enable us to reduce costs and gain economies  of scale from the elimination of redundant facilities and equipment and the  reduction of personnel. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Specialty Testing: We also intend to continue to increase our  penetration into the specialty testing market, especially genomics. The  current annual value of gene-based testing in the United States is  approximately one billion dollars. We believe that we have positioned  ourselves to take advantage of this market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| • | Medical Information: Our medical information unit, PSIMedica, seeks  to combine laboratory data with these other data elements so as to improve  the quality and efficiency of healthcare.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

Billing

 

Billing for laboratory services is extremely complicated. We must billvarious payors, such as patients, Medicare, Medicaid, insurance companies andemployer groups, all of which have different billing requirements. Compliancewith applicable laws and regulations as well as internal compliance proceduresadds complexity to this process.

 

Our bad debt expense is the result of issues that are notcredit-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 increasesthe aging of our accounts receivable. When all issues are not resolved in atimely manner, the item is written-off to bad debt expense. 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 highly fragmented andcompetitive industry: hospital laboratories, physician-office laboratories andother independent clinical laboratories. Our major competitors in the New Yorkmetropolitan area are Quest Diagnostics and Laboratory

 

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Corporation of America. Although we are much smaller than thesenational laboratories, we believe that we compete successfully with them in ourregion because of the following factors:

 
| • | Fewer layers of staff                 |
|--------|---------------------------------------|
| • | A more responsive business atmosphere |
| • | Customized service                    |

 

We believe our responses to medical consultation are faster and morepersonalized than those of the national laboratories. Our client service staffonly deals with basic technical questions and those that have medical orscientific significance are referred directly to our senior scientists andmedical staff.

 

Quality Assurance

 

Medical testing is essentially a process of communication and datatransfer. In order to provide accurate and precise information to thephysician, it is essential that we maintain a well structured and vigorousquality assurance program. Our goal is to continually improve this process. Wehold the required Federal and State licenses necessary to permit our operationof a clinical laboratory at our facilities in New Jersey, New York and Massachusetts.We submit to vigorous proficiency tests (or surveys) in all tests that weperform. We are also subject to unannounced inspections from the various statelicensing agencies.

 

Our laboratories are accredited by the College of American Pathologists(“CAP”). This accreditation includes on-site inspections and participation inthe CAP proficiency testing program or an equivalent. CAP is an independentorganization of board certified pathologists approved by the Center forMedicare and Medicaid Services (“CMS”) to inspect clinical laboratories inorder to determine compliance with the standards required by the ClinicalLaboratory Improvement Amendments of 1988 (“CLIA-88”).

 

Our Quality Assurance Committee, headed by a Quality AssuranceCoordinator and composed of supervisors from all departments, meets daily toassess and evaluate the laboratory’s quality. Based on the information received from the Committee, recommendationsare made to correct conditions which have led to errors.  Management, department supervisors andmembers of the Committee continually monitor the laboratory’s quality.  Depending on the test, two or three levels ofQuality Control materials are run in each analytical assay to assure precisionand accuracy.  Patient populationstatistics are evaluated each day. Testing of highly abnormal samples is repeatedto assure accuracy.

 

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

 

Regulation of Clinical Laboratory Operations

 

The clinical laboratory industry is highly regulated and subjected tosignificant Federal and state regulation. This includes inspections and auditsby governmental agencies. These agencies may impose fines, criminal penalties,or other enforcement actions to enforce laws and regulations. These penaltiescan include revocation of a clinical laboratory’s license. Changes inregulations may increase the cost of testing or processing claims.

 

Waste management is subject to Federal and state regulations governingthe transportation and disposal of medical waste including bodily fluids.  Federal regulations require licensure ofinterstate transporters of medical waste. In New Jersey, we are subject to theComprehensive Medical Waste Management Act, (“CMWMA”), which requires us toregister as a generator of special medical waste. All of our medical waste isdisposed of by a licensed interstate hauler. The hauler provides a manifest of the disposition of the waste productsas well as a certificate of incineration which is retained by us. These recordsare audited by the State of New Jersey on a yearly basis. We are also subjectto Federal requirements. The Federal Hazardous materials

 

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transportation law, 49 U.S.C. 5101 et seq., and the Hazardous MaterialsRegulations (HMR), 49 CFR parts 171-180. The Federal government has classifiedhazardous medical waste as hazardous materials for the purpose of regulation.These regulations preempt State regulation which must be “substantively thesame,” “the non-Federal requirement must conform “in every significant respectto the Federal requirement. Editorial and other similar de minimis changes arepermitted” 49 CFR 107.202(d). The amendments to provisions in 49 U.S.C., 5125reaffirmed the need to achieve greater uniformity and to promote the publichealth, welfare, and safety at all levels, Federal standards for regulating thetransportation of hazardous materials in intrastate, interstate, and foreigncommerce are necessary and desirable. We believe we are in compliance with allFederal and State medical waste regulations.

 

Regulation of Reimbursement for Laboratory Services

 

Containment of health-care costs, including reimbursement for clinicallaboratory services, has been a focus of ongoing governmental activity.  Omnibus budget reconciliation legislation,designed to “reconcile” existing laws with reductions and reimbursementsrequired by enactment of a Congressional budget can adversely affect clinicallaboratories by reducing Medicare reimbursement for laboratory services. Formost of the tests performed for Medicare beneficiaries or Medicaid recipients,laboratories are required to bill Medicare or Medicaid directly, and to acceptMedicare or Medicaid reimbursement as payment in full.

 

The current administration, Congress and various Federal agencies haveexamined the rapid growth of Federal expenditures for clinical laboratoryservices, and the use by the major clinical laboratories of dual fee schedules(“client” fees charged to physicians, hospitals, institutions and companieswith whom a laboratory deals on a bulk basis and which involve relatively lowadministrative costs, and “patient” fees charged to individual patients andthird party payors, including Medicare, who generally require separate bills orclaims for each patient encounter and which involve relatively highadministrative costs).  The permittedMedicare reimbursement rate for clinical laboratory services has been reducedby the Federal government in a number of instances over the past several yearsto a present level equal to 74% of the national median of laboratory charges.Next year marks the third year of a five-year freeze (through 2008) onLaboratory fee updates, as required by the Medicare Modernization Act of 2003.A number of proposals for legislation or regulation are under discussion whichcould have the effect of substantially reducing Medicare reimbursements toclinical laboratories through reduction of the present allowable percentage orthrough other means.  In addition, thestructure and nature of Medicare reimbursement for laboratory services is alsounder discussion and we are unable to predict the outcome of these discussions.Depending upon the nature of congressional and/or regulatory action, if any,which is taken and the content of legislation, if any, which is adopted, wecould experience a significant decrease in revenues from Medicare and Medicaid,which could have a material adverse effect on us.

 

CLIA-88

 

CLIA-88 extended Federal licensing requirements to all clinicallaboratories (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 HumanServices, (“HHS,”) to implement regulations placing a limit on the number ofslides that a cytotechnologist may review in a twenty-four hour period.  CLIA-88 also established a more stringentproficiency testing program for laboratories and increased the range andseverity of sanctions for violating Federal licensing requirements.  A number of these provisions, including thosethat imposed stricter cytology standards and increased proficiency testing,have been implemented by regulations applicable only to laboratories subject toMedicare certification. On February 28, 1992, HHS published three sets ofregulations implementing CLIA-88, including quality standard regulationsestablishing Federal quality standards for all clinical laboratories;application and user fee regulations applicable to most laboratories in theUnited States which became effective on March 30 1993; and enforcementprocedure regulations applicable to laboratories that are found not to meetCLIA-88 requirements.  The qualitystandard regulations

 

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establish varying levels of regulatory scrutiny depending upon thecomplexity of testing performed.  Underthese regulations, a laboratory that performs only one or more of seventy eightroutine “waived” tests may apply for a waiver from most requirements of CLIA-88.  We believe that most tests performed byphysician office laboratories will fall into either the “waived” or the “moderatelycomplex” category.  The latter categoryapplies to simple or automated tests and generally permits existing personnelin physicians’ offices to continue to perform testing under the implementationof systems that insure the integrity and accurate reporting of results,establishment of quality control systems, proficiency testing by approvedagencies, and biannual inspection.  Ourtesting is often much more complex and as a result, we are subject to fullcompliance with CLIA-88. The quality standard and enforcement procedureregulations became effective on September 1, 1992, most personnel, qualitycontrol and proficiency testing requirements have been implemented; theremainder 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.

 

Compliance Program

 

The Office of Inspector General has published a Model ComplianceProgram for the clinical laboratory industry. This is a voluntary program forlaboratories to demonstrate to the Federal government that they are responsibleproviders. We have implemented a voluntary compliance program adhering to thestandards set forth in the Model Compliance Program.

 

Confidentiality of Health Information

 

Pursuant to the Health Insurance Portability and Accountability Act of1996 (“HIPAA”), on December 28, 2000, the Secretary of HHS issued finalregulations that would establish comprehensive federal standards with respectto the use and disclosure of protected health information by a health plan,healthcare provider or healthcare data clearinghouse. The regulations establisha regulatory framework on various subject matter, including:

 
| • | The circumstances under which disclosures and uses of protected  health information require the patient’s consent, authorization or no patient  consent or authorization. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | The content of notices of privacy practices for protected health  data.                                                                                                        |
| • | Patient’s rights to access, amend and receive an accounting of the  disclosures and uses of protected health information.                                                 |
| • | Administrative, technical and physical safeguards required for that  use or for disclosure of protected health data.                                                           |

 

These regulations establish a “minimum” and would default to morestringent state laws. Therefore, we are required to comply with both sets ofstandards. Laboratories were required to submit a compliance plan to HHS by October 16,2003.  We filed our application for a oneyear extension for compliance with the Transaction Data Set Regulations andfiled our compliance plan during the extension period in accordance with themodel form provided by HHS. HIPAA provides for significant fines as well assubstantial criminal penalties for violations of the Act.

 

Fraud and Abuse Regulations

 

Medicare and Medicaid anti-kickback laws prohibit clinical laboratoriesfrom making payments or furnishing other benefits to influence the referral oftests billed to federal programs. Federal enforcement agencies (including boththe Federal Bureau of Investigation and the Office of the Inspector General)liberally interpret and aggressively enforce statutory fraud and abuseprovisions of these anti-kickback statutes. According to public statements madeby the Department of Justice, healthcare fraud has become one of its highestpriorities. Many of the anti-fraud statutes are vague or indefinite and havenot been interpreted in the courts.  Webelieve we operate lawfully within these statutes; however, we cannot predictif some of our practices may be interpreted as violating these statutes andregulations.

 

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Insurance

 

We maintain professional liability insurance of $1,000,000 peroccurrence, $3,000,000 in the aggregate. In addition, we maintain excesscommercial insurance of $5,000,000 per occurrence and $5,000,000 in theaggregate. We believe that our present insurance coverage is sufficient tocover currently estimated exposures, but we cannot assure that we will not incurliabilities in excess of the policy limits. In addition, although we believe that we will be able to continue toobtain adequate insurance coverage, we cannot assure that we will be able to doso at acceptable costs.

 

Employees

 

At October 31, 2005, wehad 936 full-time and 340 part-time employees serving in executive positions,as technicians and technologists (including physicians, pathologists and PhDs),in marketing and as drivers and in bookkeeping, clerical and administrativepositions. None of our employees are represented by a labor union. We regardrelations with our employees as satisfactory.

 

Special Note Regarding Forward-Looking Statements

 

This Annual Report on Form 10-K includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. All statements other than statements of historical fact included inthis Report, including without limitation, statements regarding our financialposition, business strategy, products, products under development, markets,budgets and plans and objectives of management for future operations, areforward-looking statements. Although we believe that the expectations reflectedin such forward-looking statements are reasonable, we can give no assurancethat such expectations will prove to have been correct. Important factors thatcould cause actual results to differ materially from our expectations aredisclosed in statements set forth under “Cautionary Statements” herein andelsewhere in this Report, including, without limitation, in conjunction withthe forward-looking statements included in this Report. All subsequent writtenand oral forward-looking statements attributable to us, or persons on ourbehalf, are expressly qualified in their entirety by the Cautionary Statementsand such other statements.

 

Cautionary Statements

 

In addition to the other information in this Annual Report on Form 10-K,the following factors should be considered carefully in evaluating us. See also“Special Note Regarding Forward-Looking Statements.”

 

Risks Associated with Growth:

 

Overthe last several years, we have experienced substantial growth and haveexpanded our operational capabilities. In October 2005, we acquiredcertain assets of a Poughkeepsie, New York pathology practice for $2,174,000 plusassumed liabilities not to exceed $160,000. We retained the staff of thispractice and continue to operate at the same three hospital locations that thepractice previously operated at in New York’s mid-Hudson region. We intend todevelop further and expand both our core laboratory business and otherproducts. This growth and expansion has placed, and will continue to place, asignificant strain on our resources. We cannot assure that we will be able tosuccessfully manage a continuation of the rate of growth similar to that whichwe have experienced in the past, should it occur.

 

Fluctuations in Operating Results:

 

Our quarterly and annual operating results can be affected by a widevariety of factors, many of which are outside of our control and which have inthe past and could in the future materially and adversely affect our operatingresults. These factors include the quantities and timing of specimens received,pricing pressures, reimbursement changes, availability and cost of diagnosticsupplies, cost of logistic and delivery systems, changes in product mix,retention and expansion of our marketing staff, timing of payments fromgovernmental agencies and third-party payors and the effect of adverse weatherconditions. We rely principally upon our internal logistic group for pick-upand delivery of specimens. However, as we shift our product mix we have begunto rely on

 

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Federal Express, UPS and other such providers for this service. Anydisruption in this service, as occurred on September 11, 2001 when theNational Airspace System (“NAS”) was shut down for a week, could have amaterial adverse effect on our operating results. As a result of these factors,our operating results may continue to fluctuate in the future.

 

Uncertainties Related to Government Regulation and Enforcement

 

We are a provider of healthcare services. As such, we are subject toextensive and rapidly changing federal, state and local laws and regulationsgoverning licensure, billing practices, financial relationships, referrals,conduct of operations, purchase of existing businesses and other aspects of ourbusiness. We cannot predict the timing or impact of any changes in these lawsand regulations or their interpretations by regulatory bodies, and we cannotassure that these changes will not have a material adverse effect on us.

 

Current federal laws governing federal healthcare programs, as well assome state laws, regulate certain aspects of the relationship betweenhealthcare providers, including us, and their referral sources. The FederalAnti-Kickback Law and the Stark Law generally prohibit providers and othersfrom soliciting, offering, receiving or paying, directly or indirectly, anymonies in return for either making a referral for a service or item orpurchasing, ordering or leasing a service or item, and prohibits physiciansfrom making such referrals to entities in which they have an investmentinterest or with which they have a compensation arrangement. Exceptions tothese laws are limited. Violations are punishable by disallowance of claims,civil monetary or criminal penalties and or exclusion from Medicare. Governmentauthorities (both federal and state) have become more aggressive in examininglaboratory billing practices, and in seeking repayments and even penaltiesbased on how the services were billed, regardless of whether the carriers hadfurnished clear guidance.

 

In addition, our laboratory operations are required to be licensed orcertified under CLIA-88, CMS and various State and local laws. We are alsosubject to federal and state laws relating to the handling and disposal ofmedical waste and radioactive materials, as well as the safety and health oflaboratory employees. Although we seek to structure our practices to complywith these laws and regulations, no assurances can be given regardingcompliance in any given situation. The possible sanctions for failure to complywith these laws and regulations may include the denial to conduct business,significant fines and criminal penalties. Any significant fine or criminalpenalty could have a material adverse effect on our financial condition. Anyexclusion or suspension from participation in a CMS program, any loss oflicensure or accreditation or the inability to obtain the required licensewould have a material adverse effect on our business.

 

Uncertainties Related to Third-Party Payors

 

We typically bill third party payors such as Medicare, Medicaid,Governmental programs and private insurers for our services. Such third partypayors are constantly negotiating prices with the goal of lowering their costs,which may result in lower profit margins for us. Reimbursement rates have beenestablished for most, but not every service. We cannot collect from third partypayors for services that these payors have not approved for reimbursement. Asis common with all laboratories, there is a certain amount of variability withrespect to reimbursement among third party payors. Furthermore, third partypayors have, on occasion ceased reimbursements when certain tests are orderedfor patients with certain diagnoses while maintaining reimbursement when thosetests are ordered for other diagnoses deemed appropriate by the carrier. Inaddition, Medicare or Medicaid may retroactively audit its payments to us andmay determine that certain payments must be returned.

 

Potential Healthcare Reform Including Decreasing Reimbursement Rates

 

The public and the federal government continue to focus attention onreforming the healthcare system in the United States. At the beginning ofcalendar year 2005, CMS announced significant cuts to Medicare reimbursementrates for flow cytometry testing. We do not anticipate any restoration of theformer reimbursement rates in fiscal 2006. Furthermore, several legislative

 

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proposals have been introduced in Congress and state legislatures inrecent years that would effect major reforms of the healthcare systems. Inaddition, CMS has made a number of proposals regarding the payment and coverageof laboratory services including the development of national coverage policies.Because of the uncertainties in regard to the nature, timing and extent of anysuch reimbursement changes, audits and reform initiatives, we are unable topredict the effect of these changes on us.

 

Insurance

 

Although we believe that our present insurance coverage is sufficientto cover currently estimated exposures, we cannot assure that we will not incurliabilities in excess of the policy limits. In addition, although we believe that we will be able to continue toobtain adequate insurance coverage, we cannot assure that we will be able to doso at acceptable cost.

 

Uncertainties Related to Accounts Receivable

 

All of our services are rendered on a list fee for services. Wetherefore assume the financial risk related to collection of these receivablessuch as:

 
| • | Delays attendant to reimbursement by third party payors             |
|--------|---------------------------------------------------------------------|
| • | Difficulties in gathering complete and accurate billing information |
| • | Inability to collect accounts                                       |
| • | Long collection cycles                                              |

 

There have been times whenour accounts receivable have increased at a greater rate than revenue growthand, therefore, has adversely affected our cash from operations. We have takensteps to implement systems and processing changes intended to improve billingprocedures and related collection results. We believe that we have madeprogress by reorganizing our accounts receivable and billing functions and thatour allowance for doubtful accounts is adequate. However, we cannot assure thatour ongoing assessment of accounts receivable will not result in the need foradditional provisions. Such additional provisions, if implemented, could have amaterial adverse effect on our operating results.

 

Competition

 

We operate in a businesswhich is characterized by intense competition. Our major competitors in the NewYork metropolitan area, Quest Diagnostics and Laboratory Corporation ofAmerica, are large national laboratories which possess greater namerecognition, larger customer bases and significantly greater financialresources and employ substantially more personnel than we do. Many of ourcompetitors have long established relationships. We cannot give assurances thatwe will be able to compete successfully with such entities in the future. Ourability to attract and retain sales representatives and management may alsoaffect our ability to compete in this marketplace.

 

### Dependence on Bank Financing

 

InOctober 2004, we entered into an Amended and Restated Loan and SecurityAgreement (the “Loan Agreement”) with PNC Bank, National Association (“PNC Bank”)as Lender. Pursuant to the Loan Agreement, our credit facility from PNC Bankwas extended to October 31, 2007 and the maximum permitted amount of ourcredit line (not to exceed 50% of our “eligible receivables” as defined in theLoan Agreement) was increased from $25,000,000 to $30,000,000. The LoanAgreement also provides us with an “Acquisition Subline” under the maximum$30,000,000 credit facility of up to $10,000,000 which can be repaid in 36equal monthly installments thereafter. Interest on advances under this creditfacility are subject to PNC Bank’s prime rate or the Eurodollar rate ofinterest plus, in certain instances, an additional interest percentage.

 

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Dependence on our Chief Executive Officer

 

Our success is substantially dependent on the efforts and abilities ofMarc D. Grodman, M.D., our founder, president and chief executive officer. Theunavailability of Dr. Grodman, whether as a result of his death,disability or otherwise, could have a material adverse effect upon ourbusiness.

 

Possible Volatility of Stock Price

 

There is a history of volatility in the market price for shares ofcompanies in the healthcare marketplace. Factors such as fluctuations in ourquarterly revenues and operating results, announcements of new innovations orservices by us or our competitors, changes in third party payment policies andgovernment regulations may have an effect on the market price of our CommonStock. In addition, any announcement of a material pending legal action couldhave a negative impact on the market price of our Common Stock regardless ofthe outcome of any such matter.

 

Factors In Place To Discourage Takeover Attempts

 

The substantial percentage ownership of our outstanding Common Stock byour executive officers and directors; our charter provision providing for astaggered board of directors so that only one-third of the board is electedeach year to serve a three year term; our Rights Plan which was adopted todiscourage hostile acquisitions of control of the Company; and the requirementthat the holders of not less than 80% of our outstanding Common Stock mustapprove any merger, consolidation, asset sale or acquisition of the Company notapproved by the board may discourage attempts by third parties to tender for orotherwise obtain control of the Company, even if such an attempt might bedeemed beneficial to the Company and its shareholders. See Item 11 – “EmploymentAgreements with Executive Officers” and “Severance Payments for Other Employees”as to employment agreements signed by the Company which provide for substantialSeverance Payments upon termination of employment in the event of a Change inControl of the Company. These Severance Payment provisions may also discourageattempts by third parties to tender for or otherwise obtain control of theCompany.

 

Item 2. - Properties

 

Our executive offices and New Jersey processing facility occupyapproximately 122,500 square feet of leased space in two one-story brickbuildings at 481-487 Edward H. Ross Drive, Elmwood Park, New Jersey.  We are currently paying approximately $74,000in total in monthly rentals for these facilities.  The leases for the majority of thesefacilities expire in February 2009. Our New York processing facilityoccupies approximately 12,000 square feet of leased space in a two-story brickbuilding at 140 Route 303, Valley Cottage, New York.  The lease for this facility, which expires inApril 2008, provides for a monthly rental of approximately $12,300. Ourcancer cytogenetics testing facility occupies approximately 6,900 square feetof leased space in a three story brick building at 25 Birch Street, Milford,Massachusetts. The lease for this facility, which expires in December 2007,provides for a monthly rental of approximately $8,000. Our testing equipmentmaintained at each of our processing and testing facilities is in goodcondition and in working order.  Webelieve that these facilities, as presently equipped, have the capacity togenerate up to approximately $250,000,000 in net revenues based on the type oftesting now being performed by us.  Wemaintain fire, theft and liability insurance coverage for our facilities inwhat we believe are adequate amounts.  Wealso 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. - Legal Proceedings

 

At October 31, 2005 and at the date of this Report, we were notinvolved in any material legal proceedings.

