UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




(Mark
One)


x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the fiscal year ended September 30,
  2010.


OR


 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the transition period from ___________ to
      _____________.





Commission
File Number 000-23357





BIOANALYTICAL
SYSTEMS, INC.





(Exact
name of the registrant as specified in its charter)





INDIANA
                    (State
      or other jurisdiction of incorporation or organization)
                  
                  35-1345024
                    (I.R.S.
      Employer Identification No.)2701
      KENT AVENUE
                    WEST LAFAYETTE, INDIANA
                    (Address
      of principal executive offices)
                  
                  47906
                    (Zip
      code)





(765)
463-4527


(Registrant's
telephone number, including area code)





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





Securities
registered pursuant to section 12(g) of the Act: Common Shares





Name of
exchange on which registered:  NASDAQ Capital Market





Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.  YES  ̈NO x





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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YES x        NO
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).   YES  ̈ NO  ̈





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):


Large
accelerated filer  ̈Accelerated filer
 ̈Non-accelerated
filer  ̈Smaller Reporting
Company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    YES  ̈NO x





Based on
the closing price on the NASDAQ Global Market on March 31, 2010, the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was $4,348,000. As of January 7, 2011,
4,915,318 of registrant's common shares were outstanding. None of the
registrant's Preferred Shares were outstanding as of January 7,
2011.





Documents
Incorporated by Reference





Portions
of the registrant’s definitive proxy statement for its 2011 Annual Meeting of
Shareholders are incorporated by reference into Part III
hereof.







TABLE OF
CONTENTS





PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              11Item
      1B.
              Unresolved
      Staff Comments
              17Item
      2.
              Properties
              17Item
      3.
              Legal
      Proceedings
              17Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              17PART
      IIItem
      5.
              Market
      for Registrant's Common Equity and Related Stockholder
    Matters
              18Item
      6.
              Selected
      Financial Data
              19Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      7A.
              Quantitative
      and Qualitative Disclosures about Market Risk
              30Item
      8.
              Financial
      Statements and Supplementary Data
              31Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              54Item
      9A.
              Controls
      and Procedures
              54Item
      9B.
              Other
      Information
              55PART
      IIIItem
      10.
              Directors
      and Executive Officers of the Registrant
              55Item
      11.
              Executive
      Compensation
              57Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management
              57Item
      13.
              Certain
      Relationships and Related Transactions
              57Item
      14.
              Principal
      Accounting Fees and Services
              57PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              58





PART
I




This
Report may contain "forward-looking statements," within the meaning of Section
27A of the Securities Act of 1933, as amended, and/or Section 21E of the
Securities Exchange Act of 1934, as amended.  Those statements may
include, but  are  not  limited to, discussions
regarding our intent, belief or current expectations with respect to (i) our
strategic plans; (ii) our future profitability, liquidity and capital resources;
(iii) our capital requirements; (iv)
industry  trends  affecting  our  financial  condition  or
results of operations;  (v)  our sales or marketing plans;
or (vi) our growth  strategy.  Investors in  our
common shares are cautioned that reliance
on  any  forward-looking  statement  involves
risks and uncertainties, including  the risk factors contained
beginning on page 11 of the
Report.  Although  we  believe  that  the
assumptions
on  which  the  forward-looking  statements  contained  herein
are based are reasonable, any of those assumptions could fail to project actual
events and, as a result,  the  forward-looking statements
based upon those assumptions could prove to be significantly different from
actual results.  In  light  of  the
uncertainties inherent in any forward-looking
statement,  the  inclusion  of  a
forward-looking statement herein should not be
regarded  as  a  representation  by  us  that
our plans and
objectives  will  be  achieved.  We do
not undertake any obligation to update any forward-looking
statement.




(Dollar
amounts in thousands, except per share data, unless noted
otherwise.)