 

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

 

No matter was submitted to a vote of our security holders during thefourth quarter of fiscal 2005.

 

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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 NASDAQ National MarketSystem under the symbol “BRLI”. It traded on the NASDAQ Small Cap System from November 24,1993 until March 26, 2002 when our application to list our Common Stock onthe NASDAQ National Market System was approved.

 

The following table sets forth the range of high and low closing bidprices for our Common Stock for the periods indicated, as derived from reports furnishedby Pink Sheets LLC. Such quotations represent prices between dealers, do notinclude mark-ups, mark-downs or commissions and may not necessarily representactual transactions.

 
| ** **       | ** ** | **Bid Prices** | ** ** |
|------------------|------------|----------------|------------|
| **Fiscal  Year** | ** ** | **High**       | ** ** | **Low** | ** ** |
|             |       |           |       |   |   |
| **2004**         |       |           |       |   |   |
| First Quarter    |       | $              | 21.88      |   | $ | 12.62 |   |
| Second Quarter   |       | 21.45          |       | 13.09 |   |
| Third Quarter    |       | 15.46          |       | 10.76 |   |
| Fourth Quarter   |       | 14.87          |       | 11.23 |   |
|             |       |           |       |   |   |
| **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 |   |

 

On January 9, 2006 the last sale price for the Common Stock onNASDAQ was $17.10 per share.

 

AtOctober 31, 2005, the number of record owners of the Common Stock was 370.Such number of record owners was determined from our shareholder records anddoes not include beneficial owners whose shares are held in nominee accountswith brokers, dealers, banks and clearing agencies.

 

Dividends

 

We have not paid any dividends on our Common Stock since our inceptionand, do not contemplate or anticipate paying any dividends in the foreseeablefuture. Furthermore, our loan agreement with PNC Bank prohibits us from payingany cash dividends or making any cash distributions with respect to shares ofour Common Stock.

 

Recent Sales of Unregistered Securities

 

On April 14, 2005 we issued 13,334 shares of our common stock toan executive officer, Howard Dubinett, upon his exercise of incentive stockoptions issued in 1997. He paid the full exercise price of $.71875 per share atthe time of exercise.

 

On July 19, 2005, we issued 200,000 shares of our common stock toa consulting firm upon its exercise of warrants issued in fiscal 2001 forsoftware services. The full exercise price of $2.00 per share was paid at thetime of exercise.

 

A restrictive legend was placed on the certificates for the 13,334shares and the 200,000 shares and stop transfer instructions were issuedagainst the shares. The shares were issued in reliance upon the exemption fromthe registration requirements of the Securities Act of 1933 in

 

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accordance with Section 4(2) of the Act on the basis thatneither transaction involved a public offering.

 

Equity Compensation Plan Information

 

The information required under this item is disclosed in item 12 ofthis Annual Report on Form 10-K and is incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

On June 1, 2005, the Board of Directors authorized the repurchaseof up to 500,000 shares of our common stock from time to time at prevailingmarket prices in the over-the-counter market over the period ending October 31,2007. As of October 31, 2005, no shares had been repurchased under thisplan.

 

Item 6. -  Selected FinancialData

 
| ** **                                 | ** ** | **[In thousands, except per share data]** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **Years ended**                           | ** ** |
| ** **                                 | ** ** | **October 31,**                      | ** ** |
| ** **                                 | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Operating Data:**                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Net Revenues                               |       | $                                         | 163,896    |   | $ | 136,184 |   | $ | 109,034 |   | $ | 96,631 |   | $ | 80,622 |   |
| Cost of Services                           |       | $                                         | 83,352     |   | $ | 68,201 |   | $ | 56,216 |   | $ | 51,706 |   | $ | 44,265 |   |
| Gross Profit                               |       | $                                         | 80,544     |   | $ | 67,983 |   | $ | 52,818 |   | $ | 44,925 |   | $ | 36,357 |   |
| General and Administrative Expenses        |       | $                                         | 67,937     |   | $ | 55,163 |   | $ | 43,533 |   | $ | 38,853 |   | $ | 32,750 |   |
| Income from Operations                     |       | $                                         | 12,607     |   | $ | 12,820 |   | $ | 9,285 |   | $ | 6,072 |   | $ | 3,607 |   |
| Other Expenses - Net                       |       | $                                         | 1,118      |   | $ | 634 |   | $ | 681 |   | $ | 849 |   | $ | 1,660 |   |
| Provision for Income Tax Expense [Benefit] |       | $                                         | 3,868      |   | $ | 3,670 |   | $ | 2,064 |   | $ | 301 |   | $ | (414 | ) |
| Net Income                                 |       | $                                         | 7,621      |   | $ | 8,516 |   | $ | 6,540 |   | $ | 4,922 |   | $ | 2,361 |   |
| Net Income Per Common Share                |       | $                                         | .60        |   | $ | .71 |   | $ | .57 |   | $ | .43 |   | $ | .24 |   |
| Net Income Per Share - Diluted             |       | $                                         | 58         |   | $ | .67 |   | $ | .51 |   | $ | .39 |   | $ | .21 |   |
| Cash Dividends Per Common Share            |       | $                                         | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| **Balance Sheet Data:**                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Total Assets                               |       | $                                         | 88,373     |   | $ | 72,151 |   | $ | 53,219 |   | $ | 47,442 |   | $ | 44,006 |   |
| Total Long-Term Liabilities                |       | $                                         | 4,934      |   | $ | 4,520 |   | $ | 2,833 |   | $ | 1,519 |   | $ | 1,158 |   |
| Total Liabilities                          |       | $                                         | 37,658     |   | $ | 31,478 |   | $ | 23,261 |   | $ | 23,235 |   | $ | 25,532 |   |
| Working Capital                            |       | $                                         | 30,515     |   | $ | 23,815 |   | $ | 18,302 |   | $ | 12,651 |   | $ | 7,257 |   |
| Shareholders’ Equity                  |       | $                                         | 50,715     |   | $ | 40,673 |   | $ | 29,958 |   | $ | 24,207 |   | $ | 18,474 |   |

 

Item 7. - Management’s Discussion and Analysis of Financial Condition andResults of Operations

 

OVERVIEW

 

We are a clinical laboratory located in northeastern New Jersey. Ourregional footprint lies within the New York City metropolitan area and thesurrounding areas of New Jersey and southern New York State as well easternPennsylvania and some areas of western Connecticut; under certaincircumstances, we provide services further into New York State, Pennsylvania,Delaware and Maryland. As a regional provider, we are a full-service laboratorythat primarily services physician office practices; our drivers pick up samplesand deliver reports and supplies, we provide sophisticated technical support,phlebotomy services or patient service centers where appropriate, andelectronic communication services in many cases. We have also developed anational reputation for our expertise in certain focused areas of clinicaltesting. GenPath, our cancer and oncology laboratory, is one of the premierhematopathology laboratories in the country. Physicians outside of our regionalfootprint send samples to our laboratory in order to take advantage of theexpertise that we are able to provide in blood-based cancer pathology and associateddiagnostics. Our correctional healthcare services are used throughout thecountry at prisons and jails. The focused markets we

 

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serve on a national basis outside of our regional footprint do not requiremany of the logistical and other ancillary support services required within theregion. Even within our regional footprint, we provide the same services thatwe provide on a national basis as well as some regional focused diagnosticservices, such as histology and pathology support services, substance abusetesting, fertility testing, hemostasis testing, women’s health testing, andmolecular diagnostics that are unavailable from many of the smaller regionalcompetitors; testing for some of these areas may be provided outside ofphysician offices.

 

Over the last few years, there have been fundamental changes in thelaboratory services industry. In the 1990s, the industry was negativelyimpacted by the growth of managed care, increased government regulation, andinvestigations into fraud and abuse. These factors led to revenue and profitdeclines and industry consolidations, especially among commercial laboratories.There are currently only four publicly-traded laboratories, and one of those isbeing acquired by a private corporation and will be leaving the public marketsin the near future. While that will leave the two national mega-laboratoriesand BioReference 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.

 

As a full service clinical laboratory, we are constantly looking fornew technologies and new methodologies that will help us to grow. Since theturn of the century, our size alone has made us attractive to companies thatare driving the advances in technology. We represent a significant opportunityfor these companies to market their products in one of the major populationcenters of the world—the New York Metropolitan area. We have had severalsuccessful strategic relationships with such technology opportunities. Inaddition to new technology opportunities, we have an extremely seasoned andtalented management staff that has been able to identify emerging laboratorymarkets that are under-served or under-utilized. We are currently developingprograms for histology and women’s health to go along with our existinghemostasis, hematopathology and correctional healthcare initiatives which havealready been established and in which we have been increasing our market sharefor the past several years. We will continue to vigilantly seek focuseddiagnostic marketing opportunities where we can provide information,technology, service or support that expand and grow our clinical laboratory.

 

While we recognize that we are a clinical laboratory that processessamples, we also understand that we are an information company that needs toeffectively communicate the results of our efforts back to healthcareproviders. Laboratory results play a major role in the implementation ofphysician healthcare. Laboratory results are used to diagnose, monitor andclassify health concerns. In many cases, laboratory results represent theconfirming data in diagnosing complicated health issues. Since laboratoryresults play such an important role in routine physician care, we havedeveloped informatics solutions that leverage our role in healthcare. We neededto build a web-based solution to quickly, accurately, conveniently andcompetitively collect ordering information and deliver results, so we built aninternal solution that we call CareEvolve. That solution has been so essentialto our own operations that we license the technology to other laboratoriesthroughout the country so they may more effectively compete against thenational laboratories. These other laboratories licensing our technology arenot out competitors since they are outside our regional footprint. In 2001, weentered 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 and to help other smaller labs effectively competeagainst our common competition.

 

We have also created our PSIMedica business unit which has developed aClinical Knowledge Management (CKM) System that takes data from enrollment,claims, pharmacy, laboratory results

 

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and any other available electronic source to provide bothadministrative and clinical analysis of a population. The system usesproprietary 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.

 

To date, neither our PSIMedica business unit nor CareEvolve hasproduced significant revenues.

 

Results of Operations (In thousands, except per patient data)

 

Fiscal Year 2005 Compared to 2004

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2005 were $163,896 ascompared to $136,184 for the year ended October 31, 2004; this representsa 20% increase in net revenues. This increase is due to a 15% increase inpatients serviced and a 5% increase in net revenue per patient. Our laboratoryoperations had net revenues of $161,856 in fiscal 2005.

 

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

 

COST OF SERVICES:

 

Cost of Services for the year ended October 31, 2005 was $83,352as compared to $68,201 for the year ended October 31, 2004, an increase of22%. Employee related expenses increased by $7,031 (23%) and is attributable tothe hiring of additional technical and professional personnel dedicated to theexpansion of the Company’s cancer and esoteric testing business. Depreciationincreased from $1,764 for the period ended October 31, 2004 to $2,946 forthe period ended October 31, 2005, an increase of $1,182 or 67% and isconsistent with our investment in infrastructure and capacity. Totaldepreciation and amortization increased from $2,602 for the period ended October 31,2004 to $4,206 for the period ended October 31, 2005 an increase of $1,604or 62%.

 

GROSS PROFIT:

 

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

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the yearended October 31, 2005 were $67,937 as compared to $55,163 for the yearended October 31, 2004, an increase of $12,774 or 23%. This is 3% greaterthan the increase in net revenues and is attributable to an increase in baddebt expense to just over 13% of net revenues as compared to just under 13% forthe twelve month period ended October 31, 2004. Management believes that thisexpense category may remain at this level in the immediate future. Marketingexpenses as a percent of net revenues remained relatively constant over the twoyear period at 10% and management believes that it may remain at this level inthe future.

 

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INTEREST EXPENSE:

 

Interest expense increased from $667 during theyear ended October 31, 2004 to $1,226 during the year ended October 31,2005; an increase of $559. This increase is due to an increase in the variableinterest rates associated with and the increased utilization of our line ofcredit. Management believes that this trend may continue in the future due tothe continued use of our revolving line of credit to fund our growth and theincrease in interest rates that may continue to occur during fiscal year 2006.

 

NET INCOME:

 

We realized 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-tax income for the period ended October 31, 2005 was $11,489,as compared to $12,186 for the period ended October 31, 2004, a decreaseof $697 (6%) and was caused primarily by an increase in expenses in relation toan increase in net revenues.  Theprovision for income taxes increased from $3,670 for the period ended October 31,2004, to $3,868 for the current twelve month period.

 

Fiscal Year 2004 Compared to 2003

 

NET REVENUES:

 

Net Revenues for the year ended October 31, 2004 were $136,184 ascompared to $109,034 for the year ended October 31, 2003; this representsa 25% increase in net revenues. This increase is due to a 19% increase inpatients serviced and a 5% increase in net revenue per patient. Our laboratoryoperations had net revenues of $135,435 in fiscal 2004.

 

The number of patients serviced during the year ended October 31,2004 was 2,522 which was 19% greater when compared to the prior fiscalyear.  Net revenue per patient for theyear ended October 31, 2004 was $53.71 compared to net revenue per patientfor the year ended October 31, 2003 of $51.41, an increase of $2.30 or 4%as a result of increases in esoteric testing.

 

COST OF SERVICES:

 

Cost of Services for the year ended October 31, 2004 was $68,201as compared to $56,216 for the year ended October 31, 2003, an increase of21%.  This increase is related to theincrease in net revenues of 25%.

 

GROSS PROFIT:

 

Gross profit on net revenues increased to $67,983 for the year ended October 31,2004 from $52,818 for the year ended October 31, 2003; an increase of$15,165 (29%), primarily attributable to the increase in net revenues and thedecrease in direct costs relative to the increase in net revenues. Gross profitmargins in the laboratory increased to 50% from 48%, primarily due to theincrease in net revenues and efficiencies in direct operating expenses.

 

GENERAL AND ADMINISTRATIVE EXPENSES:

 

General and administrative expenses for the yearended October 31, 2004 were $55,163 as compared to $43,533 for the yearended October 31, 2003, an increase of $11,630 or 27%. This is 2% greaterthan the increase in net revenues and is attributable to several factors. Baddebt expense increased to 13% of net revenues as compared to 12% for the twelvemonth period ended October 31, 2003. This increase in bad debt is partlyattributable to an increase in our third party billing and our acquisition ofnew payors in new geographical regions resulting from the expansion of our

 

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Oncology and esoteric testing services.Marketing expenses as a percent of net revenues increased from 9% in fiscalyear 2003 to 10% in fiscal year 2004, a result of our continued emphasis onsales and marketing in the area of Oncology and esoteric testing. In addition,we took a one time charge against earnings of approximately $400,000 that cameabout because of changes in an Addendum we executed to our Strategic MarketingAlliance with Roche Diagnostic Corporation.

 

INTEREST EXPENSE:

 

Interest expense decreased from $704 during theyear ended October 31, 2003 to $667 during the year ended October 31,2004; a decrease of $37. This decrease is due to a decline in the variableinterest rates associated with our line of credit. Management believes thatthis trend may not continue in the future due to the continued use of ourrevolving line of credit to fund our expansion and growth and the increase ininterest rates that may continue to occur during fiscal year 2005.

 

NET INCOME:

 

We realized net income of $8,516 for the twelve month period ended October 31,2004 as compared to $6,540 for the twelve month period ended October 31,2003, an increase of 30%.

 

Pre-tax income for the period ended October 31, 2004 was $12,186,as compared to $8,604 for the period ended October 31, 2003, an increaseof $3,582 (42%) and was caused primarily by a decrease in expenses in relationto an increase in net revenues.  Theprovision for income taxes increased from $2,064 for the period ended October 31,2003, to $3,670 for the current twelve month period. This increase wasanticipated due to the full utilization of Federal and State net operating losscarry-forwards during the third quarter of fiscal 2003. However, it wasmitigated by other tax considerations.

 

**Liquidity and Capital Resources (In thousands)**

 

For the Fiscal Year Ended October 31,2005

 

Our working capital at October 31, 2005 was approximately $30,515as compared to approximately $23,815 at October 31, 2004, an increase of $6,700.Our cash position decreased by approximately $2,378 during the current period.We increased our short term borrowing by approximately $555 and repaidapproximately $3,094 in existing debt. We had current liabilities ofapproximately $32,724 at October 31, 2005. We generated approximately $2,899in cash from operations, a decrease of approximately $2,127 as compared to theyear ended October 31, 2004.

 

At the end of the third quarter of the current fiscal year, our shortterm debt was approximately $17,007. We utilized approximately $2,568 in cashand allowed our accounts payable to increase approximately $1,007 during thefourth quarter to decrease our short term debt to $10,888 at October 31,2005. In addition, we utilized approximately $2,174 of cash for the PATHCO acquisition.

 

Accounts receivable, net of allowance for doubtful accounts, totaledapproximately $53,113 at October 31, 2005, an increase of approximately $12,161from October 31, 2004, or 30%. This increase was primarily attributable toincreased revenue.  Cash collected overthe twelve month period ended October 31, 2005 increased 17% over theprior twelve month period.

 

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

 
| ** **                                                          | ** ** | **Years Ended  October 31** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Gross Revenues                                                      |       | 430,162                          |       | 341,180 |   | 269,676 |   |
| Contr. Adjustments and Discounts                                    |       | 266,266                          |       | 204,996 |   | 160,642 |   |
| Net Revenues                                                        |       | 163,896                          |       | 136,184 |   | 109,034 |   |
| Percent of Contractual Adjustments and  Discounts To Gross Revenues |       | 61.9                             | %          | 60.0 | % | 59.6 | % |

 

20

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The table above illustrates the relationship between contractualadjustments and gross revenues for the years 2003, 2004 and 2005. From 2003 to2004, contractual allowances as a percentage of gross revenues increasedapproximately 40 basis points, consistent with a relatively stablereimbursement environment. Between 2004 and 2005, contractual allowancesincreased approximately 190 basis points. The most significant factor in thisincrease was the decrease in reimbursement rates for flow cytometry. Thisdecrease was fully discussed upon release of our fiscal 2004 results. TheCompany’s growth in flow cytometry testing volume contributed significantly tothe increase in contractual allowances for fiscal year 2005.

 

Credit risk with respect to accounts receivable is generallydiversified due to the large number of patients comprising our clientbase.  We have significant receivablebalances with government 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 minimizepotential credit risks associated with our accounts receivable and 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 number of proposals for legislation continue to be under discussionwhich could substantially reduce Medicare and Medicaid reimbursements toclinical laboratories.  Depending uponthe nature of regulatory action, and the content of legislation, we couldexperience a significant decrease in revenues from Medicare and Medicaid, whichcould have a material adverse effect on us. We are unable to predict, however,the extent to which such actions will be taken.

 

**G**ROSSRECEIVABLES BY PAYOR GROUP

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   |       |

 

FY 2004

 
| ** **    | ** ** | **30 Days** | ** ** | **%** | ** ** | **60 Days** | ** ** | **%** | ** ** | **90 Days** | ** ** | **%** | ** ** | **>90 Days** | ** ** | **%** | ** ** | **Total** | ** ** | **%** | ** ** |
|---------------|------------|-------------|------------|-------|------------|-------------|------------|-------|------------|-------------|------------|-------|------------|-----------------|------------|-------|------------|-----------|------------|-------|------------|
| Self Pay      |       | 2,003       |       | 17    |       | 1,334       |       | 11    |       | 1,131       |       | 10    |       | 7,410           |       | 62    |       | 11,878    |       | 15    |       |
| Medicare      |       | 7,910       |       | 38    |       | 2,316       |       | 11    |       | 994         |       | 5     |       | 9,646           |       | 46    |       | 20,866    |       | 27    |       |
| Medicaid      |       | 1,255       |       | 38    |       | 721         |       | 22    |       | 511         |       | 16    |       | 782             |       | 24    |       | 3,269     |       | 4     |       |
| Prof. Billing |       | 4,054       |       | 53    |       | 804         |       | 11    |       | 883         |       | 12    |       | 1,874           |       | 25    |       | 7,615     |       | 10    |       |
| Comm. Ins     |       | 12,753      |       | 37    |       | 6,521       |       | 19    |       | 3,274       |       | 9     |       | 11,932          |       | 35    |       | 34,480    |       | 44    |       |
| Total         |       | 27,975      |       | 36    |       | 11,696      |       | 15    |       | 6,793       |       | 9     |       | 31,644          |       | 41    |       | 78,108    |       | 100   |       |

 

Billing for laboratory services is complicated and we must bill variouspayors, such as the individual, the insurance company, the government (federalor state), the private company or the health clinic. Other factors that maycomplicate billing include:

 
| • | Differences between fee schedules and reimbursement rates.               |
|--------|--------------------------------------------------------------------------|
| • | Incomplete or inaccurate billing information as provided by the  doctor. |
| • | Disparity in coverage and information requirements.                      |
| • | Disputes with payors.                                                    |
| • | Internal and external compliance policies and procedures.                |

 

Significant costs are incurred as a result of our participation ingovernment programs since billing and reimbursement for laboratory tests aresubject to complex regulations. We perform the requested tests and report theresults whether the information is correct or not or even missing. This adds tothe complexity and slows the collection process and increases the aging of ouraccounts receivable (“A/R”). When patient invoices are not collected in atimely manner the item is written off to the allowance.

 

21

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Days Sales Outstanding (“DSO”) for fiscal years 2004 and 2005 were 101and 111, respectively, an increase of approximately 10%. During April of2005, CMS along with other commercial insurers implemented certain changes asrequired by HIPAA that caused this increase in our DSO’s. These changes areexaggerated by our primary marketplace, the physician office marketplace. Thisevent caused a 3% reduction in cash collected, as compared to the prior fiscalyear. However, when you compare our DSO lag to our collectable net revenues asreported on our financial statements for the periods in question, it variesbetween 98% to 102%, depending on the period.

 

Overall, the components of A/R as shown above for the two years underreview have not varied much year over year. The percent of A/R over 90 days hasdecreased from 41% as of October 31, 2004 to 38% as of October 31,2005. We have maintained a 48% reserve in both fiscal years.

 

In October 2004, the Company entered into an amended revolvingnote payable loan agreement with a bank. The maximum amount of the credit line available to the Company is thelesser of (i) $30,000 or (ii) 50% of the Company’s qualified accountsreceivable [as defined in the agreement]. The amended loan agreement providesfor an “acquisition subline” of up to $10,000 which can be repaid in 36 equalmonthly installments. The amendment to the Loan and Security Agreement providesfor interest on advances to be subject to the bank’s prime rate or Eurodollarrate of interest plus, in certain instances, an additional interestpercentage.  The additional interestpercentage charges on Eurodollar borrowings range from 1% to 4% and aredetermined based upon certain financial ratios achieved by the Company.  At October 31, 2005, the Company hadelected to have $10,000 of the total advances outstanding converted into aEurodollar rate loan with a variable interest rate of 5.02% at October 31,2005.  The remaining outstanding advancesduring that period were subject to the bank’s prime rate of interest.  At October 31, 2005, advances of $888were subject to interest at the prime rate. As of October 31, 2005 and 2004, the bank’s prime rate of interestwas 6.75% and 4.75%, 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 forannual periods 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, 2005, the Company utilized$13,434 (including $2,546 utilized under the “acquisition subline”) and had$19,931 of available unused credit under this revolving note payable loanagreement.

 

The weighted average interest rate on short-term borrowings outstandingas of October 31, 2005 and 2004 was approximately 5.84% and 3.92%,respectively.

 

We intend to expand our laboratory operations through aggressivemarketing while also attempting to diversify into related medical fieldsthrough acquisitions.  These acquisitionsmay involve cash, notes, Common Stock, and/or combinations thereof.

 

22

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Tabular Disclosure of Contractual Obligations

**Payments Due By Period**

(Dollars in thousands)

 
| ** **                                                       | ** ** | **Total**     | ** ** | **FY  2006**  | ** ** | **FY  2007** | ** ** | **FY  2008** | ** ** | **FY  2009** | ** ** | **FY 2010  and  thereafter** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|---------------|------------|--------------|------------|--------------|------------|--------------|------------|------------------------------|------------|
|                                                             |       |          |       |          |       |         |       |         |       |         |       |                         |       |
| Long-Term  Debt                                                  |       | $ 1,061  |       | $ 1,061  |       | $ -0-   |       | $ -0-   |       | $ -0-   |       | $ -0-                   |       |
|                                                             |       |          |       |          |       |         |       |         |       |         |       |                         |       |
| Capital  Leases                                                  |       | $ 6,823  |       | $ 2,504  |       | $ 2,092 |       | $ 1,302 |       | $ 676   |       | $ 249                   |       |
|                                                             |       |          |       |          |       |         |       |         |       |         |       |                         |       |
| Operating  Leases                                                |       | $ 4,441  |       | $ 1,323  |       | $ 1,122 |       | $ 948   |       | $ 899   |       | $ 149                   |       |
|                                                             |       |          |       |          |       |         |       |         |       |         |       |                         |       |
| Purchase  Obligations                                            |       | $ 18,211 |       | $ 7,594  |       | $ 4,837 |       | $ 2,631 |       | $ 2,203 |       | $ 946                   |       |
|                                                             |       |          |       |          |       |         |       |         |       |         |       |                         |       |
| Long-Term Liabilities under Employment and  Consultant Contracts |       | $ 8,016  |       | $ 2,411  |       | $ 1,905 |       | $ 1,100 |       | $ 1,100 |       | $ 1,500                 |       |
| Total                                                            |       | $ 38,552 |       | $ 14,893 |       | $ 9,956 |       | $ 5,981 |       | $ 4,878 |       | $ 2,844                 |       |

 

Our cash balances at October 31, 2005 totaled approximately $4,303as compared to approximately $6,681 at October 31, 2004.  We believe that our cash position, theanticipated cash generated from future operations, and the availability of ourcredit line with PNC Bank, will meet our anticipated cash needs in fiscal 2006.

 

We do not have any off-balance sheet items.

 

Impact of Inflation

 

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

 

New Authoritative Pronouncements

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 151, “Inventory Costs – an amendment to ARB No. 43.” Thisstatement provides guidance to clarify the accounting for abnormal amounts ofidle facility expense, freight handling costs, and wasted material (spoilage),among other production costs. Provisions of ARB No. 43 stated that undersome circumstances, items such as idle facility expense, excessive spoilage andother costs “may” be so abnormal as to require treatment as current periodcharges. This statement requires that those items be recognized as currentperiod charges regardless of whether they meet the criterion of so abnormal. Inaddition, SFAS 151 requires that allocation of fixed production overheads tothe costs of conversion be based on the normal capacity of the productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Adoption of the Statement is not expected to have amaterial impact on the financial statements of the Company.

 

In November 2004, the FASB issued SFAS No. 152 “Accountingfor Real Estate time-Sharing Transactions” – An amendment of SFAS No. 66and 67. This Statement amends SFAS No. 66. “Accounting for Sales of RealEstate, to reference the financial accounting and reporting guidance for realestate time-sharing transactions that is provided in AICPA Statement ofPosition (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions.This Statement also amends SFAS No. 67, “Accounting for Costs and InitialRental Operations of Real Estate Projects,” to state the guidance for (a) incidentalcosts and (b) costs incurred to sell real estate projects does not applyto real estate time-sharing transactions. The accounting for those operationsand costs is subject to guidance in SOP 04-2. Effective for financialstatements with fiscal years beginning after June 15, 2005. Adoption ofthis Statement is not expected to have a material impact on the financialstatements of the Company.

 

23

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In November 2004, the FASB issued SFAS No. 153, “Exchanges ofNonmonetary Assets – an amendment to APB No. 29.” This Statement amendsOpinion No. 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity expected to change significantly as a result of the exchange. Adoptionof this statement is not expected to have a material impact on the financialstatements of the Company.

 

In December 2004, the FASB issued SFAS No. 123 (Revised2004). “Share-Based Payment.” The statement requires that the compensation costrelating to share-based payment transactions be recognized in financialstatements. That cost will be measured based on the fair value of the equity orliability instrument issued. The statement covers a wide range of share-basedcompensation arrangements including share options, restricted share plans,performance-based awards, share appreciation rights, and employee sharepurchase plans. The company will be required to adopt SFAS 123 (R) as of August 1,2005. The adoption may have a material impact on the consolidated financial statementsof the Company.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3.” This Statement applies to all voluntary changes inaccounting principle. It also applies to changes required by an accountingpronouncement, in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. The company will berequired to adopt SFAS No. 154 as of November 1, 2006. The adoptionof this standard may have a material impact on the Company’s consolidatedfinancial statements.

 

In June 2005, the EITF reached consensus on Issue No. 05-6,Determining the Amortization Period for Leasehold Improvements (“EITF 05-6”).EITF 05-6 provides guidance on determining the amortization period forleasehold improvements acquired in a business combination or acquiredsubsequent to lease inception. The guidance in EITF 05-6 will be appliedprospectively and is effective for periods beginning after June 29, 2005.EITF 05-6 is not expected to have a material impact on the Company’s unauditedinterim consolidated financial statements.

 

With the exception of the adoption of SFAS 123(R) and SFAS 154, the Company expects that the adoption of the new statementswill not have a significant impact on its consolidated financial statements.

 

Critical Accounting Policies

 

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reported periods.

 

Accounting for Goodwill

 

We evaluate the recoverability and measure the possible impairment ofits goodwill under SFAS 142, The impairment test is a two-step process thatbegins with the estimation of the fair value of the reporting unit. The firststep screens for potential impairment and the second step measures the amountof the impairment, if any.  Management’sestimate of fair value considers publicly available information regarding ourmarket capitalization as well as (i) publicly available informationregarding comparable publicly-traded companies in the clinical laboratorytesting industry, (ii) the financial projections and future prospects of ourbusiness, including its growth opportunities and likely operationalimprovements, and (iii) comparable sales prices, if available. As part ofthe first step to assess potential impairment, management compares the estimateof its fair value to its book value on a consolidated net assets.  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

 

24

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The implied fair value is determined by allocating the fair value ofthe reporting unit to all of the assets and liabilities of that unit as if thereporting unit had been acquired in a business combination and the fair valueof the reporting unit was the purchase price paid to acquire the reportingunit.  The excess of the fair value ofthe reporting unit over the amounts assigned to its assets and liabilities isthe implied fair value of goodwill.  Ifthe carrying amount of the goodwill is greater than its implied fair value, animpairment loss will be recognized in that period.

 

Accountingfor Intangible and Other Long-Lived Assets

 

We******evaluatethe possible impairment of our long-lived assets, including intangible assets.We review the recoverability of our long-lived assets when events or changes incircumstances occur that indicate that the carrying value of the asset may notbe recoverable.  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 forthe difference between the estimated fair value and carrying amount of theasset.

 

Accounting for Revenue

 

Service revenues are principallygenerated from clinical laboratory testing services such as routine and esoterictesting (See pages 3 and 4).  Netservice revenues are recognized at the time the testing services are performedand are reported at the estimated net realizable amounts from patients,third-party payors and others for services rendered including prospectivelydetermined adjustments under reimbursement agreements with third-partypayors.  These adjustments are accrued onan estimated basis in the period the related services are rendered and adjustedin future periods as final settlements are determined.  The Company has a subsidiary that providesnon-clinical laboratory services. Revenues generated from these services are not material for each of theyears presented.

 

Accounting for Contractual Credits and DoubtfulAccounts

 

An allowance for contractual credits is determined based upon a reviewof the reimbursement policies and subsequent collections for the differenttypes of payors (such as the decrease in flow cytometry reimbursement ratesfrom CMS starting January 1, 2005). Agings of accounts receivable aremonitored by billing personnel and follow-up activities are conducted asnecessary. Bad debt expense is recorded within selling, general andadministrative expenses as a percentage of sales considered necessary tomaintain the allowance for doubtful accounts at an appropriate level, based onour experience with our accounts receivable. We write off accounts against theallowance for doubtful accounts when they are deemed to be uncollectible. Forclient billing, accounts are written off when all reasonable collection effortsprove to be unsuccessful. Patient accounts are written off after the normaldunning cycle has occurred and the account has been transferred to a thirdparty collection agency. Third party accounts are written off when they exceedthe payer’s timely filing limits.

 

Accounting for Employment Benefit Plan

 

We sponsor the Bio-Reference Laboratories, Inc. 401(k)Profit-Sharing Plan [the “Plan”].  Our employeesbecome eligible for participation after attaining the age of eighteen andcompleting one year of service.  Participantsmay elect to contribute up to ten percent of their compensation, as defined inthe Plan Adoption Agreement, to a maximum allowed by the Internal RevenueService.  We may choose to make amatching contribution to the plan for each participant who has elected to maketax-deferred contributions for the plan year, at a percentage determined eachyear by the Company.  For the plan yearsbeginning January 1, 2005 we elected to make a matching contribution of 3%of salary not to exceed $500 which amounted to $182,739.  For the plan years beginning January 1,2004 and 2003, we elected to make a matching contribution of 3% of salary notto exceed $250 per participant which amounted to $78,000 and $71,000respectively which were charged to operations. Our contribution will be fully vested after the third year of service.

 

25

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Accounting for Income Taxes

 

We account for income taxes utilizing the asset and liability method.Under this method deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and for tax loss carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. Future tax benefits, such as net operating loss carryforwards,are recognized to the extent that realization of such benefits is more likelythan not.

 

Forward Looking Statements

 

This Annual Report on Form 10-K contains historical information aswell as forward-looking statements. Statements looking forward in time areincluded in this Annual Report pursuant to the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995. Such statements involve knownand unknown risks and uncertainties that may cause our actual results in futureperiods to be materially different from any future performance suggestedherein.

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and assumptions that affect the reported amounts of revenues andexpenses during the reporting period. While many aspects of our business aresubject to complex federal, state and local regulations, the accounting for ourbusiness is generally straightforward. Our revenues are primarily comprised of a high volume of relatively lowdollar transactions, and about 42% of all our costs consist of employeecompensation and benefits.  Revenues arerecognized at the time the services are performed and are reported at theestimated net realizable amounts from patients, third-party payors and othersfor services rendered including prospectively determined adjustments underreimbursement agreements with third-party payors.  These adjustments are accrued on an estimatedbasis in the period the services are rendered and adjusted in future periods asfinal settlements are determined.  Theseestimates are reviewed and adjusted, if warranted, by senior management on amonthly basis.  We believe that ourestimates and assumptions are correct; however, several factors could causeactual results to differ materially from those currently anticipated due to anumber of factors in addition to those discussed under “Cautionary Statements”as well as elsewhere herein including:

 

**•**                                          ourfailure to integrate newly acquired businesses (if any) and the cost related tosuch 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 described above underCautionary Statements).

 

•                                          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.

 

26

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•              liabilitiesthat result from our inability to comply with new corporate governancerequirements.

 

•              failureto comply with the Sarbanes-Oxley Act of 2002.

 

Item 7A. -  Quantitative andQualitative Disclosures about Market Risk

 

We do not invest in or trade market risk sensitive instruments. We alsodo not have any foreign operations or foreign sales so that our exposure toforeign currency exchange rate risk is non-existent.

 

We do have exposure to both rising and falling interest rates. At October 31,2005, advances of approximately $888 under our Loan Agreement with PNC Bankwere subject to interest charges at the Bank’s then prime rate of 6.75 %. Inaddition, we elected to have the remaining $10,000 of advances outstanding atsaid date converted into a Eurodollar rate loan with a variable interest rateof 5.02%.

 

We estimate that our monthly cash interest expense at October 31,2005 was approximately $102 thousand and that a one percentage point increaseor decrease in short-term rates would increase or decrease our monthly interestexpense by approximately $14 thousand.

 

See Note 5  to the ConsolidatedFinancial Statements contained herein.

 

Item 8. -  FinancialStatements and Supplementary Data

 

Financial Statements are annexed hereto

 

Item 9. -  Changes in andDisagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. -  Controls andProcedures

 

An evaluation was carried out under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e) under the Exchange Act as of the end of the period covered bythis report. Based upon that evaluation, our principal executive officer andprincipal financial officer concluded that those disclosure controls andprocedures were effective to ensure that information required to be disclosedby the Company in the reports that it files or submits under the Exchange Actis recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Management’s Report on Internal Control over Financial Reporting**

 

The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting for the Company.Internal 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 withaccounting principles generally accepted in the United States of America. TheCompany’s internal control over financial reporting includes those policies andprocedures that i) pertain to the maintenance of records that in reasonabledetail accurately reflect the transactions and dispositions of the assets ofthe Company; ii) provide reasonable assurance that transactions are recorded asnecessary to permit preparations of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe Company are being made only in accordance with authorizations of managementand directors of the Company; and iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material effect on the Company’sfinancial statements.

 

27

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Internal control over financial reporting cannot provide absoluteassurance regarding the prevention or detection of misstatements because ofinherent limitations. These inherent limitations are known by management andconsidered in the design of the Company’s internal control over financialreporting which reduce, though not eliminate this risk.

 

Management conducted an evaluation of the effectiveness of the Company’sinternal control over financial reporting based on the criteria set forth in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations (“COSO”) of the Treadway Commission.Based on this evaluation, management concluded that the Company’s internalcontrol over financial reporting was effective as of October 31, 2005.Management’s assessment of the effectiveness of the Company’s internal controlover financial reporting as of October 31, 2005, has been audited by MooreStephens, P.C., an independent registered public accounting firm, as stated intheir report, which is included in part II, Item 8 of this Form 10-K.

 

Item 9B. -  Other Information

 

None.

 

28

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**PART III**

 

Item 10.- Directors and Executive Officers of the Registrant

 

The following table sets forth certaininformation with respect to each of the directors and executive officers of theCompany.

 
| **Name**                           | ** ** | **Age** | ** ** | **Position**                                                                    |
|------------------------------------|------------|---------|------------|---------------------------------------------------------------------------------|
| Marc D. Grodman, M.D.              |       | 54      |       | Chairman of the Board, President, Chief Executive Officer and  Director         |
|                               |       |    |       |                                                                            |
| Howard Dubinett                    |       | 54      |       | Executive Vice President, Chief Operating Officer and Director                  |
|                               |       |    |       |                                                                            |
| Sam Singer                         |       | 62      |       | Vice President, Chief Financial Officer, Chief Accounting Officer and  Director |
|                               |       |    |       |                                                                            |
| Joseph  Benincasa(a)(c)(e)         |       | 56      |       | Director                                                                        |
|                               |       |    |       |                                                                            |
| Harry  Elias(a)(c)(e)              |       | 75      |       | Director                                                                        |
|                               |       |    |       |                                                                            |
| Gary Lederman, Esq. (b)(c)(e) |       | 71      |       | Director                                                                        |
|                               |       |    |       |                                                                            |
| John  Roglieri, M.D. (a)(d)(e)     |       | 66      |       | Director                                                                        |

 

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(a)                                  Member of the Audit Committee

(b)                                 Chairman of the Audit Committee

(c)                                  Member of the Compensation Committee

(d)                                 Chairman of the Compensation Committee

(e)                                  Member of Nominating Committee

 

The Audit Committee iscomprised of the four non-employee members of the Board of Directors, GaryLederman (Chairman), Joseph Benincasa, John Roglieri and Harry Elias. The Boardof Directors deems each such individual as “independent” as defined by the rules ofthe National Association of Securities Dealers. The Audit Committee met fourtimes during fiscal year 2005. The Audit Committee confers with the Company’sauditors and reviews, evaluates and advises the Board of Directors concerningthe adequacy of the Company’s accounting systems, its financial reportingpractices, the maintenance of its books and records and its internal controls.In addition, the Audit Committee reviews the scope of the audit of the Company’sfinancial statements and the results thereof. The Board of Directors hasdetermined that Gary Lederman is qualified to serve as the Company’s “auditcommittee financial expert” as defined in Item 401 (h) of Regulation S-Kpromulgated by the SEC.

 

The Compensation Committeeis comprised of four non-employee members of the Board of Directors, JohnRoglieri (Chairman), Joseph Benincasa, Harry Elias and Gary Lederman. TheCompensation Committee met four times during fiscal year 2005. The CompensationCommittee reviews salaries, cash bonuses and compensation plans for the Company’sexecutive officers and eligible employees and makes recommendations concerningsame to the Board of Directors.

 

The Company does not have anExecutive Committee. Officers are elected by and hold office at the discretionof the Board of Directors.

 

The Nominating Committee is comprised ofthe four non-employee members of the Board of Directors, Harry Elias, JosephBenincasa, Gary Lederman and John Roglieri. Pursuant to its charter, theNominating Committee’s role is to establish criteria for the selection ofdirectors; to identify individuals qualified to be directors; to evaluatedirector candidates proposed by stockholders; to recommend individuals to fillvacancies on the Board and to recommend nominees for director at each annualstockholder meeting.

 

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**Code of Ethics**

 

The Company has adopted aCode of Ethics that applies to its executive officers and to key financial andaccounting personnel. The Company will, upon a stockholder’s written request toInvestor Relations, c/o the Company, furnish a paper copy of the Code ofEthics.

 

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

 

Marc D. Grodman, M.D.founded the Company in December 1981 and has been its Chairman of theBoard, President, Chief Executive Officer and a Director since its formation. Dr. Grodmanis an Assistant Professor of Clinical Medicine at Columbia University’s Collegeof Physicians and Surgeons and Assistant Attending Physician at PresbyterianHospital, New York City. From 1980 to 1983, Dr. Grodman attended theKennedy School of Government at Harvard University and was a Primary CareClinical Fellow at Massachusetts General Hospital. From 1982 to 1984, he was amedical consultant to the Metal Trades Department of the AFL-CIO. Dr. Grodmanreceived a B.A. degree from the University of Pennsylvania in 1973 and an M.D.degree from Columbia University College of Physicians and Surgeons in1977.  Except for his part time duties asAssistant Professor of Clinical Medicine and Assistant Attending Physician atColumbia University and Presbyterian Hospital, Dr. Grodman devotes all ofhis working time to the business of the Company.

 

SinceJanuary 2005, Dr. Grodman has been a member of the Board of Directorsof the American Clinical Laboratory Association, an industry organizationcomprised of the largest and most significant commercial clinical laboratoriesin the United States. Other Board members include the chief executive officersof Quest Diagnostics and Laboratory Corporation of America.

 

HowardDubinett has been the Executive Vice-President and Chief Operating Officer ofthe Company since its formation in 1981. He became a Director of the Company inApril 1986. Mr. Dubinett attended Rutgers University. Mr. Dubinettdevotes all of his working time to the business of the Company.

 

SamSinger has been the Company’s Vice President and Chief Financial Officer since October 1987and a Director since November 1989. He is responsible for all of the Company’s financial activities. Mr. Singerwas the Controller for Sycomm Systems Corporation, a data processing andmanagement consulting company, from 1981 to 1987, prior to joining theCompany.  He received a B.A. degree fromStrayer University and an M.B.A. from Rutgers University.  Mr. Singer devotes all of his workingtime to the business of the Company.

 

JosephBenincasa became a Director of the Company in June 2005. Mr. Benincasacurrently serves as the Executive Director of The Actors’ Fund of America, aposition he has held since 1989. The Actors’ Fund is the leading national,non-profit human services organization providing comprehensive social andhealth care services, employment, training and housing support to theentertainment profession. It is headquartered in New York City with regionaloffices in Chicago and Los Angeles. Mr. Benincasa also sits on the Boardof Directors of The Greater New York Blood Program where he previously servedas Director of Public Education and Public Relations. He is a director of St.Peter’s University Medical Center and also sits on the board of directors ofBroadway Cares/Equity Fights AIDS; the National Theatre Workshop of theHandicapped; Career Transition for Dancers; the Times Square Alliance; the NewYork Society of Association Executives and the Somerset Patriots, a minorleague 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 Companyin March 2004. Mr. Elias commenced his employment in sales andmarketing with JVC Company of America (“JVC”) in 1967, subsequently beingappointed as JVC’s Senior Vice President of Sales and Marketing in 1983 and asExecutive Vice President of Sales and Marketing in 1990. In 1995, Mr. Eliaswas named as JVC’s Chief Operating Officer, a position he occupied until April 2003when he resigned his positions upon his

 

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appointment as JVC’s “Honorable Chairman.”JVC, a distributor of audio and video products headquartered in Wayne, NewJersey is the wholly owned United States subsidiary of Victor Company of Japan,a manufacturer of audio and video products headquartered in Japan. In January 2005,after retiring from JVC, Mr. Elias was appointed Chairman of the Board ofand commenced to serve as a consultant to AKAI USA, the sole distributor in theUnited States of electronic products produced by AKAI, a Chinese manufacturer.