ITEM
1 - BUSINESS




General




The
Company, a corporation organized in Indiana, provides contract drug development
services and research equipment to many leading global pharmaceutical, medical
research and biotechnology companies and institutions. We offer an efficient,
variable-cost alternative to our clients' internal product development programs.
Outsourcing development work to reduce overhead and speed drug approvals through
the Food and Drug Administration ("FDA") is an established alternative to
in-house development among pharmaceutical companies. We derive our revenues from
sales of our research services and drug development tools, both of which are
focused on determining drug safety and efficacy.  The Company has been
involved in the research of drugs to treat numerous therapeutic areas since its
formation in 1974.




We
support the preclinical and clinical development needs of researchers and
clinicians for small molecule and large biomolecule drug candidates. We believe
our scientists have the skills in analytical instrumentation development,
chemistry, computer software development, physiology, medicine, analytical
chemistry and toxicology to make the services and products we provide
increasingly valuable to our current and potential clients. Our principal
clients are scientists engaged in analytical chemistry, drug safety evaluation,
clinical trials, drug metabolism studies, pharmacokinetics and basic
neuroscience research from small start-up biotechnology companies to many of the
largest global pharmaceutical companies.




Changing
Nature of the Pharmaceutical Industry




Our
services and products are marketed globally to pharmaceutical, medical research
and biotech companies and institutions engaged in drug research and development.
The research services industry is highly fragmented among many niche vendors led
by a small number of larger companies; the latter offer an ever-growing
portfolio of start-to-finish pharmaceutical development services. Our products
are also marketed to academic and governmental institutions. Our services and
products may have distinctly different clients (often separate divisions in a
single large pharmaceutical company) and requirements. We believe that all
clients are facing increased pressure to outsource facets of their research and
development activities and that the following factors will increase client
outsourcing:




Accelerated Drug
Development




Clients
continue to demand faster, more efficient, more selective development of an
increasing pool of drug candidates. Consequently, our clients require fast,
high-quality service in order to make well-informed decisions to quickly exclude
poor candidates and speed development of successful ones. The need for
additional development capacity to exploit more opportunities, accelerate
development, extend market exclusivity and increase profitability drives the
demand for outsourced services.


1




Cost
Containment




Pharmaceutical
companies continue to push for more efficient operations through outsourcing to
optimize profitability as development costs climb, staff costs increase, generic
competition challenges previously secure profit generators, political and social
pressures to reduce health care costs escalate, and shareholder expectations
mount.




Patent
Expiration




As
exclusivity ends with patent expiry, drug companies defend their proprietary
positions against generic competition with various patent extension strategies.
Both the drug company creating these extensions and the generic competitors
should provide additional opportunities for us.




Alliances




Strategic
alliances allow pharmaceutical companies to share research know-how and to
develop and market new drugs faster in more diverse, global markets. We believe
that such alliances will lead to a greater number of potential drugs in testing,
many under study by small companies lacking broad technical resources. Those
small companies can add shareholder value by further developing new products
through outsourcing, reducing risk for potential allies.  Clients seek
realistic business partnerships with their service provider in an effort to
ensure that costs are controlled as their development programs
progress.  We have long-standing business relationships with many
pharmaceutical companies and continue to offer flexible services and adapt to
our client’s requirements.




Mergers and
Acquisitions




Consolidation
in the pharmaceutical industry is commonplace. As firms blend personnel,
resources and business activities, we believe they will continue to streamline
operations and minimize staffing, which may lead to more outsourcing.
Consolidation may result in a disruption in the progress of drug development
programs as merging companies rationalize their respective drug development
pipelines.




Biotechnology Industry and
Virtual Drug Company Growth




The
biotechnology industry continues to grow and has introduced many new
developmental drugs. Many biotechnology drug developers do not have in-house
resources to conduct development. Many new companies choose only to carry a
product to a developed stage sufficient to attract a partner who will
manufacture and market the drug. Efficient use of limited funds motivates
smaller firms to seek outside service providers rather than build expensive
infrastructure.




Unique Technical
Expertise




The
increasing complexity of new drugs requires highly specialized, innovative,
solution-driven research not available in all client labs. We believe that this
need for unique technical expertise will increasingly lead to outsourcing of
research activity.