 

GaryLederman, Esq. became a Director of the Company in May 1997. Hereceived his B.A. degree from Brooklyn College in 1954 and his J.D. degree fromNYU Law School in 1957.  He was managerof Locals 370, 491 and 662 of the U.F.C.W. International Union from 1961 to1985. He is retired from the unions and has been a lecturer at QueensboroCommunity College in the field of insurance. He currently serves on aninstitutional review board for RTL, a pharmaceutical drug testing laboratory.

 

John Roglieri, M.D. became a Director of the Company in September 1995.  He is an Assistant Professor of ClinicalMedicine at Columbia University’s College of Physicians and Surgeons and anAssistant Attending Physician at Presbyterian Hospital, New York City.  Dr. Roglieri received a B.S. degree inChemical Engineering and a B.A. degree in Applied Sciences from LehighUniversity in 1960, an M.D. degree from Harvard Medical School in 1966, and aMaster’s degree from Columbia University School of Business in 1978.  From 1969 until 1971, he was a SeniorAssistant 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 ofNYLCare, a managed care subsidiary of New York Life. Dr. Roglieri waschief medical officer of Physician WebLink, a national physician practicemanagement company, from 1999 to 2000. Since 2001, he has been Medical Directorfor New York Life Insurance Company in Manhattan. He is a member of advisoryboards to several pharmaceutical companies, a member of the Editorial AdvisoryBoard of the journals Managed Care and Seminars in Medical Practice, and is asubject of biographical record in Who’s Who in America.

 

There are no family relationships betweenor among any directors or executive officers of Bio-Reference Laboratories. TheCompany’s Certificate of Incorporation provides for a staggered Board ofDirectors pursuant to which the Board is divided into three classes ofdirectors and the members of only one class are elected each year to serve athree-year term. Dr. Grodman and Mr. Dubinett are the Class Idirectors whose term expires in fiscal 2007. Mr. Singer and Mr. Eliasare the Class II directors whose term expires in fiscal 2008. Mr. Benincasa,Mr. Lederman and Dr. Roglieri are the Class III directors whoseterm expires in fiscal 2006.

 

Key Personnel and Consultants

 

The following key personnel and consultants make significantcontributions to the Company’s operations.

 

James Weisberger, M.D. (Age 50) joined the Company in September 2003as Vice President, Assistant Chief Medical Officer and Director ofHematopathology. He is currently employed as the Company’s Chief MedicalOfficer. Prior to joining the Company, he was Director of Hematopathology atIMPATH, Inc.  (1999-2003). He isboard certified in internal medicine, anatomic and clinical pathology, andhematopathology. He has a New York State Department of Health Certificate ofQualification as a Laboratory Director. He is a Clinical Assistant Professor ofPathology at New York Medical College, Valhalla, New York.  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 54) is a Senior Vice President engagedin Sales. Mr. Todd was the founder and CEO of GenCare Biomedical ResearchCorporation, a specialty oncology laboratory that was purchased by the Companyin 1995.  He attended Seton HallUniversity from where he received a B.S. degree in Finance in 1974.

 

John W. Littleton (Age 44)joined the Company in September 2002 as a Vice President engaged inSales.  Prior to joining the Company, Mr. Littleton was Vice President of Sales for Specialty Laboratories and theNortheast Regional Vice President of Sales for Quest Diagnostics.  He received a B.A.. degree from Seton HallUniversity in 1983.

 

John Bennett, M.D., (Age 72)Scientific Advisory Board Chairman, Professor Emeritus, University of RochesterMedical Center, Rochester, New York.  Dr. Bennetthas long been recognized as an intellectual force in the treatment andunderstanding of leukemias, lymphomas and other cancer-related diseases.  He established the French-American-British(FAB) Leukemia working Group and is one of the world’s leading authorities onMyelodysplasia.  He is founder andChairman of the MDS Foundation, as well as Editor of the Journal of LeukemiaResearch. Dr.  Bennett is currently Professor Emeritus and former Head ofthe Medical Oncology Unit at the University of Rochester Medical Center andformerly was a Professor of Oncology in Medicine, Pathology and LaboratoryMedicine at the University of Rochester Medical School.  For nearly four decades, Dr.  Bennetthas been honored by the medical community as an expert in the field of oncologyas evidenced by the numerous chairs he has held in prestigious societies andcommittees and over 400 publications in peer review journals, the majority ofwhich are in the area of hematologic malignancies.  Dr. Bennett earned his B.A. from HarvardUniversity and his M.D. from Boston University. He served his residency inmedicine at Beth-Israel Hospital, Boston, Massachusetts and completed afellowship in hematology at Boston City Hospital. He headed the Morphology andCytochemistry Section of the Clinical Center at NIH before joining thefaculty at the University of Rochester. Dr. Bennett serves the Company inan advisory capacity as chairman of our Scientific Advisory Board.

 

Compliance with Section 16(a) of the Exchange Act

 

Based solely on a review of Forms 3 and 4 and any amendments theretofurnished to the Company pursuant to Rule 16a-3(e) under theSecurities Exchange Act of 1934, or representations that no Forms 5 wererequired, we believe that with respect to fiscal 2005, our officers, directorsand beneficial owners of more than 10% of our equity timely complied with allapplicable Section 16(a) filing requirements. However, Harry Eliasfiled a Form 4 on June 14, 2005 reporting his open market purchase onJuly 13, 2004 of 1,000 shares of our common stock.

 

Item 11. - Executive Compensation

 

The following table sets forth information concerning the compensationpaid or accrued by us during the year ended October 31, 2005 to our ChiefExecutive Officer and our other executive officers who were serving as ourexecutive officers at October 31, 2005. All of our group life, health,hospitalization or medical reimbursement plans, if any, do not discriminate inscope, terms or operation, in favor of the executive officers or directors andare generally available to all salaried employees.

 

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SUMMARY COMPENSATION TABLE

 
|                            |   | **Annual  Compensation**    |   | **Long-Term  Compensation** |   |
|---------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                            |   | **Year**                    |   | ** **                  |   |   |   | **Other** | ** ** | **Restricted** |   | ** ** | ** ** | ** ** |   | **All** |   |
| **Name and Principal Position** |   | **Ended  October 31,** |   | **Salary**                  |   | **Bonus(a)** |   | **Annual  Compensation(b)** | ** ** | **Stock  Awards** |   | **Options  (SARs)** |   | **LTIP  Payouts** |   | **Other  Compensation** |   |
|                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Marc D. Grodman  M.D.           |   | 2005                        |   | $ 750,000              |   | $ — |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| President and  Chief            |   | 2004                        |   | $ 554,625              |   | $ 125,000 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| Executive Officer               |   | 2003                        |   | $ 499,750              |   | $ 154,750 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
|                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Howard Dubinett                 |   | 2005                        |   | $ 285,000              |   | $ 14,600 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| Executive Vice                  |   | 2004                        |   | $ 272,200              |   | $ 60,000 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| President and  Chief            |   | 2003                        |   | $ 240,000              |   | $ 21,800 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| Operating Officer               |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sam Singer                      |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Vice President  and             |   | 2005                        |   | $ 285,000              |   | $ 14,600 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| Chief Financial  and            |   | 2004                        |   | $ 259,004              |   | $ 60,000 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |
| Accounting  Officer             |   | 2003                        |   | $ 240,000              |   | $ 9,600 |   | $ -0- |   | -0- |   | -0- |   | $ -0- |   | $ -0- |   |

 

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(a)The Compensation Committee adopted an Incentive Bonus Plan for SeniorManagement with respect to fiscal 2005. The Plan established two classes ofemployee participants. Dr. Grodman and two other management employeescomprised the Class I participants. Mr. Dubinett, Mr. Singer andsix other management employees comprised the Class II participants. ThePlan entitled each participant to earn a bonus equal to a percentage of his orher annual gross wages to the extent that the Company’s operating income infiscal 2005 was equal to or greater than certain percentages of its NetRevenues in the case of Class I participants, or in the case of Class IIparticipants, to the extent that the Company’s adjusted operating income infiscal 2005 was equal to or greater than certain percentages of its adjustedNet Revenues as defined by the Plan. No bonuses were earned for fiscal 2005pursuant to the Plan by the Class I participants. An aggregate $94,400 inbonuses were earned for fiscal 2005 pursuant to the Plan by the eight Class IIparticipants including the bonus amounts reflected in the above table for Messrs. Dubinettand Singer.

 

(b) See“Split-Dollar Life Insurance” herein concerning our payment of life insurancepremiums pursuant to “split-dollar” life insurance programs for our threeexecutive officers.

 

Employment Agreements with Executive Officers

 

Dr. Grodman serves as our President and Chief Executive Officerpursuant to a seven-year employment agreement which expires on October 31,2011. Dr. Grodman has the right to elect to cancel the employmentagreement effective at the end of any calendar month commencing October 31,2008 on not less than 90 days prior written notice, subject to a six monthnon-competition restriction. The employment agreement is automaticallyrenewable for additional two year periods subject to the right of either partyto elect not to renew at least six months prior thereto. The employmentagreement provides Dr. Grodman with minimum annual base compensation of$750,000 subject to annual percentage increases to the extent of annualpercentage increases in the Consumer Price Index. The Compensation Committeecan but is not required to increase Dr. Grodman’s compensation at the endof any fiscal year based upon his and the Company’s performance. The employmentagreement also provides Dr. Grodman with business use of an automobileleased by the Company and participation in any fringe benefit and bonus plansavailable to the Company’s employees to the extent determined by theCompensation Committee. The employment agreement contains provisions governingin the event of Dr. Grodman’s partial or total disability and provides fortermination for cause or in the event of Dr. Grodman’s death. Dr. Grodmanhas the right to terminate the employment agreement in the event of a materialchange in his duties and responsibilities, the relocation of the Company’sprincipal executive offices from Elmwood Park, New Jersey to a location morethan fifty miles distant or a material breach of the employment agreement bythe Company (including a reduction in Dr. Grodman’s benefits under theagreement). In the event of a Change in Control of the Company, Dr. Grodmancan elect to terminate the agreement. In that event, he will be entitled to bepaid a 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

 

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the calendar year of the Date of Termination. See “Split-Dollar LifeInsurance” herein as to the Endorsement Split-Dollar Life Insurance Agreementbetween the Company and Dr. Grodman.

 

Mr. Dubinett serves as Executive Vice President and ChiefOperating Officer pursuant to an employment agreement which was extended infiscal 2004 for two additional years beyond its October 31, 2004 terminationdate.  Mr. Dubinett’s minimum annualcompensation under the extended agreement is equal to his annual compensationin fiscal 2002 and is subject to increases based on increases in the ConsumerPrice Index as well as to increases (including bonuses) at the discretion ofthe Compensation Committee.  Theagreement provides (i) typical health insurance coverage; (ii) theleasing of an automobile for his use; (iii) participation in fringebenefit, bonus, pension, profit sharing, and similar plans maintained for theCompany’s employees; (iv) disability benefits; (v) certaintermination benefits; and (vi) in the event of termination due to a Changein Control of the Company, a Severance Payment equal to 2.99 times Mr. Dubinett’saverage annual compensation during the preceding five years.  The Company has the option to extend theextension period of the employment agreement on the same terms and conditionsthrough October 31, 2007.  See “SplitDollar Life Insurance” herein as to the Endorsement Split Dollar Life InsuranceAgreement between the Company and Mr. Dubinett.

 

Mr. Singer serves as Vice President and Chief Financial Officerpursuant to an employment agreement which was extended in fiscal 2004 for twoadditional 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 the discretionof the Compensation Committee. The agreement provides (i) typical healthinsurance coverage; (ii) the leasing of an automobile for his use; (iii) participationin fringe benefit, bonus, pension, profit sharing, and similar plans maintainedfor the Company’s employees; (iv) disability benefits; (v) certaintermination benefits; and (vi) in the event of termination due to a Changein Control of the Company, a Severance Payment equal to 2.99 times Mr. Singer’saverage annual compensation during the preceding five years. The Company hasthe option to extend the employment agreement on the same terms and conditionsthrough October 31, 2007. See “Split-Dollar Life Insurance” herein as tothe Endorsement Split-Dollar Life Insurance Agreement between the Company and Mr. Singer.

 

The Compensation Committee increased Dr. Grodman’s, Mr. Dubinett’sand Mr. Singer’s minimum annual base compensation with respect to fiscal2006 by 5% in each case over his fiscal 2005 annual base salary.

 

Severance Payments for Other Employees

 

The Company signed employment agreements with three other employeeseffective November 1, 2005 providing in each case for a Severance Paymentequal to 2.99 times the employee’s average annual compensation during thepreceding five years in the event of termination of the employee’s employmentupon a Change in Control of the Company. The Severance Payment provisions forthese three employees were approved by the Compensation Committee. Two of theemployees including Charles T. Todd, Jr. are engaged in Sales and thethird employee is the Company’s Director of Information Services.

 

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

 

Pursuant to the terms of their 1997 employment agreements, the Companyhad establishedsplit-dollar life insurance programs for each of its threeExecutive Officers. As a result of the passage of the Sarbanes Oxley Act of2002 (signed into law on July 30, 2002), these three programs weremodified. Pursuant to the modification, each of the three Executive Officersassigned ownership of his policies to the Company and new policies were issuedto replace the prior policies with annual premiums under the new policies($70,000 under Dr. Grodman’s policy and $25,000 each under Messrs. Dubinett’sand Singer’s policies) being equal to the premiums paid under the replacedpolicies. The Company has now executed new “Endorsement Split-Dollar LifeInsurance Agreements” with each of its three Executive Officers. Pursuant tothe new agreements, the

 

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Company has agreed to continue to pay the annual premium on the policyon each officer’s life during the period of his full-time employment by theCompany. The Company is the sole owner of the policy and of its net cashsurrender value, and in the event of the officer’s death while serving as afull-time employee of the Company, the Company will be entitled to receive thatamount of the death proceeds equal to its interest in the policy (the aggregateamount of premiums paid by the Company with respect to the policy less theamount of any loans, if any, from the Insurer to the Company against the cashvalue or policy proceeds, and less the aggregate amount of any premiums paid bythe officer to the Company in reimbursement of premiums paid by the Company)and the balance of the death proceeds will be paid to the officer’s designatedbeneficiaries. The premiums paid by the Company on the current policies and theprior policies aggregated approximately $1,114 at October 31, 2005. Atthat date, the net cash surrender value of the three current policiesaggregated approximately $690 and is recorded on the books of the Company atthat value.

 

**Stock Options**

** **

Employee Stock Option Plans****

 

###### The 1989 Plan

 

In July 1989, the Company’s Board of Directors adopted the 1989Employees Stock Option Plan (the “1989 Plan”) which was approved byshareholders in November 1989.  The1989 Plan provided for the grant of options to purchase up to 666,667 shares ofCommon Stock.  Under the terms of the1989 Plan, options granted thereunder could be designated as options whichqualify for incentive stock option treatment (“ISOs”) under Section 422 ofthe Internal Revenue Code of 1986 (“the Code”), or options which do not soqualify (“NQOs”).

 

Under the 1989 Plan, theexercise price of an option designated as an ISO could not be less than thefair market value of the Common Stock on the date the option was granted.  However, in the event an option designated asan ISO was granted to a 10% shareholder (as defined in the 1989 Plan) suchexercise price was required to be at least 110% of such fair market value.  Exercise prices of NQOs could be less thansuch fair market value.  The aggregatefair market value of shares subject to options granted to a participant whichare designated as ISOs which first become exercisable in any calendar yearcould not exceed $100,000. All options under the 1989 Plan were required to begranted before the Plan’s July 1999 Termination Date so that no furtheroptions can be granted under the 1989 Plan.

 

Duringfiscal 2005, Howard Dubinett, an executive officer, exercised ISOs under the1989 plan and purchased an aggregate 13,334 shares at an exercise price of$.71875 per share and one employee terminated his employment with the Companyand an aggregate 33,334 shares were canceled. As a result, at October 31,2005, there were outstanding ISOs under the 1989 Plan exercisable to purchasean aggregate 6,000 shares at an exercise price of $.71875 per share.

 

**The 2000 Plan**

 

OnAugust 25, 2000, the Board of Directors adopted the 2000 EmployeeIncentive Stock Option Plan (the “2000 Plan”) reserving an aggregate 800,000shares of Bio-Reference Common Stock for issuance upon exercise of ISOs whichmay be granted under the 2000 Plan. Stockholders ratified the adoption of the 2000 Plan at our December 14,2000 Annual Meeting of Stockholders. During fiscal 2005, twelve employeesexercised ISOs issued under the 2000 Plan and purchased an aggregate 54,094shares at exercise prices ranging from $4.21 to $9.66 per share and oneemployee terminated her employment with the Company and options to purchase anaggregate 12,218 shares were canceled. As a result, at October 31, 2005,there were outstanding ISOs under the 2000 Plan exercisable to purchase anaggregate 475,600 shares at exercise prices ranging from $1.688 to $15.34 pershare.

 

The 2000 Plan authorizes thegrant of options which qualify for ISO treatment under Section 422 of theCode, to purchase up to a maximum aggregate 800,000 shares of the Company’s

 

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CommonStock. Options may only be granted under the 2000 Plan to employees of theCompany and its subsidiaries (including officers and directors who are alsoemployees).

 

The 2000 Plan will beadministered by the Board of Directors or by a Stock Option Committeedesignated by the Board of Directors. The Board or the Stock Option Committee,as the case may be, has the discretion to determine the eligible employees towhom, and the price (not less than the fair market value on the date of grant)at which options will be granted; the periods during which each option isexercisable; and the number of shares subject to each option. The Board or theStock Option Committee has the authority to interpret the 2000 Plan and toestablish and amend rules and regulations relating thereto.

 

The 2000 Plan provides thatthe exercise price of an option granted thereunder shall not be less than thefair market value of the Common Stock on the date the option is granted.However, in the event an option is granted under the 2000 Plan to a holder of10% or more of the Company’s outstanding Common Stock, the exercise price mustbe at least 110% of such fair market value. Under the 2000 Plan, options mustbe granted before the August 24, 2010 Termination Date. No option may havea term longer than ten years (limited to five years in the case of an optiongranted to a 10% or greater stockholder of the Company). The aggregate fairmarket value of the Company’s Common Stock with respect to which options areexercisable for the first time by a grantee under the 2000 Plan during anycalendar year cannot exceed $100,000. Options granted under the 2000 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 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.

 

**The 2003 Plan**

 

On June 3, 2003, the Boardof Directors adopted the 2003 Employee Incentive Stock Option Plan (the “2003Plan”) reserving an aggregate 800,000 shares of Bio-Reference Common Stock forissuance upon exercise of ISOs which may be granted under the 2003 Plan.Stockholders ratified the adoption of the 2003 Plan at our July 31, 2003Annual Meeting of Stockholders. During fiscal 2005,ISOs were granted under the plan to 108 employees exercisable to purchase anaggregate 375,458 shares at exercise prices ranging from $12.48 to $18.25 pershare, eight employees exercised their ISOs and purchased an aggregate 23,500shares at exercise prices ranging from $12.22 to $14.82 per share and sevenemployees terminated their employment with the Company as a result of which,options to purchase an aggregate 39,500 shares were canceled. As a result, at October 31,2005, there were outstanding ISOs under the 2003 Plan exercisable to purchasean aggregate 414,458 shares at exercise prices ranging from $12.22 to $21.46per share.

 

The 2003 Plan authorizes the grant of options which qualify for ISOtreatment under Section 422 of the Code to purchase up to a minimumaggregate 800,000 shares of the Company’s Common Stock.  Options may only be granted under the 2003Plan to employees of the Company and its subsidiaries (including those officersand directors who are also employees).

 

The 2003 Plan will beadministered by the Board of Directors or by a Stock Option Committeedesignated by the Board of Directors. The Board or the Stock Option Committee, as the case may be, has thediscretion to determine the eligible employees to whom, and the prices (notless than the fair market value on the date of grant) at which options will begranted; the periods during which each option is exercisable; and the number ofshares subject to each option.  The Boardor the Stock Option Committee has the authority to interpret the 2003 Plan andto establish and amend rules and regulations relating thereto.

 

The 2003 Plan provides thatthe exercise price of an option granted thereunder shall not be less than thefair market value of the Common Stock on the date the option is granted.  However, in

 

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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.

 

Under the 2003 Plan, optionsmust be granted before the June 2, 2013 Termination Date.  No option may have a term longer than tenyears (limited to five years in the case of an option granted to a 10% orgreater 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 all of theCompany’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-Qualified Options (NQOs) and Warrants

 

At October 31, 2004, there were outstanding NQOs and Warrantsowned by directors, consultants including members of the Scientific AdvisoryBoard and a software provider exercisable to purchase an aggregate 326,000shares at exercise prices ranging from $1.19 to $13.70 per share. During fiscal2005, NQOs exercisable to purchase 232,500 shares were exercised by threeindividuals and a software provider. As a result, at October 31, 2005,there were outstanding NQOs and Warrants owned by directors, and members of theScientific Advisory Board exercisable to purchase an aggregate 93,500 shares atexercise prices ranging from $3.14 to $13.70 per share.

 

See Note 11 of Notes to the Consolidated Financial Statements.

 

**Option Grants to Our Three Named Executive Officers in Last Fiscal Year**

 

No options to purchase shares of our Common Stock were granted to anyof our three Named Executive Officers in fiscal 2005.

 

**Aggregated Option Exercises by Our Three Named Executive Officers inLast Fiscal Year And Fiscal Year-End Option Values**

 
| **Name**         | ** ** | **Shares  of Common  Stock Acquired  Upon Option Exercise  in Fiscal 2005** | ** ** | **Value  Realized** | ** ** | **Shares  of Common Stock  Underlying Unexercised  Options at 2005  Fiscal Year End (b)** | ** ** | **Value of  Unexercised  In-The-Money  Options at 2005  Fiscal Year-End (c)** | ** ** |
|------------------|------------|-----------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Marc D.  Grodman |       | —                                                                      |       | —              |       | 4,000                                                                                     |       | $ 75,568                                                                 |       |
| Howard  Dubinett |       | 13,334                                                                      |       | $ 178,517(a)   |       | 4,000                                                                                     |       | 75,568                                                                        |       |
| Sam Singer       |       | —                                                                      |       | —              |       | 4,000                                                                                     |       | 75,568                                                                        |       |

 

----

(a) Basedupon the difference between the last sale price for the Common Stock on NASDAQon April 14, 2005 (the date of exercise) and the exercise price.

(b) Allof these options are currently exercisable.

(c) Basedupon the difference between the last sales price for the Common Stock on NASDAQon Monday, October 31, 2005 and the exercise price.

 

##### **Directors’ Compensation**

##### ** **

Directors who are not our employees were each paid a $12,500 perquarter director’s fee during of fiscal year 2005. Directors who chair acommittee received an additional $2,500 per quarter during fiscal year 2005.

 

37

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Item 12. - Security Ownership of Certain Beneficial Owners andManagement and Related

 

Stockholder Matters

 

The following table setsforth information as of January 6, 2006 with respect to the ownership ofCommon Stock by (i) each person known to us to be the beneficial owner ofmore than 5% of our outstanding Common Stock, (ii) each of our directors, (iii) eachof our executive officers, and (iv) all directors and executive officersas a group.  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  Executive Officers*** | ** ** | **Shares of Common Stock  Beneficially Owned(1)** | ** ** | **Percentage  Ownership** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                        | ** ** | ** **                                        | ** ** | ** **                | ** ** |
| Marc D.  Grodman(2)                                                               |       | 1,657,846                                         |       | 12.8%                     |       |
| Howard  Dubinett(3)                                                               |       | 481,001                                           |       | 3.7%                      |       |
| Sam  Singer(4)                                                               |       | 277,467                                           |       | 2.1%                      |       |
| Joseph  Benincasa                                                                 |       | -0-                                               |       | 0%                        |       |
| Harry Elias                                                                       |       | 1,000                                             |       | **                        |       |
| Gary  Lederman(5)                                                            |       | 27,200                                            |       | **                        |       |
| John  Roglieri(6)                                                            |       | 52,000                                            |       | **                        |       |
| Executive Officers and Directors as a group  (seven persons)(2)(3)(4)(5)(6)       |       | 2,496,514                                         |       | 19.1%                     |       |
|                                                                              |       |                                              |       |                      |       |
| Other Greater than 5%                                                             | ** ** | ** **                                        | ** ** | ** **                | ** ** |
| Beneficial Owner                                                                  | ** ** | ** **                                        | ** ** | ** **                | ** ** |
|                                                                              |       |                                              |       |                      |       |
| Babson  Capital Management LLC(7)                                                 |       |                                              |       |                      |       |
| One Memorial  Drive                                                               |       |                                              |       |                      |       |
| Cambridge,  MA 02142-1300                                                         |       | 1,513,894                                         |       | 11.6%                     |       |

 

----

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

 

**               Less than one (1%) percent.

 

(1)               Except as otherwise noted, each holdernamed in the table has sole voting and investment power with respect to allshares of Common Stock shown as beneficially owned.

 

(2)               Includes 1,429,779 shares owned directlyand 4,000 shares issuable upon exercise of options.  Also includes 176,067 shares owned directlyby Dr. Grodman’s wife, Pam Grodman, and 48,000 shares owned by their minorchildren. Dr. Grodman disclaims beneficial ownership of these 224,067shares.

 

(3)               Includes 477,001 shares owned directlyand 4,000 shares issuable upon exercise of options. In lieu of an outrightsale, on March 30, 2004, Mr. Dubinett entered into a pre-paidvariable forward sales contract (“Forward Contract”) with Bear Stearns Bank plc(“Bear Stearns”). Pursuant to the Forward Contract, Mr. Dubinett pledged100,000 shares of his BRLI Common Stock to secure his obligation to deliver amaximum 100,000 shares of BRLI Common Stock to Bear Stearns on March 30,2006 (the “Settlement Date”). As prepayment

 

38

----

 

for the pledge of these shares, Bear Stearns paid Mr. Dubinett$1,297,680 or approximately $12.98 per share representing 80.75% of theproceeds from the sale of 100,000 shares on March 30, 31 and April 1,2004. The number of shares that Mr. Dubinett will be obligated to deliveron the Settlement Date varies based on the price of the Common Stock on theSettlement Date. Mr. Dubinett will benefit from any excess in the price ofthe Common Stock on the Settlement Date between $16.07 per share up to amaximum $21.69 per share by being able to deliver fewer shares.

 

In addition, in lieu of an outright sale, on September 28, 2005,Howard Dubinett entered into a second pre-paid variable forward sales contract(“Forward Contract”) with Bear Stearns Bank plc (“Bear Stearns”). Pursuant tothe Forward Contract, Mr. Dubinett pledged 100,000 shares of his BRLICommon Stock to secure his obligation to deliver a maximum 100,000 shares ofBRLI Common Stock to Bear Stearns on September 28, 2007 (the “SettlementDate”). As prepaymentfor the pledge of these shares, Bear Stearns paid Mr. Dubinett$1, 374,400 or approximately $13.74 per share representing 80% of the proceedsfrom the sale of 100,000 shares on September 28, 2005. The number of sharesthat Mr. Dubinett will be obligated to deliver on the Settlement Datevaries based on the price of the Common Stock on the Settlement Date. Mr. Dubinettwill benefit from any excess in the price of the Common Stock on the SettlementDate between $17.18 per share up to a maximum $24.052 per share by being ableto deliver fewer shares.

 

(4)               Includes 268,567 shares owned directly,4,000 shares issuable upon exercise of options and 4,900 shares owned bychildren who share Mr. Singer’s household. Mr. Singer disclaimsbeneficial ownership of these 4,900 shares.

 

(5)               Includes 15,200 shares owned directlyand 12,000 shares issuable upon exercise of options.

 

(6)               Includes 40,000 shares owned directlyand 12,000 shares issuable upon exercise of options.

 

(7)               Babson Capital LLC (“Babson”) in itscapacity as an investment advisor may be deemed the beneficial owner of these1,513,894 shares which are owned by investment advisory clients. In its Schedule 13GAmendment No. 1 dated May 10, 2005 filed with the Securities andExchange Commission, Babson stated that to the best of its knowledge, these1,513,894 shares were acquired in the ordinary course of business; were notacquired for the purpose of and do not have the effect of changing orinfluencing the control of the Company; and were not acquired in connectionwith or as a participant in any transaction having such purpose or effect.

 

**Equity Compensation Plan Information**

 

Thefollowing table provides information as of October 31, 2005 regardingshares of Common Stock that may be issued pursuant to the Company’s equitycompensation plans:

 
| ** **                                              | ** ** | **(a)  Number of Shares  Issuable upon Exercise  of Outstanding  Options and Warrants** | ** ** | **(b)  Weighted-Average  Exercise Price per  Share of Outstanding  Options and Warrants** | ** ** | **(c)  Number of Shares  Remaining Available for  Future Issuances Under  Equity Compensation Plans  (Excluding Shares  Reflected in Column (a))** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans Approved by  Stockholders     |       | 896,058                                                                                 | (1)        | $                                                                                         | 8.67       |                                                                                                                                               | 372,260    | (2) |
|                                                    |       |                                                                                    |       |                                                                                      |       |                                                                                                                                               |       |
| Equity Compensation Plans Not Approved by  Stockholders |       | 93,500                                                                                  | (3)        | $                                                                                         | 7.72       |                                                                                                                                               | -0         | - |
| Totals                                                  |       | 989,558                                                                                 |       | $                                                                                         | 8.58       |                                                                                                                                               | 372,260    |   |

 

39

----

 

----

(1) Reflects shares issuable upon exercise of outstanding ISOsgranted pursuant to the Company’s 1989, 2000 and 2003 Employee Stock OptionPlans.

 

(2) Reflects shares reserved for issuance upon the grant of ISOswhich may be granted pursuant to the Company’s 2000 and 2003 Employee IncentiveStock Option Plans.

 

(3) Includes 57,500shares issuable upon exercise of NQOs held bymembers of the Company’s Scientific Advisory Board; and 36,000 shares issuableupon exercise of NQOs held by five directors.

 

Item 13. – Certain Relationships and Related Transactions

 

Nomaterial transactions occurred between the Company and related parties other thanreported elsewhere herein during fiscal 2005.

 

Item 14. -  PrincipalAccountant Fees and Services

 

The firm of Moore Stephens, P.C. (“Moore Stephens”) certified publicaccountants, audited our accounts and the accounts of our subsidiaries for thefiscal years ended October 31, 2005 and 2004. Moore Stephens and itspredecessor firm have been our auditors since 1988.

 

(1)          Audit Fees

 

Moore Stephens billed us $187,600 for professional services rendered inconnection with the audit of our annual financial statements for the fiscalyear ended October 31, 2005 and the review of the financial statementsincluded in our quarterly reports on Form 10-Q for such fiscal yearcompared to $125,600 in billings for such services for the fiscal year ended October 31,2004. In addition, Moore Stephens billed us $9,400 in fiscal 2005 for its auditof our 401(k) Plan for calendar year 2004 as compared to $7,600 of such fees infiscal 2004 with respect to calendar year 2003.

 

(2)   Audit-RelatedFees

 

Moore Stephens billed us $7,000 for due diligence fees incurred inrelation to an acquisition during fiscal 2005 and $80,000 for Sarbanes-Oxley (“SOX”)related audit fees.

 

(3)   TaxFees

 

Moore Stephens billed us approximately $68,500 for tax services forfiscal 2005 and approximately $39,000 for tax services for fiscal 2004. Thefees were billed for tax return preparation.

 

(4)   AllOther Fees

 

No fees were billed to us by Moore Stephens with respect to fiscal 2005or fiscal 2004 other than for services described in Item 14 (1) and (3) herein.

 

(5)          Pre-Approval Policies and Procedures

 

The engagement of Moore Stephens to render the above audit and taxserviceswas approved by our audit committee prior to the engagement.

 

40

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**PART IV**

 
| Item 15. – Exhibits and Financial Statement Schedules |                                                                                    |
|------------------------------------------------------------|-----------------------------------------------------------------------------------------|
|                                                       |                                                                                    |   |
| (a)1.                                                      | Financial Statements                                                                    |   |
|                                                       |                                                                                    |   |
|                                                       | The following financial statements of the Company are included in  Part II, Item 8 | ** ** |
|                                                       |                                                                                    | **Page To  Page** |
|                                                       | Report of Independent Registered Public  Accounting Firm                                | 46 |
|                                                       |                                                                                    |   |
|                                                       | Consolidated Balance Sheets -  October 31, 2005 and 2004                           | 47 - 48 |
|                                                       |                                                                                    |   |
|                                                       | Consolidated Statements of Operations-                                                  |   |
|                                                       | Years ended October 31, 2005, 2004 and  2003                                       | 49 |
|                                                       |                                                                                    |   |
|                                                       | Consolidated Statements of Shareholders’  Equity                                   |   |
|                                                       | Years ended October 31, 2005, 2004,  and 2003                                      | 50 |
|                                                       |                                                                                    |   |
|                                                       | Consolidated Statements of Cash Flows -                                                 |   |
|                                                       | Years ended October 31, 2005, 2004 and  2003                                       | 51 - 52 |
|                                                       |                                                                                    |   |
|                                                       | Notes to Consolidated Financial Statements-                                             | 53 - 73 |
|                                                       |                                                                                    |   |
| 2.                                                         | Financial Statements Schedule                                                           | 74 |
|                                                       |                                                                                    |   |
|                                                       | Schedule II -                                                                      | 75 |
|                                                       |                                                                                    |   |
|                                                       | Years ended October 31, 2005, 2004 and  2003                                       |   |
|                                                       |                                                                                    |   |
| 3.                                                         | Exhibits                                                                                | After 75 |

 
| ** **           | ** ** | ** **                                                                                                                                   | ** ** | **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

----

 
| 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                                                                                                                                      |   |   |
|    |   |                                                                                                                                                                                                                                         |   |   |
| 10.4.4  |   | Employment Agreement between the Company and Scott Fein effective October 31,  2005                                                                                                                                                     |   |   |
|    |   |                                                                                                                                                                                                                                         |   |   |
| 10.4.5  |   | Employment Agreement between the Company and Richard L. Faherty effective  November 1, 2005.                                                                                                                                            |   |   |
|    |   |                                                                                                                                                                                                                                         |   |   |
| 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.                  |   |   |
|    |   |                                                                                                                                                                                                                                         |   |   |
| 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. on the one hand and Roche  Diagnostics Corporation on the other. (terminated in the fourth quarter of  fiscal 2005). |   | (H)    |

 

42

----

 
| 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)    |
|     |   |                                                                                                                                                                                                               |   |   |
| 21       |   | Subsidiaries of the Company                                                                                                                                                                                        |   |   |

 

The following are the Company’s two wholly-owned subsidiaries:

 
| ** **                | ** ** | ** **                                                                        | ** **                  | ** ** | ** ** | **Name  under which it Conducts or** |
|---------------------------|------------|-----------------------------------------------------------------------------------|-----------------------------|------------|------------|--------------------------------------|
| ** **                | ** ** | ** **                                                                        | **State of  Incorporation** | ** ** | ** ** | **Conducted  Business**              |
| ** **                | ** ** | ** **                                                                        | ** **                  | ** ** | ** ** | ** **                           |
| Medilabs, Inc.       |       | New  York                                                                         |                        | Medilabs   |
| CareEvolve.com, Inc. |       | New  Jersey                                                                       |                        | CareEvolve |
| ** **                | ** ** | ** **                                                                        | ** **                  | ** ** | ** ** | ** **                           |
| 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 designated above with an asterisk (*) have previously beenfiled with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32,are incorporated by reference to the documents as indicated below.

 

(A)                              Incorporated by referenceto exhibit filed with the Company’s Registration Statement on Form S-1(File No. 33-31360).

 

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

 

(C)                                Incorporated by referenceto exhibit filed with the Company’s Registration Statement on Form SB-2(File No. 33-68678).

 

(D)                               Incorporated byreference to exhibit filed with the Company’s Registration Statement on Form S-18(File No. 33-5048-NY).

 

(E)                                 Incorporated byreference to exhibit filed with the Company’s report on Form 8-A dated March 31,1998.

 

(F)                                 Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-Kfor the year ended October 31, 1999.

 

(G)                                Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-Kfor the year ended October 31, 2000.

 

(H)                               Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-Kfor the year ended October 31, 2001.

 

(I)                                    Incorporated byreference to exhibit filed with the Company’s annual report on Form 10-Kfor the year ended October 31, 2002

 

(J)                                   Incorporated byreference to exhibit filed with the Company’s Registration Statement on Form S-8(File No.  333-111578).

 

43

----

 

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

 

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

 

(M)                            Incorporated by referenceto exhibit filed with the Company’s annual report on Form 10-K for theyear ended October 31, 2004.

 

44

----

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act,the registrant caused this report to be signed on its behalf by theundersigned, 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, 2006               |                |

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 
| /S/ Marc D. Grodman                      |   |
|------------------------------------------|--------|
| Marc D. Grodman                          |   |
| Chairman of the Board, President,        |   |
| Chief Executive Officer and Director     |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ Howard Dubinett                      |   |
| Howard Dubinett                          |   |
| Executive Vice President,                |   |
| Chief Operating Officer and Director     |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ Sam Singer                           |   |
| Sam Singer                               |   |
| Vice President, Chief Financial Officer, |   |
| Chief Accounting Officer and Director    |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ Joseph Benincasa                     |   |
| Joseph Benincasa                         |   |
| Director                                 |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ Harry Elias                          |   |
| Harry Elias                              |   |
| Director                                 |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ Gary Lederman                        |   |
| Gary Lederman                            |   |
| Director                                 |   |
| January 12, 2006                    |   |
|                                     |   |
| /S/ John Roglieri                        |   |
| John Roglieri                            |   |
| Director                                 |   |
| January 12, 2006                    |   |

 

45

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

** **

To the Board of Directors and Shareholders of

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

We have audited the accompanying consolidated balance sheets ofBio-Reference Laboratories, Inc. and its subsidiary as of October 31,2005 and 2004, and the related consolidated statements of operations,shareholders’ equity, and cash flows for each of the three fiscal years in theperiod ended October 31, 2005. We also have audited management’s assessment,included in the accompanying Report of Management on Internal Control overFinancial Reporting, that Bio-Reference Laboratories, Inc. maintainedeffective internal control over financial reporting as of October 31, 2005based on criteria established in “Internal Control-Integrated Framework” issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Bio-Reference Laboratories, Inc.’s management is responsible for theseconsolidated financial statements for maintaining effective internal controlover financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on these consolidated financial statements, an opinion on management’sassessment, and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained in allmaterial respects. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such procedures as we considered necessary in the circumstances. We believethat our audits provide a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made inaccordance with authorizations of management and directors of the company; and(3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrol may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Bio-Reference Laboratories, Inc. and its subsidiaries as of October 31,2005 and 2004, and the consolidated results of their operations and their cashflows for each of the three fiscal years in the period ended October 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America. Also in our opinion, management’s assessment thatBio-Reference Laboratories, Inc. maintained effective internal controlover financial reporting as of October 31, 2005, is fairly stated, in allmaterial respects, based on criteria established in “InternalControl—Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Furthermore, in our opinion,Bio-Reference Laboratories Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of October 31, 2005, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).”

 

MOORE STEPHENS, P. C.

Certified Public Accountants.

 

Cranford, New Jersey

### December 17, 2005

 

46

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                   | ** ** | **October 31,** | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **2005**             | ** ** | **2004** | ** ** |
|                                         |       |                 |       |   |   |
| ***Assets:***                                |       |                 |       |   |   |
| **Current Assets:**                          |       |                 |       |   |   |
| Cash and Cash Equivalents                    |       | $                    | 4,303      |   | $ | 6,681 |   |
| Accounts Receivable - Net                    |       | 53,113               |       | 40,952 |   |
| Inventory                                    |       | 1,339                |       | 1,277 |   |
| Other Current Assets                         |       | 878                  |       | 834 |   |
| Deferred Tax Asset                           |       | 3,606                |       | 1,029 |   |
|                                         |       |                 |       |   |   |
| **Total Current Assets**                     |       | 63,239               |       | 50,773 |   |
|                                         |       |                 |       |   |   |
| **Property and Equipment - At Cost**         |       | 18,703               |       | 13,501 |   |
|                                         |       |                 |       |   |   |
| **Less:**** **Accumulated  Depreciation |       | 6,776                |       | 4,225 |   |
|                                         |       |                 |       |   |   |
| **Property and Equipment - Net**             |       | 11,927               |       | 9,276 |   |
|                                         |       |                 |       |   |   |
| **Other Assets:**                            |       |                 |       |   |   |
| Deposits                                     |       | 450                  |       | 426 |   |
| Goodwill - Net                               |       | 8,919                |       | 8,190 |   |
| Intangible Assets - Net                      |       | 3,079                |       | 2,438 |   |
| Other Assets                                 |       | 759                  |       | 1,048 |   |
|                                         |       |                 |       |   |   |
| **Total Other Assets**                       |       | 13,207               |       | 12,102 |   |
|                                         |       |                 |       |   |   |
| **Total Assets**                             |       | $                    | 88,373     |   | $ | 72,151 |   |

 

The Accompanying Notes are an Integral Part ofThese Consolidated Financial Statements.