Data Management and Quality
Expertise




Our
clients and the FDA require more data, greater access to that data, consistent
and auditable management of that data, and greater security and control of that
data. We have made significant investments in software throughout our contract
services groups to optimize efficiency and ensure compliance with FDA
regulations and market expectations.




Globalization of the
Marketplace




Foreign
firms rely on independent development companies with experience in the U.S. to
provide integrated services through all phases of product development and to
assist in preparing complex regulatory submissions. Domestic drug firms are
broadening product availability globally, demanding local regulatory approval.
We believe that domestic service providers with global reach, established
regulatory expertise, and a broad range of integrated development services will
benefit from this trend.


2


The
Company's Role in the Drug Development Process




After a
new drug candidate is identified and carried through preliminary screening, the
development process for new drugs has three distinct phases.




1)           The
preclinical
phaseincludes safety testing
to prepare an Investigational New Drug ("IND") for submission to the FDA. The
IND must be accepted by the FDA before the drug can be tested in humans. Once a
pharmacologically active molecule is fully analyzed to confirm its integrity,
the initial dosage form for clinical trials is created. An analytical chemistry
method is developed to enable reliable quantification. Stability and purity of
the formulation are also determined.




Clients
work with our preclinical services group to establish pharmacokinetics (PK),
pharmacodynamics (PD) and safety testing of the new drug. These safety studies
range from dose ranging studies, that involve acute safety monitoring of drugs
and medical devices to chronic, multi-year oncogenicity and reproductive
toxicity studies. Dose level confirmation is provided by our pharmaceutical
analysis group.  Bioanalyses of blood sampled under these protocols by
our bioanalytical services group provide pharmacokinetic and metabolism data
that is used with the safety and toxicity information to determine the exposure
required to demonstrate toxicity.  A no effect level is then
established for the drug and sets the basis for future dose levels in further
safety testing and clinical phase I studies.  Upon successful
completion of preclinical safety studies, an IND submission is prepared and
provided to the FDA for review prior to human clinical trials.




Many of
our products are designed for use in discovery and preclinical development. The
Culex® family of robotic automated dose delivery and blood and other biofluids
sampling and physiological parameters measurement systems enable researchers to
quickly and cost effectively determine PK/PD profiles of drugs in large and
small animal models.  The Culex system allows experiments on freely
moving conscious animals from early research for therapeutic target validation
to lead optimization of compounds.  Using the Culex system,
researchers are able to automatically dose and sample in-vivo to develop
pharmacokinetic and pharmacodynamic profiles of drugs during early screening in
rodents and other animals quickly and cost effectively. Our bioanalytical
services group utilizes our depth of expertise in liquid chromatography with
detection by mass spectrometry as a mainstay of our bioanalytical laboratories
to support research, preclinical and clinical programs.  We also offer
bioanalytical services that utilize electrochemistry, spectrophotometric (UV/Vis
or fluorescence) and Corona Discharge detection as options. We have invested
heavily in robotics and mass spectrometry systems in previous
years.  Application of this technology allows us to rapidly develop
and validate methods for new compounds and obtain information suitable for
regulatory submission.




2)           The
clinical
phasefurther explores the
safety and efficacy of the substance in humans. The sponsor conducts Phase I
human clinical trials in a limited number of healthy individuals to determine
safety and tolerability. Bioanalytical assays determine the availability and
metabolism of the active ingredient following administration. Expertise in
method development and validation is critical, particularly for new chemical
entities.




Exhaustive
safety, tolerability and dosing regimens are established in sick humans in Phase
II trials. Phase III clinical trials verify efficacy and safety. After
successful completion of Phase III trials, the sponsor of the new drug submits a
New Drug Application ("NDA") or Product License Application ("PLA") to the FDA
requesting that the product be approved for marketing. Early manufacturing
demonstrates production of the substance in accordance with FDA Good
Manufacturing Practices ("GMP") guidelines. Data are compiled in an NDA, or for
biotechnology products a PLA, for submission to the FDA requesting approval to
market the drug or product. Our bioanalytical work per study grows rapidly from
Phase I through Phase III. The number of samples per patient declines as the
number of patients grows in later studies. Phase II and III studies take several
years, supported by well-proven, consistently applied analytical methods. It is
unusual for a sponsor to change laboratories unless there are problems in the
quality or timely delivery of results.