 

47

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| ** **                                                                                                                                                                      | ** ** | **October 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ***Liabilities and Shareholders’ Equity:***                                                                                                                                |       |                 |       |   |   |
| **Current Liabilities:**                                                                                                                                                        |       |                 |       |   |   |
| Accounts Payable                                                                                                                                                                |       | $                    | 14,346     |   | $ | 10,801 |   |
| Accrued Salaries and Commissions                                                                                                                                                |       | 3,352                |       | 2,139 |   |
| Accrued Taxes and Expenses                                                                                                                                                      |       | 1,028                |       | 1,081 |   |
| Revolving Note Payable - Bank                                                                                                                                                   |       | 10,888               |       | 10,333 |   |
| Current Maturities of Long-Term Debt                                                                                                                                            |       | 1,061                |       | 1,273 |   |
| Capitalized Lease Obligation - Short-Term  Portion                                                                                                                              |       | 2,049                |       | 1,331 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| **Total Current Liabilities**                                                                                                                                                   |       | 32,724               |       | 26,958 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| **Long-Term Liabilities:**                                                                                                                                                      |       |                 |       |   |   |
| Capitalized Lease Obligations - Long-Term  Portion                                                                                                                              |       | 3,956                |       | 3,092 |   |
| Long-Term Debt—Net of Current Portion                                                                                                                                      |       | —               |       | 1,061 |   |
| Other Long-Term Liabilities                                                                                                                                                     |       | —               |       | 25 |   |
| Deferred Tax Liabilities                                                                                                                                                        |       | 978                  |       | 342 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| **Total Long-Term Liabilities**                                                                                                                                                 |       | 4,934                |       | 4,520 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| **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, Issued and Outstanding; -0- and 604,078 Shares  at October 31, 2005 and 2004, respectively  |       | —               |       | — |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| 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 12,981,367 and 12,657,939  Shares at October 31, 2005 and 2004, Respectively |       | 130                  |       | 127 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| Additional Paid-in Capital                                                                                                                                                      |       | 32,348               |       | 30,099 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| Retained Earnings                                                                                                                                                               |       | 18,452               |       | 10,831 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| Totals                                                                                                                                                                          |       | 50,930               |       | 41,057 |   |
| Deferred Compensation                                                                                                                                                           |       | (215                 | )          | (384 | ) |
|                                                                                                                                                                            |       |                 |       |   |   |
| **Total Shareholders’ Equity**                                                                                                                                             |       | 50,715               |       | 40,673 |   |
|                                                                                                                                                                            |       |                 |       |   |   |
| **Total Liabilities and Shareholders’ Equity**                                                                                                                             |       | $                    | 88,373     |   | $ | 72,151 |   |

 

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

 

48

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                    | ** ** | **Years ended** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **October 31,** | ** ** |
| ** **                                    | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                          |       |            |       |   |   |   |   |
| **Net Revenues**                              |       | $               | 163,896    |   | $ | 136,184 |   | $ | 109,034 |   |
|                                          |       |            |       |   |   |   |   |
| **Cost of Services:**                         |       |            |       |   |   |   |   |
| Depreciation and Amortization                 |       | 2,946           |       | 1,764 |   | 1,032 |   |
| Employee Related Expenses                     |       | 37,849          |       | 30,818 |   | 26,562 |   |
| Reagents and Laboratory Supplies              |       | 24,716          |       | 20,523 |   | 16,843 |   |
| Other Cost of Services                        |       | 17,841          |       | 15,096 |   | 11,779 |   |
|                                          |       |            |       |   |   |   |   |
| **Total Cost of Services**                    |       | 83,352          |       | 68,201 |   | 56,216 |   |
|                                          |       |            |       |   |   |   |   |
| **Gross Profit**                              |       | 80,544          |       | 67,983 |   | 52,818 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **General and Administrative Expenses:**      |       |            |       |   |   |   |   |
| Depreciation and Amortization                 |       | 1,260           |       | 838 |   | 689 |   |
| General and Administrative Expenses           |       | 44,817          |       | 36,819 |   | 30,038 |   |
| Provision for Doubtful Accounts               |       | 21,860          |       | 17,506 |   | 12,806 |   |
|                                          |       |            |       |   |   |   |   |
| **Total General and Administrative Expenses** |       | 67,937          |       | 55,163 |   | 43,533 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Income from Operations**                    |       | 12,607          |       | 12,820 |   | 9,285 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Other [Income] Expense:**                   |       |            |       |   |   |   |   |
| Interest Expense                              |       | 1,226           |       | 667 |   | 704 |   |
| Interest Income                               |       | (108            | )          | (33 | ) | (23 | ) |
|                                          |       |            |       |   |   |   |   |
| **Total Other Expense - Net**                 |       | 1,118           |       | 634 |   | 681 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Income Before Income Taxes**                |       | 11,489          |       | 12,186 |   | 8,604 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Provision for Income Tax Expense**          |       | 3,868           |       | 3,670 |   | 2,064 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Net Income**                                |       | $               | 7,621      |   | $ | 8,516 |   | $ | 6,540 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Net Income Per Common Share - Basic**       |       | $               | .60        |   | $ | .71 |   | $ | .57 |   |
| ** **                                    |       |            |       |   |   |   |   |
| **Net Income Per Common Share - Diluted**     |       | $               | .58        |   | $ | .67 |   | $ | .51 |   |

 

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

 

49

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

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**[Dollars In Thousands]**

 
| ** **                                    | ** ** | **Series A**          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**        | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|--------------|------------|------------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Senior Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Deferred** | ** ** | **Shareholders’** | ** ** |
| ** **                                    | ** ** | **Shares**                 | ** ** | **Amount**       | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **[Deficit]**          | ** ** | **Compensation** | ** ** | **Equity** | ** ** |
| **Balance - October 31, 2002**           |       | 604,078                    |       | $                | 60         |        | 11,588,583 |            | $          | 116          |       | $                      | 28,544     |             | $          | (4,225 | ) | $ | (288 | ) | $ | 24,207 |   |
|                                          |       |                       |       |             |       |        |       |            |       |         |       |                   |       |             |       |   |   |
| Amortization of Deferred Compensation         |       | —                     |       | —           |       | —      |       | —          |       | —       |       | —                 |       | 140              |       | 140 |   |
| Shares Issued for Compensation                |       | —                     |       | —           |       | 10,000      |       | —          |       | 15           |       | —                 |       | —           |       | 15 |   |
| Exercise of Options - Employees               |       | —                     |       | —           |       | 82,140      |       | 1               |       | 125          |       | —                 |       | —           |       | 126 |   |
| Warrants Issued to Advisory Board             |       | —                     |       | —           |       | —      |       | —          |       | 291          |       | —                 |       | (291             | )          | — |   |
| Common Stock Repurchased and Retired          |       | —                     |       | —           |       | (229,700    | )          | (2              | )          | (1,068       | )          | —                 |       | —           |       | (1,070 | ) |
| Net Income                                    |       | —                     |       | —           |       | —      |       | —          |       | —       |       | 6,540                  |       | —           |       | 6,540 |   |
| ** **                                    |       |                       |       |             |       |        |       |            |       |         |       |                   |       |             |       |   |   |   |   |   |   |   |   |
| **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 |   |

 

TheAccompanying Notes are an Integral Part of These Consolidated FinancialStatements.

 

50

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**[Dollars In Thousands]**

 
| ** **                                                                                    | ** ** | **Years ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                    | ** ** | **October 31,** | ** ** |
| ** **                                                                                    | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating Activities:**                                                                     |       |            |       |   |   |   |   |
| Net Income                                                                                    |       | $               | 7,621      |   | $ | 8,516 |   | $ | 6,540 |   |
| Adjustments to Reconcile Net Income to Net  Cash Provided by [Used for] Operating Activities: |       |            |       |   |   |   |   |
| Depreciation and Amortization                                                                 |       | 4,206           |       | 2,602 |   | 1,722 |   |
| Amortization of Deferred Compensation                                                         |       | 169             |       | 192 |   | 140 |   |
| Provision for Doubtful Accounts                                                               |       | 21,860          |       | 17,506 |   | 12,806 |   |
| Deferred Income Tax (Benefit)/Expense                                                         |       | (1,942          | )          | (1,318 | ) | 939 |   |
| Stock Issued for Compensation                                                                 |       | —          |       | — |   | 15 |   |
| Loss on Disposal of Property, and Equipment                                                   |       | 9               |       | — |   | — |   |
|                                                                                          |       |            |       |   |   |   |   |
| Changes in Assets and Liabilities                                                             |       |            |       |   |   |   |   |
| [Net of Effects from Acquisitions]:                                                           |       |            |       |   |   |   |   |
| [Increase] Decrease in:                                                                       |       |            |       |   |   |   |   |
| Accounts Receivable                                                                           |       | (33,726         | )          | (25,330 | ) | (17,020 | ) |
| Inventory                                                                                     |       | (63             | )          | (189 | ) | (7 | ) |
| Other Current Assets                                                                          |       | (44             | )          | (71 | ) | 113 |   |
| Other Assets                                                                                  |       | 289             |       | 222 |   | (203 | ) |
| Deposits                                                                                      |       | (25             | )          | (112 | ) | (21 | ) |
|                                                                                          |       |            |       |   |   |   |   |
| Increase [Decrease] in:                                                                       |       |            |       |   |   |   |   |
| Accounts Payable, Accrued Taxes and  Expenses                                                 |       | 4,545           |       | 3,008 |   | 569 |   |
|                                                                                          |       |            |       |   |   |   |   |
| Total Adjustments                                                                             |       | (4,722          | )          | (3,490 | ) | (947 | ) |
|                                                                                          |       |            |       |   |   |   |   |
| **Net Cash - Operating Activities - Forward**                                                 |       | 2,899           |       | 5,026 |   | 5,593 |   |
| ** **                                                                                    |       |            |       |   |   |   |   |
| **Investing Activities:**                                                                     |       |            |       |   |   |   |   |
| Business Acquisitions                                                                         |       | (2,174          | )          | (3,146 | ) | — |   |
| Acquisition of Property and Equipment                                                         |       | (2,860          | )          | (3,541 | ) | (1,105 | ) |
| Proceeds from Sale of Equipment                                                               |       | 65              |       | — |   | — |   |
| Capitalized Loan Fees                                                                         |       | (21             | )          | (75 | ) | — |   |
|                                                                                          |       |            |       |   |   |   |   |
| **Net Cash - Investing Activities - Forward**                                                 |       | (4,990          | )          | (6,762 | ) | (1,105 | ) |
| ** **                                                                                    |       |            |       |   |   |   |   |
| **Financing Activities:**                                                                     |       |            |       |   |   |   |   |
| Proceeds from Long-Term Debt                                                                  |       | —          |       | 2,546 |   | — |   |
| Payments of Long-Term Debt                                                                    |       | (1,298          | )          | (212 | ) | (400 | ) |
| Payments of Capital Lease Obligations                                                         |       | (1,796          | )          | (1,505 | ) | (753 | ) |
| Increase [Decrease] in Revolving Line of  Credit                                              |       | 555             |       | 1,615 |   | (1,828 | ) |
| Proceeds from the Exercise of Stock Options                                                   |       | 2,252           |       | 1,904 |   | 126 |   |
| Conversion of Preferred Stock                                                                 |       | —          |       | 453 |   | — |   |
| Common Stock Repurchased                                                                      |       | —          |       | (350 | ) | (1,070 | ) |
| **Net Cash - Financing Activities - Forward**                                                 |       | $               | (287       | ) | $ | 4,451 |   | $ | (3,925 | ) |

 

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

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**[Dollars In Thousands]**

 
| ** **                                              | ** ** | **Years ended** | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **October 31,** | ** ** |
| ** **                                              | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Cash - Operating Activities - Forwarded**         |       | $               | 2,899      |   | $ | 5,026 |   | $ | 5,593 |   |
| ** **                                              |       |            |       |   |   |   |   |
| **Net Cash - Investing Activities - Forwarded**         |       | (4,990          | )          | (6,762 | ) | (1,105 | ) |
| ** **                                              |       |            |       |   |   |   |   |
| **Net Cash - Financing Activities - Forwarded**         |       | (287            | )          | 4,451 |   | (3,925 | ) |
| ** **                                              |       |            |       |   |   |   |   |
| **Net Increase in Cash and Cash Equivalents**           |       | (2,378          | )          | 2,715 |   | 563 |   |
| ** **                                              |       |            |       |   |   |   |   |
| **Cash and Cash Equivalents - Beginning of  Years**     |       | 6,681           |       | 3,966 |   | 3,403 |   |
| ** **                                              |       |            |       |   |   |   |   |
| **Cash and Cash Equivalents - End of Years**            |       | $               | 4,303      |   | $ | 6,681 |   | $ | 3,966 |   |
| ** **                                              |       |            |       |   |   |   |   |
| **Supplemental Disclosures of Cash Flow  Information:** |       |            |       |   |   |   |   |
| Cash paid during the years for:                         |       |            |       |   |   |   |   |
| Interest                                                |       | $               | 1,160      |   | $ | 646 |   | $ | 723 |   |
| Income Taxes                                            |       | $               | 5,413      |   | $ | 4,590 |   | $ | 326 |   |

** **

**Supplemental Schedule of Non-CashInvesting and Financing Activities:**

 

In October 2005, the Company assumed $160 of liabilities inconnection with the acquisition of PATHCO

 

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

 

During fiscal 2005 and 2004, the Company wrote-off approximately $806and $617 of furniture and equipment which were fully depreciated.

 

Approximately $428 of capitalized costs related to covenantsnot-to-compete and employment agreements, which were fully amortized and writtenoff in fiscal 2004.

 

During fiscal 2005, 2004 and 2003, the Company incurred capital leaseobligations totaling approximately $3,185, $2,869 and $1,807 in connection withthe acquisition of property and equipment.

 

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

 

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

 

52

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Dollars In Thousands Except Per Share Dataor Unless Otherwise Indicated]**

 

***[1] Organization andBusiness***

 

Bio-Reference Laboratories, Inc. [“Bio-Reference” or the “Company”]was incorporated on December 24, 1981. Bio-Reference is principally engaged in providing clinical laboratorytesting services, primarily to customers in the greater New York metropolitanarea as well as to customers in a number of other states.  Bio-Reference offers a comprehensive list ofchemical diagnostic tests including blood and urine analysis, blood chemistry,hematology services, serology, radioimmuno analysis, toxicology (including drugscreening), pap smears, tissue pathology (biopsies) and other tissueanalysis.  It operates two clinicallaboratories, one in Elmwood Park, New Jersey and one in Valley Cottage, NewYork, and an andrology laboratory in New York City and a cytogenetics testinglaboratory located in Milford, MA.. Bio-Reference markets its clinical laboratory testing services directlyto physicians, hospitals, clinics, correctional and other health facilities.

 

In October 2005, the Company acquired certain assets of a Poughkeepsie, New York pathology practicefor $2,174 plus accounts payable of $160. We retained the staff of thispractice and continue to operate at its premises in Poughkeepsie, New York.

 

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

 

***Principles of Consolidation-*** The consolidated financial statements includethe accounts of the Company and its wholly-owned subsidiary.  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 $2,790 and $4,282in cash equivalents at October 31, 2005 and 2004, respectively.

 

***Inventory -***Inventory is stated at the lower of cost [on a first-in, first-out basis] ormarket.  Inventory consists primarily ofpurchased laboratory supplies, which is used in our various testinglaboratories.

 

***Property andEquipment -***Property and equipment are carried atcost.  Depreciation is computed by thestraight-line method over the estimated useful lives of the respective assetswhich 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 depreciation expense related toproperty and equipment of $3,592, $2,034 and $1,153 for the years ended October 31,2005, 2004 and 2003, respectively.

 

On sale or retirement, the asset cost and related accumulateddepreciation or amortization are removed from the accounts, and any relatedgain or loss is reflected in general and administrative expenses.  Repairs and maintenance are charged toexpense when incurred.

 

**Goodwill -**Effective November 1, 2001,the Company evaluates the recoverability and measures the possible impairmentof its goodwill under SFAS 142, “Goodwill and Other Intangible Assets.”  The impairment test is a two-step processthat begins with the estimation of the fair value of the reporting unit. Thefirst step screens for potential impairment and the second step measures theamount of the impairment, if any. Management’s estimate of fair value considers publicly availableinformation regarding the market capitalization of the Company as well as (i) publiclyavailable information regarding comparable publicly-traded companies in theclinical laboratory testing industry, (ii) the financial projections andfuture prospects of the Company’s business, including its growth opportunitiesand likely operational improvements, and (iii) comparable sales prices, ifavailable. As part of the first step to assess potential impairment, managementcompares the estimate of fair value for the Company to

 

53

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the book 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 the fair value ofthe reporting unit to all of the assets and liabilities of that unit as if thereporting unit had been acquired in a business combination and the fair valueof the reporting unit was the purchase price paid to acquire the reportingunit.  The excess of the fair value ofthe reporting unit over the amounts assigned to its assets and liabilities isthe implied fair value of goodwill.  Ifthe carrying amount of the goodwill is greater than its implied fair value, animpairment loss will be recognized in that period.  No impairment loss was recognized in theyears ended October 31, 2005, 2004 and 2003.

 

The balance sheet reflects accumulated amortization of $2,401 as of October 31,2005 and 2004, 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 $614,$568, and $569 for the years ended October 31, 2005, 2004 and 2003,respectively.  The balance sheet reflectsaccumulated amortization of $3,409, and $2,795 as of October 31, 2005, and2004, respectively.

 

***Net Service Revenue -***Service revenues are principally generated from clinical laboratory testingservices including chemical diagnostic tests such as blood and urine analysis,among others.  Net service revenues arerecognized at the time the testing services are performed and are reported atthe 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.  The Company has historically not provided anysignificant amount of charity care.Net service revenues on the statements ofoperations are as follows:

 
| ** **                                  | ** ** | **Years ended** | ** ** |
|---------------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **October 31,** | ** ** |
| ** **                                  | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                        |       |            |       |   |   |   |   |
| Gross Revenues                              |       | $               | 430,162    |   | $ | 341,180 |   | $ | 269,676 |   |
|                                        |       |            |       |   |   |   |   |
| Contractual Adjustments and Discounts:      |       |            |       |   |   |   |   |
| Medicare/Medicaid Portion                   |       | 113,650         |       | 92,753 |   | 78,148 |   |
| Other                                       |       | 152,616         |       | 112,243 |   | 82,494 |   |
| Total Contractual Adjustments and Discounts |       | 266,266         |       | 204,996 |   | 160,642 |   |
|                                        |       |            |       |   |   |   |   |
| ***Net Revenues***                          |       | $               | 163,896    |   | $ | 136,184 |   | $ | 109,034 |   |

 

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***Contractual Creditsand Provision for Doubtful Accounts -*** An allowancefor contractual credits is determined based upon a review of the reimbursementpolicies and subsequent collections for the different types of payors.  An allowance for doubtful accounts isdetermined based upon a percentage of total receivables.  The aggregate allowance, which is shown netagainst accounts receivable, was $48,920 and $38,102 as of October 31, 2005and 2004, respectively.

 

As of October 31, 2005 and 2004, accounts receivable is reportednet of an allowance for doubtful accounts which is comprised of the followingitems:

 
| ** **                     | ** ** | **October 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Contractual  Credits/Discounts |       | $                    | 40,945     |   | $ | 31,067 |   |
| Doubtful  Accounts             |       | 7,975                |       | 7,035 |   |
|                           |       |                 |       |   |   |
| ***Total Allowance***          |       | $                    | 48,920     |   | $ | 38,102 |   |

 

***Deferred IncomeTaxes -*** Deferred income tax assets and liabilitiesare computed annually for differences between the financial statement and taxbases of assets and liabilities that will result in taxable or deductibleamounts in the future based on enacted tax laws and rates applicable to theperiods in which the differences are expected to affect taxable income.

 

Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.

 

***Earnings Per Share -***Basic earnings per share [“EPS”] reflects the amount of income [loss]attributable to each share of common stock based on average common sharesoutstanding during the period.  DilutedEPS reflects Basic EPS while giving effect to all potential dilutive commonshares that were outstanding during the period, such as common shares thatcould result from the exercise or conversion of securities into commonstock.  The computation of Diluted EPS iscalculated by using the treasury stock method, which assumes that any proceedsobtained from the exercise of such dilutive securities would be used topurchase common stock at the average market price of the common stock duringthe period.  This reduces the grossnumber of dilutive shares by the number of shares purchasable from the proceedsof the securities assumed to be exercised. Securities whose conversion would have an anti-dilutive effect on EPSare not assumed converted.  Securitiesthat could potentially dilute earnings in the future are disclosed in Note 10.

 

***Use of Estimates -***The preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

***Recoverability andImpairment of Intangible Assets and Other Long-Lived Assets -***Effective November 1, 2002, the Company evaluates the possible impairmentof its long-lived assets, including intangible assets (which are amortizedpursuant to the provisions of SFAS 142), under SFAS No. 144, “Accountingfor Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). The Companyreviews the recoverability of its long-lived assets when events or changes incircumstances occur that indicate that the carrying value of the asset may notbe recoverable.  Evaluation of possibleimpairment is based on the Company’s ability to recover the asset from theexpected future pretax cash flows (undiscounted and without interest charges)of the related operations. If the expected undiscounted pretax cash flows areless than the carrying amount of such asset, an impairment loss is recognizedfor the difference between the estimated fair value and carrying amount of theasset. The Company’s adoption of SFAS 144 did not result in any impairment lossbeing recorded.  No impairment loss wasrecognized in the fiscal years ended October 31, 2005, 2004 and 2003.

 

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***Stock Options Issuedto Employees -*** The Company adopted Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation,” for financial note disclosure purposes and continues to applythe intrinsic value method of Accounting Principles Board [“APB”] Opinion No. 25,“Accounting for Stock Issued to Employees,” for financial reporting purposes.

 

***Advertising Costs -***Advertisingcosts are expensed when incurred. Advertising costs amounted to approximately $213, $272 and $188 for theyears ended October 31, 2005, 2004 and 2003, respectively.

 

***Reclassification -***Certain prior year amounts have been reclassified to conform with the currentyear presentation.

 

***[3] Property andEquipment -*** Property and equipment - at cost issummarized as follows:

 
| ** **                                     | ** ** | **October 31,** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Medical Equipment                              |       | $                    | 7,467      |   | $ | 5,980 |   |
| Leasehold Improvements                         |       | 3,728                |       | 3,313 |   |
| Furniture, Fixtures and Office Equipment       |       | 3,815                |       | 1,873 |   |
| Automobiles                                    |       | 3,693                |       | 2,335 |   |
|                                           |       |                 |       |   |   |
| Totals                                         |       | 18,703               |       | 13,501 |   |
| Less: Accumulated Depreciation                 |       | 6,776                |       | 4,225 |   |
|                                           |       |                 |       |   |   |
| ***Totals - Net of Accumulated Depreciation*** |       | $                    | 11,927     |   | $ | 9,276 |   |

 

***[4] IntangibleAssets***

 

Intangible assets are summarized as follows:

 

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 |   |

 

October 31, 2004:

 
| ** **                     | ** ** | **Weighted-Average**    | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net of Accumulated** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| **Intangible  Asset**          | ** ** | **Amortization Period** | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Amortization**       | ** ** |
|                           |       |                    |       |       |       |             |       |                   |       |
| Software  Costs                |       | 5                       |       | $          | 1,535      |             | $          | 943                    |       | $ | 592 |   |
| Customer  Lists                |       | 20                      |       | 1,697      |       | 860              |       | 837                    |       |
| Covenants  Not-to-Compete      |       | 5                       |       | 5          |       | 1                |       | 4                      |       |
| Employment  Agreement          |       | 7                       |       | 825        |       | 661              |       | 164                    |       |
| Costs  Related to Acquisitions |       | 19                      |       | 1,015      |       | 260              |       | 755                    |       |
| Patent                         |       | 17                      |       | 156        |       | 70               |       | 86                     |       |
|                           |       |                    |       |       |       |             |       |                   |       |
| ***Totals***                   |       | 11                      |       | $          | 5,233      |             | $          | 2,795                  |       | $ | 2,438 |   |

 

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The estimated amortization expense related to intangible assets foreach of the five succeeding fiscal years and thereafter as of October 31,2005 is as follows:

 
| **Year Ended**       | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| **October 31,** | ** ** | ** ** | ** ** |
|                 |       |       |       |
| 2006                 |       | $          | 344        |       |
| 2007                 |       | 300        |       |
| 2008                 |       | 291        |       |
| 2009                 |       | 271        |       |
| 2010                 |       | 250        |       |
| Thereafter           |       | 1,623      |       |
|                 |       |       |       |
| ***Total***          |       | $          | 3,079      |       |

 

***[5] Revolving NotePayable - Bank***

 

In October 2004, the Company entered into an amended revolvingnote payable loan agreement with a bank. The maximum amount of the credit line available to the Company is thelesser of (i) $30,000 or (ii) 50% of the Company’s qualified accountsreceivable [as defined in the agreement]. The amended loan agreement providesfor an “acquisition subline” of up to $10,000 which can be repaid in 36 equalmonthly installments. The amendment to the Loan and Security Agreement providesfor interest on advances to be subject to the bank’s prime rate or Eurodollarrate of interest plus, in certain instances, an additional interestpercentage.  The additional interestpercentage charges on Eurodollar borrowings range from 1% to 4% and aredetermined based upon certain financial ratios achieved by the Company.  At October 31, 2005, the Company hadelected to have $10,000 of the total advances outstanding converted into aEurodollar rate loan with a variable interest rate of 5.02% at October 31,2005.  The remaining outstanding advancesduring that period were subject to the bank’s prime rate of interest.  At October 31, 2005, advances of $888were subject to interest at the prime rate. As of October 31, 2005 and 2004, the bank’s prime rate of interestwas 6.75% and 4.75%, 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 forannual periods by mutual consent, thereafter. The terms of this agreement contain, among other provisions,requirements for maintaining defined levels of capital expenditures, fixed chargecoverage, insurance coverage and the prohibition of the payment by the Companyof cash dividends. As of October 31, 2005, the Company utilized $13,434(including $2,546 utilized under the “acquisition subline”) and had $17,385 ofavailable unused credit under this revolving note payable loan agreement.

 

The weighted average interest rate on short-term borrowings outstandingas of October 31, 2005 and 2004 was approximately 5.84% and 3.92%,respectively.

 

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

 

In connection with the CGI acquisition, the Company borrowed $2,546under the “acquisition subline” available under the revolving note payableagreement (See notes 5 and 18). Principal and interest are due in 26 equalinstallments of $113 through August 2006. At October 31, 2005 theCompany had a principal balance of $1,061 outstanding. Interest is charged atthe bank’s prime rate % per annum. At October 31, 2005 the principalbalance outstanding under the borrowing was subject to interest at 6.75% perannum.

 

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Principal repayment for each of the five succeeding fiscal years andthereafter as of October 31, 2005 is as follows:

 
| **Year Ended**       | ** ** | ** ** |
|----------------------|------------|------------|
| **October 31,** | ** ** | ** ** | ** ** |
| 2006                 |       | $          | 1,061 |   |
|                      |            |            |  |  |

 

***[7] Related PartyTransactions***

 

In March 2001, the Company entered into a joint marketingagreement [the “agreement”] with General Prescription Programs, Inc. [“GPP”].  Provisions of the agreement provide that GPPwill assist the Company in marketing its PSIMedica programs to variouscustomers.  In addition, GPP will provideongoing data and data support to the PSIMedica program development.  The term of the agreement is for a five yearperiod commencing on October 2001. In exchange for obtaining GPP marketing and technical services, theCompany issued GPP 220,000 shares of its common stock with a fair value ofapproximately $248 which is being amortized over the five year term of theagreement. For the years ended October 31, 2005, 2004 and 2003, theCompany recorded an expense of $50, $50 and $50, respectively.  The Chairman of the Board of GPP is thebrother of the Company’s Chief Executive Officer.

 

See Note 9A as to the conversion by the Company’s Chief ExecutiveOfficer and his wife of shares of Series A Senior preferred Stock duringfiscal 2004.

 

***[8] Income Taxes***

*** ***

The reconciliation of income tax from continuing operations computed atthe U.S. federal statutory tax rate to the Company’s effective income tax rateis as follows:

 
| ** **                                                            | ** ** | **October 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| U.S. Federal Statutory Rate                                           |       | 34                   | %          | 34.0 | % | 34.0 | % |
| State and Local Income Taxes, Net of U.S. Federal  Income Tax Benefit |       | 7.0                  | %          | 6.0 | % | 6.0 | % |
| Permanent Differences and Other                                       |       | (7.0                 | )%         | (10.0 | )% | 13 | % |
| Utilization of Net Operating Loss  Carryforwards                      |       | —               | %          | — | % | (18.0 | )% |
| Change in Valuation Allowance                                         |       | —               | %          | — | % | (11.0 | )% |
|                                                                  |       |                 |       |   |   |   |   |
| ***Actual Rate***                                                |       | 34                   | %          | 30.0 | % | 24.0 | % |

 

The provision [benefit] for income taxes shown in the consolidatedstatements of operations consist of the following:

 
| ** **                         | ** ** | **October 31,** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:                           |       |                 |       |   |   |   |   |
| Federal                            |       | $                    | 4,577      |   | $ | 3,562 |   | $ | 543 |   |
| State and Local                    |       | 1,233                |       | 1,426 |   | 582 |   |
|                               |       |                 |       |   |   |   |   |
| Deferred:                          |       |                 |       |   |   |   |   |
| Federal                            |       | (1,530               | )          | (1,120 | ) | 798 |   |
| State and Local                    |       | (412                 | )          | (198 | ) | 141 |   |
|                               |       |                 |       |   |   |   |   |
| *Total Provision for Income Taxes* |       | $                    | 3,868      |   | $ | 3,670 |   | $ | 2,064 |   |

 

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At October 31, 2005 and 2004, the Company had a net deferred taxasset [liability] of approximately $2,628 and $687, respectively.  The deferred taxes primarily relate to timingdifferences associated with the deductibility of depreciation, bad debts andcertain accrued expenses and deferred costs. For fiscal year ended in 2005 andin 2004, the Company had no net operating loss carryforwards available toreduce current year taxable income. For fiscal 2003, the Company utilizedapproximately $4,378 (federal) and $2,682 (state) of net operating losscarryforwards to reduce current year taxable income.

 
| ** **                                      | ** ** | **October 31,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2005**             | ** ** | **2004** | ** ** |
|                                            |       |                 |       |   |   |
| Deferred Tax Asset:                             |       |                 |       |   |   |
| Bad Debt Allowance                              |       | $                    | 3,190      |   | $ | 2,814 |   |
| Accrued Expenses                                |       | 502                  |       | 329 |   |
|                                            |       |                 |       |   |   |
|                                            |       | 3,692                |       | 3,143 |   |
| Deferred Tax Liability:                         |       |                 |       |   |   |
| Deferred Costs                                  |       | (1,050               | )          | (2,114 | ) |
| Property and Equipment                          |       | (14                  | )          | (342 | ) |
|                                            |       |                 |       |   |   |
|                                            |       | (1,064               | )     | (2,456 | ) |
|                                            |       |                 |       |   |   |
| ***Deferred Tax Asset [Liability] – Net*** |       | $                    | 2,628      |   | $ | 687 |   |
| *** ***                                    |       |                 |       |   |   |
| ***As Follows:***                               |       |                 |       |   |   |
|                                            |       |                 |       |   |   |
|   Net  Current Deferred Tax Asset          |       | $                    | 3,606      |   | $ | 1,029 |   |
|   Net  Long-Term Deferred Tax Liability    |       | (978                 | )          | (342 | ) |
|                                            |       |                 |       |   |   |
| **Deferred Tax Asset [Liability] - Net**        |       | $                    | 2,628      |   | $ | 687 |   |

 

The companyhas recorded a deferred tax asset of $3,606 reflecting the benefit ofapproximately $8,000 in allowance for bad debts and $1,200 in certain accruedexpenses in future periods as well as generating sufficient taxable income inorder to utilize these deferred assets. Although realization is not assured, managementbelieves it is more likely than not that all of the deferred tax asset will berealized. The amount of the deferred tax asset considered realizable, however,could be reduced in the near term if estimates of future taxable income orchanges in the accrued expenses during the future periods are reduced.

 

***[9] CapitalTransactions***

 

***[A] Preferred Stockand Common Stock -*** The Company is authorized toissue an aggregate of 1,666,667 shares of preferred stock, $.10 par value.  At October 31, 2003, there were 604,078shares of Series A Senior preferred stock issued and outstanding.  The Series A Senior preferred stock isconvertible into an aggregate 604,078 shares of common stock on or before May 1,2007 at a conversion price of $.75 per share and has the same voting rights[one vote per share], dividend rights and liquidation rights as each share ofcommon stock. In July 2004, the Series A Senior preferred stockshareholders (the Company’s Chief Executive Officer and his wife) converted604,078 shares of preferred stock into an equal number of common shares of theCompany. The Company received approximately $453 in proceeds upon conversion.

 

In July 2003, the stockholders approved an increase in the numberof authorized shares of common stock from 18,333,333 shares to 35,000,000shares.

 

Holders of the Company’s Common Stock are entitled to one vote pershare on matters submitted for shareholder vote.  Holders are also entitled to receivedividends ratably, if declared.  In theevent of dissolution or liquidation, holders are entitled to share ratably inall assets remaining after payment of liabilities.

 

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On March 31, 1998, the Company’s Board of Directors adopted aShareholder Rights Plan and declared a dividend distribution of one Right foreach outstanding share of Common Stock and each outstanding share of Series ASenior Preferred Stock.  Each Rightentitles the registered holder to purchase one one-ten-thousandth of a share ofSeries A Junior Participating Preferred Stock [the “Junior Preferred Stock”]from the Company at a price of $4.00. Because of the nature of the dividend, liquidation and voting rights ofthe Junior Preferred Stock, the value of each one-ten-thousandth of a share ofJunior Preferred Stock is intended to approximate the value of one share ofCommon Stock.  Junior Preferred Stockpurchasable upon exercise of the Rights will not be redeemable.  Each outstanding share of Junior PreferredStock will be entitled to a minimum preferential quarterly dividend of $.05 pershare and will be entitled to an aggregate dividend of 10,000 times thedividend declared per share of Common Stock. In the event of liquidation, the holders of the Junior Preferred Stockwill be entitled to a minimum preferential liquidation payment of $10 per shareand will be entitled to an aggregate payment of 10,000 times the payment madeper share of Common Stock.  Each share ofJunior Preferred Stock will have 10,000 votes, voting together with the CommonStock.

 

In the event of any merger, consolidation or other transaction in whichthe Common Stock is exchanged, each share of Junior Preferred Stock will beentitled to receive 10,000 times the amount received per share of CommonStock.  The Rights are protected by customaryanti-dilution provisions.  The Rights arenot exercisable unless any one of certain triggering events occur including theacquisition by an individual or entity and their associates of 25% or more ofthe outstanding shares of Common Stock. The Shareholder Rights Plan is designed to protect the Company and itsshareholders from coercive, unfair and inadequate takeover bids andpractices.  The Plan is designed tostrengthen the Board of Directors’ ability to deter a person or group fromattempting to gain control of the Company without offering a fair price andequal treatment to all shareholders.

 

The Company implemented a stock repurchaseprogram to repurchase up to 500,000 shares of its common stock in theover-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 or dealer on that day (2) any suchrepurchases on a given day shall not be the opening transaction recorded to theconsolidated transaction reporting system and no repurchases shall be madeduring the last half hour before the scheduled close of trading (3) thehighest price paid to repurchase any shares shall not exceed the higher of thehighest independent bid or the last independent reported sale price and (4) themaximum number of shares that can be repurchased on a given day (excludingblock repurchases) shall not exceed 25% of the average daily trading volumereported for the four calendar weeks preceding the week in which the repurchaseis made. Common Stock acquired by the Company under the repurchase program areto be retired and canceled. In fiscal 2004 and 2003, the Company repurchased30,000 and 229,300 shares of the Company’s common stock at a cost of $350 and$1,070, respectively.

 

On June 1, 2005, the Board of Directors authorized the repurchaseof up to 500,000 shares of the Company’s common stock over the period of endingOctober 31, 2007.  As of October 31, 2005, no shares wererepurchased under this plan.

 

***[B] EquityTransactions for Services -*** For the year ended October 31,2003, the Company issued 10,000 shares of common stock for employment serviceshaving a value of $15.  In fiscal yearended in 2005 and 2004, no shares of the Company’s common stock were issued foremployment or consulting services [See Note 11 for common stock options issuedfor employee and consulting services].

 

***[10] Income PerShare***

 

The computation of basic and diluted net income per common share was asfollows [in thousands, except per share data]:

 

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| ** **                                          | ** ** | **For the years ended October 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                |       |                                     |       |   |   |   |   |
| Income Available to Common Stockholders             |       | $                                        | 7,621      |   | $ | 8,516 |   | $ | 6,540 |   |
| Weighted Average Common Shares Outstanding          |       | 12,775                                   |       | 12,078 |   | 11,489 |   |
|                                                |       |                                     |       |   |   |   |   |
| Effect of Dilutive Securities:                      |       |                                     |       |   |   |   |   |
| Convertible Preferred Stock                         |       | —                                   |       | — |   | 542 |   |
| Warrants/Options                                    |       | 374                                      |       | 637 |   | 767 |   |
|                                                |       |                                     |       |   |   |   |   |
| Weighted Average Diluted Common Shares  Outstanding |       | 13,149                                   |       | 12,715 |   | 12,798 |   |
|                                                |       |                                     |       |   |   |   |   |
| Net Income Per Share - Basic                        |       | $                                        | .60        |   | $ | .71 |   | $ | .57 |   |
| Net Income Per Share - Diluted                      |       | $                                        | .58        |   | $ | .67 |   | $ | .51 |   |

 

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. For the year ended October 31, 2003,outstanding options to purchase 177,000 shares of Company common stock atexercise prices ranging from $7.79 to $11.67 per share were not included in thecomputation of diluted EPS.  For the yearended.  The exercise price of theseoptions and warrants was greater than the average market price of the commonshares and they are considered anti-dilutive. These securities could potentially dilute EPS in the future.

 

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

 

***[A] EmployeeIncentive Stock Options -*** In June 2003, theBoard of Directors adopted, and in July 2003, the stockholders approved,the 2003 Employee Incentive Stock Option Plan [the “2003 Plan”].  The 2003 Plan authorizes the grant ofincentive stock options to purchase up to a maximum aggregate 800,000 shares ofCompany common stock. The 2003 Plan provides that the exercise price of anoption granted there under shall not be less than the fair market value of theCommon Stock on the date the option is granted. However, in the event an option is granted under the 2003 Plan to aholder of 10% or more of the Company’s outstanding Common Stock, the exerciseprice 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, 2005, 2004 and 2003,375,458, 104,000 and -0- options were granted under the Plan, respectively. Atotal of 23,500, 2,000 and -0- incentive stock options issued under the 2003Plan were exercised in fiscal year ended in October 31, 2005, 2004 and2003, respectively. A total of 39,500 options were cancelled in fiscal yearended October 31, 2005.

 

61

----

 

In August 2000, the Company adopted, and on December 15,2000, the stockholders approved, the 2000 Employee Incentive Stock Option Plan[“2000 Plan”].  The 2000 Plan providesfor the granting of incentive stock options to purchase an aggregate of 800,000shares of the Company’s common stock at a price not less than 100% of the fairmarket value per 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 theCompany realizing targeted net revenue levels. In fiscal year ended October 31, 2005, 2004 and 2003 - 2,000,50,000 and 281,000 options were granted under the Plan, respectively. A totalof 54,094, 215,088 and 15,000 incentive stock options issued under the 2000Plan were exercised in fiscal year ended in October 31, 2005, 2004 and2003, respectively. A total of 12,218, -0-, 57,000 options were cancelled infiscal year ended October 31, 2005, 2004 and 2003, respectively.  Options issued under the 2000 Plan must begranted before the August 2010 termination date.

 

In November 1989, the shareholders approved and the Companyadopted the 1989 Employee Stock Option Plan [“1989 Plan”] which provides forthe granting of options to acquire 666,667 shares of common stock.  Under the terms of this stock option plan,incentive stock options to purchase shares of the Company’s common stock aregranted at a price not less than the fair market value of the common stock atthe date of grant.  A total of 13,334,205,000 and 5,000 incentive stock options issued under the 1989 Plan wereexercised in fiscal year ended October 31, 2005, 2004 and 2003respectively.  Additionally, 33,334, -0-,11,667 options were canceled in fiscal year ended in October 2005, 2004and 2003 respectively.  All options underthe 1989 Plan were required to be granted before the Plan’s July 1999’stermination date so that no further options can be granted under the 1989 Plan.

 

These stock options are exercisable up to tenyears from the date of grant.  Thefollowing is a summary of Employee Incentive Stock Option Plan transactions:

 
| ** **                                                      | ** ** | **2003 Plan**              | ** ** |
|-----------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | **Shares  Under  Options** | ** ** | **Weighted  Average  Exercise Price  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 |   |
|                                                            |       |                       |       |   |   |
| **Eligible  for Exercise at at October 31, 2005**          |       | 398                        |       | $ | 16.64 |   |

 

62

----

 
| ** **                                                          | ** ** | **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, 2002                                |       | 496                 |       | $                     | 4.27       |   | 274 |   | $ | .72 |   |
|                                                                |       |                |       |                  |       |   |   |   |   |
| Granted                                                             |       | 281                 |       | 6.34                  |       | — |   | — |   |
| Cancelled/Expired                                                   |       | (57                 | )          | 7.16                  |       | (11 | ) | .72 |   |
| Exercised                                                           |       | (15                 | )          | 1.13                  |       | (5 | ) | .72 |   |
|                                                                |       |                |       |                  |       |   |   |   |   |
| 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  and Eligible for Exercise at October 31, 2005** |       | 476                 |       | $                     | 5.40       |   | 6 |   | $ | .72 |   |

 

 
| ** **                 | ** ** | **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]** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **               | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $.71875 Per Share          |       | 6                        |       | 1.58                     |       | $ | .72 |   | 6 |   | $ | .72 |   |
| $1.688 Per Share           |       | 215                      |       | 4.83                     |       | $ | 1.69 |   | 215 |   | $ | 1.69 |   |
| $4.21 to $5.70 Per Share   |       | 31                       |       | 7.58                     |       | $ | 5.53 |   | 31 |   | $ | 5.53 |   |
| $5.94 to $6.82 Per Share   |       | 99                       |       | 6.52                     |       | $ | 6.79 |   | 99 |   | $ | 6.79 |   |
| $7.19 to $8.40 Per Share   |       | 81                       |       | 7.50                     |       | $ | 7.79 |   | 81 |   | $ | 7.79 |   |
| $12.09 to $14.50 per share |       | 98                       |       | 8.74                     |       | $ | 13.39 |   | 82 |   | $ | 13.39 |   |
| $14.51 to $15.61 per share |       | 140                      |       | 8.85                     |       | $ | 15.09 |   | 140 |   | $ | 15.09 |   |
| $17.75 to $21.46 per share |       | 226                      |       | 9.92                     |       | $ | 18.34 |   | 226 |   | $ | 18.34 |   |
|                       |       |                     |       |                     |       |   |   |   |   |   |   |
|                       |       | 896                      |       |                     |       |   |   | 880 |   |   |   |

 

63

----

 

The weighted average grant date fair value ofincentive stock options under the 2003 plan granted during the year ended October 31,2005, 2004 and 2003 was $16.50, $14.24, and $-0- per share, respectively.  These options have weighted average remainingcontractual lives of approximately 9 years.

 

The weighted average grant date fair value ofincentive stock options under the 2000 plan granted during the year ended October 31,2005, 2004 and 2003 was $5.72, $14.68, and $6.34 per share, respectively.  These options have weighted average remainingcontractual lives of approximately 5years.

 

The Company accounts for these stock-based compensation awards toemployees under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25 “Accounting for Stock Issued to Employees.”  No compensation cost was recognized forstock-based employee compensation awards for the years ended October 31,2005, 2004 and 2003.

 

***[B] Non-IncentiveStock Options and Warrants -*** Non-incentive stockoptions and warrants may be granted to employees or non-employees at fairmarket value or at a price less than fair market value of the common stock atthe date of grant.  The following is asummary of transactions:

 
| ** **                                                      | ** ** | ** **          | ** ** | **Weighted**        | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                      | ** ** | **Shares  Under**   | ** ** | **Average**         | ** ** |
| ** **                                                      | ** ** | **Options**         | ** ** | **Exercise  Price** | ** ** |
| ** **                                                      | ** ** | **and  Warrants**   | ** ** | **Per  Share**      | ** ** |
| ** **                                                      | ** ** | **[In  Thousands]** | ** ** | ** **          | ** ** |
| ** **                                                      | ** ** | ** **          | ** ** | ** **          | ** ** |
| Outstanding and Eligible for Exercise at October 31,  2002 |       | 558                 |       | $                   | 2.21       |   |
|                                                            |       |                |       |                |       |
| Granted                                                         |       | 70                  |       | 7.60                |       |
| Cancelled/Expired                                               |       | (32                 | )          | 1.77                |       |
| Exercised                                                       |       | (62                 | )          | 1.69                |       |
| 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       |   |
|                                                            |       |                |       |                |       |
| Eligible for Exercise at October 31,  2005                 |       | 89                  |       | $                   | 7.38       |   |

 

In fiscal 2004, the Company granted 15,000options to purchase common stock to an advisory board member with an exerciseprice of $13.70. A total of 5,000 options vested immediately with the remaining10,000 to vest over a two year period. The fair value of $134 has been recordedas deferred compensation and is being expensed over the term of the relatedservice agreement. During fiscal 2003, the Company granted 70,000 options topurchase common stock to members of a newly formed scientific advisoryboard.  The exercise prices of theseoptions ranged from $6.98 to $7.94 per share. The fair value of each optiongranted was estimated on the date of grant using the Black-Scholes optionpricing model.  The fair value of thoseoptions granted in fiscal 2003 was approximately $291 and has been accountedfor as deferred compensation to be expensed over the terms of the agreements.