Our
services include evaluation of bioequivalence and bioavailability to monitor the
rate and extent to which a drug is available in the body and to demonstrate that
the availability is consistent between formulations.  We additionally
offer support in clinical sample development, release and stability of clinical
samples including comparators.




3)           The
Post-approval
phasefollows FDA approval of the NDA or PLA. This includes production
and continued analytical and clinical monitoring of the drug. The post-approval
phase also includes development and regulatory approval of product modifications
and line extensions, including improved dosage forms. The drug manufacturer must
comply with quality assurance and quality control requirements throughout
production and must continue analytical and stability studies of the drug during
commercial production to continue to validate production processes and confirm
product shelf life. Samples from each manufactured batch must be tested prior to
release of the batch for distribution to the public.


3


We also
provide services in all areas during the post-approval phase, concentrating on
bioequivalence studies of new formulations, line extensions, new disease
indications and drug interaction studies.  Our ability to offer quick
sample analysis has provided increased business opportunities for release
testing.




The
increases in our services offerings as a result of both acquisition and internal
development have resulted in our ability to provide a broader range of services
to our clients, often using combined services of several disciplines to address
client needs.  Our ability to solve client problems by combining our
knowledge base, services and products has been a factor in our selection by
major pharmaceutical companies to assist in several preclinical through the
post-approval phases.




Company
Services and Products




Overview




We
operate in two business segments – contract research services and research
products, both of which address the bioanalytical, preclinical, and clinical
research needs of drug developers. Both segments arose out of our expertise in a
number of core technologies designed to quantify trace chemicals in complex
matrices. We evaluate performance and allocate resources based on these
segments.




Services




The
contract research services segment provides screening and pharmacological
testing, preclinical safety testing, formulation development, regulatory
compliance and quality control testing. Revenues from continuing operations from
the services segment were $21.9 million for fiscal 2010. The following is a
description of the services provided by our contract research services
segment:




·
            Product
      Characterization, Method Development and Validation:Analytical methods,
      primarily performed in West Lafayette, Indiana, determine potency, purity,
      chemical composition, structure and physical properties of a compound.
      Methods are validated to ensure that data generated are accurate, precise,
      reproducible and reliable and are used consistently throughout the drug
      development process and in later product
  support.




·
            Bioanalytical
      Testing:We analyze specimens
      from preclinical and clinical trials to measure drug and metabolite
      concentrations in complex biological matrices. Bioanalysis is performed at
      our facilities in Indiana, Oregon and the United Kingdom
      (“UK”).




·
            Stability
      Testing:We test stability of
      drug substances and formulated drug products and maintain secure storage
      facilities in West Lafayette, Indiana to establish and confirm product
      purity, potency and shelf life. We have multiple International Conference
      on Harmonization validated controlled-climate GMP (Good Manufacturing
      Practices) systems in place, and the testing capability to complete most
      stability programs.




·
            In
      Vivo Pharmacology:We provide
      preclinicalin vivosampling services
      for the continuous monitoring of chemical changes in life, in particular,
      how a drug enters, travels through, and is metabolized in living systems.
      Most services are performed in customized facilities in Evansville,
      Indiana using our robotic Culex® APS (Automated Pharmacology System)
      system.




·
            Preclinical
      and Pathology Services:We provide
      pharmacokinetic and safety testing in studies ranging from acute safety
      monitoring of drugs and medical devices to chronic, multi-year
      oncogenicity studies in our Evansville, Indiana site. Depending on
      protocol, multiple tissues may be collected to monitor pathological
      changes.