 

64

----

 

The Company accounts for these options under theintrinsic value method in accordance with Accounting Principles Board Opinion No. 25“Accounting for Stock Issued to Employees.” No compensation cost was recognizedagainst income for employee non-incentive stock options and warrants for theyears ended October 31, 2005, 2004 and 2003.

 
| ** **               | ** ** | **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]** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $3.14 Per Share          |       | 16                                    |       | 0.67                                  |       | $ | 3.14 |   | 16 |   | $ | 3.14 |   |
| $6.80 Per Share          |       | 20                                    |       | 1.25                                  |       | $ | 6.80 |   | 20 |   | $ | 6.80 |   |
| $6.98 to $7.94 Per Share |       | 43                                    |       | 1.18                                  |       | $ | 7.77 |   | 43 |   | $ | 7.77 |   |
| $13.70 Per Share         |       | 15                                    |       | 2.17                                  |       | $ | 13.70 |   | 10 |   | $ | 13.70 |   |
|                     |       | 94                                    |       |                                  |       |   |   | 89 |   |   |   |

 

These options have weighted average remainingcontractual lives of approximately 1 year. The weighted average grant date fair value of non-incentive stockoptions granted during the years ended October 31, 2005, 2004 and 2003 were$-0-, $8.94, and $4.16 per share, respectively.

 

***[A] and [B] ProForma -*** The Company issued employee stock optionsthrough stock-based employee compensation plans and also issued employeenon-incentive stock options.  The Companyaccounts for these options under the measurement principles of APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income, as all options granted under these plans as well asemployee non-incentive stock options have an exercise price equal to the fairmarket value of the underlying common stock on the date of grant.  The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123 to stock-based employeecompensation.

 
| ** **                                                                                                   | ** ** | **Year  ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income [Loss]:                                                                                           |       |                             |       |   |   |   |   |   |   |   |
| As Reported                                                                                                  |       | $                                | 7,621      |   | $ | 8,516 |   | $ | 6,540 |   |
|                                                                                                         |       |                             |       |   |   |   |   |
| Deduct: Stock Based Employee Compensation  Expense Determined Under the Fair Value Based Method - Net of Tax |       | (1,684                           | )          | (1,310 | ) | (1,453 | ) |

 

65

----

 
| Pro Forma - Net Income      |   | $      | 5,937  |   | $      | 7,206  |   | $ | 5,087 |   |
|-----------------------------|--------|--------|--------|--------|--------|--------|--------|---|-------|--------|
|                        |   |   |   |   |   |   |   |
| Basic Earnings Per Share:   |   |   |   |   |   |   |   |
| As Reported                 |   | $      | .60    |   | $      | .71    |   | $ | .57   |   |
| Pro Forma                   |   | $      | .46    |   | $      | .60    |   | $ | .44   |   |
|                        |   |   |   |   |   |   |   |
| Diluted Earnings Per Share: |   |   |   |   |   |   |   |
| As Reported                 |   | $      | .58    |   | $      | .67    |   | $ | .51   |   |
| Pro Forma                   |   | $      | .45    |   | $      | .57    |   | $ | .40   |   |
|                             |        |        |        |        |        |        |        |   |       |        |  |

 

The fair value used in the pro forma data wasestimated by using the Black-Scholes option-pricing model which took intoaccount as of the grant date, the exercise price and the expected life of theoption, the current price of the underlying stock and its expected volatility,expected dividends on the stock and the risk-free interest rate for theexpected term of the option.  Thefollowing is the average of the data used for 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          |       |
| October 31, 2003 |       | 5.0               | %          | 7 Years           |       | 87.91          | %          | None          |       |

 

***[12] EmploymentContracts and Consulting Agreements***

 

During fiscal 2003, the Company established aScientific Advisory Board [the “Board”] and entered into consulting agreementswith members of the Board.  The terms ofthe agreements range from three years and two months to four years and threemonths.

 

The Company has also entered into various employmentcontracts and consulting agreements for periods ranging from one to sevenyears. In January 2004, the Employment Agreement of the Chief FinancialOfficer/Vice President and Chief Operating Officer/Executive Vice Presidentwere extended for two additional years beyond their October 31, 2004termination date. Minimum annual compensation under these extended agreementsis equal to Fiscal 2002 Annual Compensation, subject to increases in theConsumer Price Index as well as to stage increases as defined in the Agreement.Subsequent to October 31, 2004, the Company entered into a new EmploymentAgreement with its Chief Executive Officer, President which expires on October 31,2007. At October 31, 2005, the approximate aggregate minimum commitmentunder these employment contracts and agreements, excluding commissions orconsumer price index increases, is as follows:

 
| **October 31,** | ** ** | **Employees and Consultants** | ** ** | **Advisory Board** | ** ** |
|----------------------|------------|-------------------------------|------------|--------------------|------------|
|                 |       |                          |       |               |       |
| 2006                 |       | $                             | 2,316      |               | $          | 70 |   |
| 2007                 |       | 1,880                         |       | 25                 |       |
| 2008                 |       | 1,100                         |       | —             |       |
| 2009                 |       | 1,100                         |       | —             |       |
| 2010                 |       | 750                           |       | —             |       |
| Thereafter           |       | 750                           |       | —             |       |
| ***Total***          |       | $                             | 7,896      |               | $          | 95 |   |

 

66

----

 

The Company entered into an employment agreementwhich included a provision for a $250 bonus to be paid over a seven-yearperiod.  At October 31, 2004, theCompany had a long-term liability of $25 and $50 current liability related tothe remaining bonus amount due the employee. The balance due at October 31, 2005 will be paid as follows:

 
| 2006 |   | $ | 25 |   |
|------|--------|---|----|--------|

 

Some of these agreements provide bonuses andcommissions based on a percentage of collected revenues ranging from 1% to 10%on accounts referred by or serviced by the employee or consultant.

 

In addition to the above, the Company hasentered into sixteen at – will employment and consulting agreements whichtogether with prior at – will agreements provide for annual aggregate minimumcommitments of approximately $9,415 which have no termination dates.

 

In accordance with Section 402 of theSarbanes-Oxley Act of 2002 [the “Act”], companies are prohibited from makingfuture loans to officers and directors and also prohibited are any extension ofcredit after the date of the acts enactment. While the Company had entered intoand funded “split-dollar” life insurance agreements of several officer/directorsof the Company before passage of the Act, future premiums could be deemed anextension of credit.  Until furtherclarification of the issue, the Company suspended paying any additional futurepremiums. In January 2004, the Company adopted a new “split-dollar” lifeinsurance program under which the Company will be the sole owner of thepolicies (including the cash values of the policies) and will pay the premiumson the policies. Prior to termination of his employment, the executive willhave the right to name the beneficiary of the death benefit but will have noaccess to any policy cash value. The new “split-dollar” insurance program wasadopted in consideration of the executives transferring back the ownership ofthe insurance policies under the original “split-dollar” program of the Companyand their reimbursement to the Company of those amounts, if any, by which thepremiums paid, exceed the net cash surrender values of the policies.

 

***[13] CapitalizedLease Obligations***

 

The Company leases various assets under capital leases expiring infiscal 2010 as follows:

 
| ** **                               | ** ** | **October 31,** | ** **  |
|------------------------------------------|------------|----------------------|-------------|
| ** **                               | ** ** | **2005**             | ** **  | **2004** | ** ** |
| ** **                               | ** ** | ** **           | ** **  | ** ** | ** ** |
| Medical Equipment                        |       | $                    | 4,061       |   | $ | 3,786 |   |
| Furniture, Fixtures and Office Equipment |       | 1,425                |        | 1,315 |   |
| Automobiles                              |       | 2,316                |        | 2,292 |   |
|                                     |       |                 |        |   |   |
| Totals                                   |       | 7,802                |        | 7,393 |   |
| Less: Accumulated Depreciation           |       | 2,420                |        | 1,998 |   |
|                                     |       |                 |        |   |   |
| ***Net***                                |       | $                    |  5,382 |   | $ |  5,395 |   |

 

67

----

 

Depreciation expense on assets under capitalleases was approximately $422, $364, and $325 for the years ended October 31,2005, 2004 and 2003, respectively.

 

Aggregate future minimum rentals under capital leases are:

 
| **Years  ended**                               | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| **October 31,**                           | ** ** | ** ** | ** ** |
| 2006                                           |       | 2,504      |       |
| 2007                                           |       | 2,092      |       |
| 2008                                           |       | 1,302      |       |
| 2009                                           |       | 676        |       |
| 2010                                           |       | 249        |       |
| Thereafter                                     |       | —     |       |
| Total                                          |       | 6,823      |       |
| Less: Interest                                 |       | 818        |       |
| ***Present Value of Minimum  Lease Payments*** |       | $          | 6,005      |   |
|                                                |            |            |            |  |

 

***[14] Commitments andContingencies***

 

The Company leases various office and laboratory facilities andequipment under operating leases expiring from 2005 to 2010.  Several of these leases contain renewaloptions for one to five year periods.

 

Total expense for property and equipment rental for the years ended October 31,2005, 2004 and 2003 was $3,871 $3,709 and $3,180, respectively.  There were no contingent rental amounts duethrough October 31, 2005.

 

Aggregate future minimum rental payments on noncancelable operatingleases [exclusive of several month to month leases] are as follows:

 
| **October 31,** | ** ** | **Property** | ** **  | **Equipment** | ** ** |
|----------------------|------------|--------------|-------------|---------------|------------|
| ** **           | ** ** | ** **   | ** **  | ** **    | ** ** |
| 2006                 |       | $            | 1,131       |          | $          | 192 |   |
| 2007                 |       | 981          |        | 141           |       |
| 2008                 |       | 902          |        | 46            |       |
| 2009                 |       | 886          |        | 13            |       |
| 2010                 |       | 148          |        | 1             |       |
| Thereafter           |       | —       |        | —        |       |
|                 |       |         |        |          |       |
| ***Totals***         |       | $            |  4,048 |          | $          |  393 |   |

 

The Company has entered into several purchase agreements for reagentsupplies through March 2010.

 

68

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Minimum purchase commitments as of October 31, 2005 are asfollows:

 
| 2006       |   | 7,594  |   |
|------------|--------|--------|--------|
| 2007       |   | 4,837  |   |
| 2008       |   | 2,631  |   |
| 2009       |   | 2,203  |   |
| 2010       |   | 946    |   |
| Thereafter |   | — |   |
|       |   | $      | 18,211 |   |
|            |        |        |        |  |

 

Reagent supplies expense under purchaseagreements amount to $3,369, $1,777 and $673 for the years ended October 31,2005, 2004 and 2003, respectively.

 

In December 2001, one of the Company’swholly owned subsidiaries [CareEvolve] 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 theagreement, CareEvolve agreed to pay to each of RDC and Bio-Reference, 50% ofthe 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 2004such amendment was completed. The Company took a one-time charge ofapproximately $400 against fiscal 2004 earnings associated with additionalexpenses incurred as a result of the amendment. The joint venture wasterminated by mutual consent in the fourth quarter of fiscal 2005.

 

***[15] Litigation***

 

In the normal course of business, the Company isexposed to a number of asserted and unasserted potential claims.  In the opinion of management, the resolutionof these matters will not have a material adverse effect on the Company’sfinancial position or results of operations.

 

***[16] Insurance***

 

The Company maintains professional liability insurance of $3,000 in theaggregate, with a per occurrence limit of $1,000 .  In addition, the Company maintains excesscommercial insurance of $5,000 per occurrence and $5,000 in aggregate.  The Company believes, but cannot assure, thatits insurance coverage is adequate for its current business needs.  A determination of Company liability foruninsured or underinsured acts or omissions could have a material adverseaffect on the Company’s operations.

 

***[17] SignificantRisks and Uncertainties***

 

***[A] Concentrationsof Credit Risk - Cash -*** At October 31, 2005and 2004, the Company had approximately $2,048 and $1,885 , respectively, incash and certificate of deposit balances at financial institutions which werein excess of the federally insured limits.

 

69

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***[B] Concentration ofCredit Risk - Accounts Receivable -*** Credit riskwith respect to accounts receivable is generally diversified due to the largenumber of patients comprising the client base. The Company does have significant receivable balances with governmentpayors and various insurance carriers. Generally, the Company does not require collateral or other security tosupport customer receivables, however, the Company continually monitors andevaluates its client acceptance and collection procedures to minimize potentialcredit risks associated with its accounts receivable and establishes anallowance for uncollectible accounts and as a consequence, believes that itsaccounts receivable credit risk exposure beyond such allowance is not materialto the financial statements.

 

A number of proposals for legislation continue to be under discussionwhich could substantially reduce Medicare and Medicaid reimbursements toclinical laboratories.  Depending uponthe nature of regulatory action, and the content of legislation, the Companycould experience a significant decrease in revenues from Medicare and Medicaid,which could have a material adverse effect on the Company.  The Company is unable to predict, however,the extent to which such actions will be taken.

 

***[18] Acquisitions***

 

In October 2005, the Company acquired certain assets of PathcoMedical, P.C. a New York State professional corporation. (“PATHCO”) for $2,174including assumed liabilities not to exceed $160.  The Company retained the staff of thispractice and continue to operate at its premises in Poughkeepsie, NewYork.  In connection with theacquisition, the Company received a five year non-compete agreements with theformer owner of PATHCO and Pathco Medical, P.C. In addition the Company entered into an employment agreement with keymanagement personnel of PATHCO.  Theacquisition resulted in goodwill of $729 being recorded.

 

In February 2004, the Company acquired certain assets andliabilities of Metropolitan Diagnostic, Inc. (“MDI”) for $500. Inconnection with the acquisition, the Company received a three year non-competeagreement with the former owners of MDI. The purchase price was principallyallocated to a customer list.

 

In July 2004, the Company entered into an agreement to purchasecertain operating assets of CGI for the sum of $2,485. The operations of CGIare included in the Company results of operations commencing August 1,2004. In connection with the acquisition, the Company entered into employmentagreements with key management personnel. In addition, the Company obtained athree year “non-competition/non-solicitation agreement” with the former ownersof CGI. The acquisition resulted in goodwill of $2,347 being recorded.

 

These acquisitions were not material to the financial position oroperations of the Company.

 

***[19] Fair Value ofFinancial Instruments***

 

For certain financial instruments, including cash and cash equivalents,trade receivables, trade payables, and short-term debt, it was estimated thatthe carrying amount approximated fair value for the majority of these itemsbecause of their short maturities.  Thefair value of the Company’s long-term debt is estimated based on the quotedmarket prices for similar issues or by discounting expected cash flows at therates currently offered to the Company for debt of the same remainingmaturities.

 

Due to the non-interest bearing nature and unspecified payment terms,it was not practicable to estimate the fair value of amounts due from relatedparties [See also Note 7].

 

70

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***[20] HealthInsurance Plan***

 

The Company has a limited self-funded health insurance plan for itsemployees under which the Company pays the initial $150 of covered medicalexpenses per person each year.  TheCompany has a contract with an insurance carrier for any excess up to a maximumof $2,000 per person and $3,844 in the aggregate.  Health insurance premium expense for theyears ended October 31, 2005, 2004 and 2003 amounted to approximately$887, $622 and $385, respectively. Uninsured employee medical expenses incurred by the Company amounted toapproximately $4,084, $3,283 and $2,515 for the years ended October 31,2005, 2004 and 2003, respectively. During fiscal years ended October 31, 2005, 2004 and 2003, employeecontributions of $929, $821 and $603 offset, the above health plan costs.

 

***[21] EmployeeBenefit Plan (Dollars Not In Thousands)***

 

The Company sponsors the Bio-ReferenceLaboratories, Inc. 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 make a matchingcontribution to the plan for each participant who has elected to maketax-deferred contributions for the plan year, at a percentage determined eachyear by the Company.  For the plan yearsbeginning January 1, 2005 the Company elected to make a matchingcontribution of 3% of salary not to exceed $500 which amounted to$182,739.  For the plan years beginning January 1,2004 and 2003, the Company elected to make a matching contribution of 3% ofsalary not to exceed $250 per participant which amounted to $78,000 and $71,000respectively which were charged to operations. The Employer contribution will be fully vested after the third year ofservice.

 

***[22] NewAuthoritative Accounting Pronouncements***

 

InNovember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 151, “Inventory Costs – an amendment to ARB No. 43.” Thisstatement provides guidance to clarify the accounting for abnormal amounts ofidle facility expense, freight handling costs, and wasted material (spoilage),among other production costs. Provisions of ARB No. 43 stated that undersome circumstances, items such as idle facility expense, excessive spoilage andother costs “may” be so abnormal as to require treatment as current periodcharges. This statement requires that those items be recognized as currentperiod charges regardless of whether they meet the criterion of “so abnormal”.In addition, this Statement requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities.  Adoption of the Statement isnot expected to have a material impact on the financial statements of theCompany.

 

In November 2004, the FASB issued SFAS No. 152 “Accountingfor Real Estate Time-Sharing Transactions” – An amendment of SFAS No. 66and 67. This Statement amends SFAS No. 66. “Accounting for Sales of RealEstate, to reference the financial accounting and reporting guidance for realestate time-sharing transactions that is provided in AICPA Statement ofPosition (SOP)04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement alsoamends SFAS No. 67, “Accounting for Costs and Initial Rental Operations ofReal Estate Projects,” to state the guidance for (a) incidental costs and (b) costsincurred to sell real estate projects does not apply to real estatetime-sharing transactions. The accounting for those operations and costs issubject to guidance in SOP 04-2. Effective for financial statements with fiscalyears beginning after June 15, 2005. Adoption of this Statement is not expected to have a material impact onthe financial statements of the Company.

 

In November 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets – an amendment to APB No. 29.” ThisStatement amends Opinion No. 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity expected to change significantly as a result of the exchange. Adoptionof this statement is not expected to have a material impact on the financialstatements of the Company.

 

71

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In December 2004, the FASB issued SFAS No. 123(Revised 2004). “Share-Based Payment.” The statement requires that thecompensation cost relating to share-based payment transactions be recognized infinancial statements. That cost will be measured based on the fair value of theequity or liability instrument issued. The statement covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans. The company will be required to adopt SFAS 123 ( R ) as of November 1,2005. The adoption may have a material impact on the consolidated financialstatements of the Company.

 

In May 2005, the FASB issued SFAS No. 154,“**AccountingChanges and Error Corrections—a replacement of APB Opinion No. 20 and FASBStatement No. 3.” **ThisStatement applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement, in the unusualinstance 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 as of November 1,2006.  The adoption of this standard isnot expected to have a material impact on the Company’s consolidated financialstatements.

 

In June 2005, the EITF reached consensus on Issue No. 05-6,Determining the Amortization Period for Leasehold Improvements (“EITF 05-6”).EITF 05-6 provides guidance on determining the amortization period forleasehold improvements acquired in a business combination or acquiredsubsequent to lease inception. The guidance in EITF 05-6 will be appliedprospectively and is effective for periods beginning after June 29, 2005.EITF 05-6 is not expected to have a material impact on the Company’sconsolidated financial statements.

 

***[23] SelectedQuarterly Financial Data [Unaudited]***

 
| ** **                                                                | ** ** | **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 |   |

 

72

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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 |   |
|                                                                           |            |                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                                | ** ** | **Three  months ended** | ** ** | **Fiscal**  | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                                                | ** ** | **1/31/03**             | ** ** | **4/30/03** | ** ** | **7/31/03** | ** ** | **10/31/03** | ** ** | **Year  2003** | ** ** |
|                                                                      |       |                    |       |        |       |   |   |   |   |   |   |
| Net Revenues                                                              |       | $                       | 23,759     |        | $          | 25,951 |   | $ | 28,920 |   | $ | 30,404 |   | $ | 109,034 |   |
|                                                                      |       |                    |       |        |       |   |   |   |   |   |   |
| Gross Profit                                                              |       | $                       | 10,572     |        | $          | 12,241 |   | $ | 14,578 |   | $ | 15,427 |   | $ | 52,818 |   |
| Net Income                                                                |       | $                       | 470        |        | $          | 1,523 |   | $ | 2,301 |   | $ | 2,246 |   | $ | 6,540 |   |
| Net Income Per Common Share:                                              |       |                    |       |        |       |   |   |   |   |   |   |
| Basic                                                                     |       | $                       | .04        |        | $          | .13 |   | $ | .20 |   | $ | .20 |   | $ | .57 |   |
| Diluted                                                                   |       | $                       | .04        |        | $          | .12 |   | $ | .18 |   | $ | .17 |   | $ | .51 |   |
| Weighted Average Common Shares Outstanding  - Basic [in thousands]        |       | 11,595                  |       | 11,487      |       | 11,423 |   | 11,451 |   | 11,489 |   |
|                                                                      |       |                    |       |        |       |   |   |   |   |   |   |
| Weighted Average Common Shares Outstanding  - Diluted [in thousands] |       | 12,899                  |       | 12,665      |       | 12,709 |   | 13,044 |   | 12,798 |   |

 

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

 

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and Shareholders of

Bio-Reference Laboratories, Inc.

Elmwood Park, New Jersey

 

Our report on our audit of the basic financial statements of Bio-ReferenceLaboratories, Inc. and its subsidiary appears on page 46.  That audit was conducted for the purpose offorming an opinion on the basic financial statements taken as a whole.  The supplemental schedule II ispresented for purposes of complying with the Securities and ExchangeCommissions Rules and Regulations under the Securities Exchange Act of1934 and is not otherwise a required part of the basic financialstatements.  Such information has beensubjected to the auditing procedures applied in the audit of the basicfinancial statements, and in our opinion, is fairly stated in all materialrespects in relation to the basic financial statements taken as a whole.

 

 
|                   | MOORE STEPHENS, P. C.         |
|------------------------|-------------------------------|
|                   | Certified Public Accountants. |
|                   |                          |
|                   |                          |
| Cranford, New Jersey   |                          |
| December 17, 2005 |                          |

 

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

 

**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS FOR THE YEARS ENDED OCTOBER 31, 2005, 2004 AND 2003.**

**[In Thousands]**

 
| **(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, 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 |   |
| *** ***                     |       |           |       |           |       |             |       |          |       |
| Year Ended October 31, 2003 |       |           |       |           |       |             |       |          |       |   |   |   |   |
| Allowance for Doubtful Accounts  |       | $              | 7,035      |           | $          | 12,806           |       | $             | (14,682    | ) | $ | 5,159 |   |
| Contractual Credits/Discounts    |       | 23,010         |       | 160,642        |       | (159,626         | )          | 24,026        |       |
|                             |       |           |       |           |       |             |       |          |       |
| ***Total Allowance***            |       | $              | 30,045     |           | $          | 173,448          |       | $             | (174,308   | ) | $ | 29,185 |   |

 

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