Research
Products




We focus
our products business on expediting preclinical screening of developmental
drugs. We compete in small niches of the multibillion dollar analytical
instrument industry. The products business targets unique niches in life science
research. We design, develop, manufacture and market
state-of-the-art:




·
            In vivo sampling
      systems and accessories (including disposables, training and systems
      qualification)




·
            Physiology
      monitoring tools




·
            Liquid
      chromatography and electrochemistry instruments
  platforms




4




Revenues
from continuing operations for our products segment were $6.9 million for fiscal
2010.  We offer three (3) principal product
lines:  Analytical Products, In vivo Sampling Products and Vetronics’
Products.  The following is a brief description of the products
offered:




·
            Analytical
      Products:  The analytical products consist of our liquid
      chromatographic and electrochemical instruments with associated
      accessories.  The critical component of these products is the
      Epsilon®electrochemical platform.  This incorporates all the
      hardware capabilities needed for most electrochemical experiments but can
      be modified through software development.  The market is
      principally academic institutions and industrial research
      companies.




·
            In vivo
      Sampling Products:The in vivo sampling
      products consist of the Culex® family of
      automated in vivo
      sampling and dosing instruments.  These are used by
      pharmaceutical researchers to dose animals and collect biological samples
      (blood, bile, urine, microdialysate, feces or any bio-fluid) from the
      animals.  Since dosing and sample collections are automated,
      animals are not manually handled, reducing stress on the animals and
      producing more representative pharmacological data.  Behavior
      and other physiological parameters can also be monitored
      simultaneously.  Compared to manual methods, the Culex® products
      offer significant reduction in test model use and comparable reduction in
      labor.  The line also includes miniaturized in vivo sampling
      devices sold to drug developers and medical research centers to assist in
      the study of  a number of medical conditions including stroke,
      depression, Alzheimer’s and Parkinson’s diseases, diabetes and
      osteoporosis.




·
            Vetronics’
      Products:The Vetronics’ products consist
      of instruments and related software to monitor and diagnose cardiac
      function (electro-cardiogram) and measure other vital physiological
      parameters primarily in cats and dogs in veterinary
      clinics.




Clients




Over the
past five years, we have regularly provided our services and/or products to most
of the top 25 pharmaceutical companies in the world, as ranked by the number of
research and development projects.  Approximately 11% of our revenues
are generated from customers outside of North America.




We
balance our business development effort between large pharmaceutical developers
and smaller drug development companies.




Pfizer,
Inc. is our largest client, accounting for approximately 7.0% of our total
revenues in fiscal 2010 and 2009.  Pfizer, Inc. accounted for 4.7% and 3.2%
of total trade accounts receivable at September 30, 2010 and 2009,
respectively.




There can
be no assurance that our business will not continue to be dependent on continued
relationships with Pfizer, Inc. or other clients, or that annual results will
not be dependent on a few large projects. In addition, there can be no assurance
that significant clients in any one period will continue to be significant
clients in other periods. In any given year, there is a possibility that a
single pharmaceutical company may account for 5% or more of our total revenue.
Since we do not have long-term contracts with our clients, the importance of a
single client may vary dramatically from year to year.




Sales
and Marketing




Our
current sales and marketing efforts target both the top 200 global
pharmaceutical companies and smaller companies. We recognize that our growth and
customer satisfaction depend upon our ability to continually improve and create
new client relationships.




Our
products and services are sold directly to the client. We currently have 10
employees on our sales and marketing staff.  Sales, marketing and
technical support is based in the corporate headquarters located in West
Lafayette, Indiana.




We have a
network of 11 established distributors covering Japan, the Pacific Basin,
South America, the Middle East, India, South Africa and Eastern Europe. All of
our distributor relationships are managed from the corporate headquarters in
West Lafayette, Indiana.


5




Contractual
Arrangements




Our
service contracts typically establish an estimated fee to be paid for identified
services. In most cases, some percentage of the contract costs is paid in
advance. While we are performing a contract, clients often adjust the scope of
services to be provided based on interim project results. Fees are adjusted
accordingly. Generally, our fee-for-service contracts are terminable by the
client upon written notice of 30 days or less for a variety of reasons,
including the client's decision to forego a particular study, the failure of
product prototypes to satisfy safety requirements, and unexpected or undesired
results of product testing. Cancellation or delay of ongoing contracts may
result in fluctuations in our quarterly and annual results. We are generally
able to recover at least our invested costs when contracts are
terminated.




Our
products business offers annual service agreements on most product
lines.




Backlog




The contracts pursuant to which we
provide our services are terminable upon written notice of 30 days or
less.  We maintain projections based on bids and contracts to optimize
asset utilization. We have increased the use of sales forecasts in manufacturing
our products, with the result that we rarely have a significant backlog for
Products. For Services, backlog generally includes work to be performed under
signed agreements (i.e., contracts and letters of intent). Once work under
a signed agreement begins, net revenues are recognized over the life of the
project.  Some of our studies and projects are performed over an
extended period of time, which may exceed several years. We maintain an order
backlog to track anticipated net revenues yet to be earned for work that has not
been performed.




Although
backlog can provide meaningful information to our management with respect to a
particular study, we believe that our backlog for Services as of any date is not
necessarily a meaningful indicator of our future results for a variety of
reasons. Studies vary in duration; the scope of studies may change, which may
either increase or decrease their value; and studies may be terminated, or
delayed at any time by the client or regulatory
authorities.




Competition




Services




We
compete with in-house research, development, quality control and other support
service departments of pharmaceutical and biotechnology companies. There are
also full-service Contract Research Organizations ("CROs") that compete in this
industry. Several of our competitors have significantly greater financial
resources than we do. The largest CRO competitors offering similar research
services include:




·
            Covance,
      Inc.;




·
            Pharmaceutical
      Product Development, Inc.;




·
            Charles
      River Laboratories, Inc.;




·
            Parexel;
      and




·
            MDS
      Health Group Ltd.




CROs
generally compete on:




·
            regulatory
      compliance record;




·
            reputation
      for on-time quality performance




·
            quality
      system;




·
            previous
      experience;




·
            medical
      and scientific expertise in specific therapeutic
  areas;




·
            scientist-to-scientist
      relationships;




·
            quality
      of contract research;




6


·
            financial
      viability;




·
            database
      management;




·
            statistical
      and regulatory services;




·
            ability
      to recruit investigators;




·
            ability
      to integrate information technology with systems to optimize research
      efficiency;




·
            quality
      of facilities;




·
            an
      international presence with strategically located facilities;
      and




·
            price.




Products




Founded
as a provider of instrumentation and products utilized in life and physical
sciences research laboratories, we continue to serve these product niches
today.  Though many global analytical instruments competitors exist,
we have an extensive, long standing network of customers who are repeat buyers
and recommend our products.  In contrast, there are few competitors
for our in vivo sampling products.  The primary market is large and
small pharmaceutical researchers.  Our differentiators are high
quality, flexibility to meet customers’ specific needs and superior technical
support and service.  We provide equipment that enables our customers
to attain premium scientific laboratory information on a reasonable operating
investment.  As customers’ needs constantly change, we continually
invest in the refinement of our products and in new product opportunities that
meet our operating objectives.




Government
Regulation




We are
subject to various regulatory requirements designed to ensure the quality and
integrity of our data and products. These regulations are promulgated primarily
under the Federal Food, Drug and Cosmetic Act, and include Good Laboratory
Practice ("GLP"), Good Manufacturing Practice ("GMP"), and Good Clinical
Practice ("GCP") guidelines administered by the FDA. The standards of GLP, GMP,
and GCP are required by the FDA and by similar regulatory authorities around the
world. These guidelines demand rigorous attention to employee training; detailed
documentation; equipment validation; careful tracking of changes and routine
auditing of compliance. Noncompliance with these standards could result in
disqualification of project data collected by the Company. Material violation of
GLP, GMP, or GCP guidelines could result in regulatory sanctions and, in severe
cases, could also result in a discontinuance of selected
operations.  Since October 2004, we have been audited, on a routine
basis, by the FDA and UK’s MHRA fifteen times. The FDA has visited five times in
West Lafayette, and twice each at the UK, Oregon, and Evansville locations. MHRA
has visited the UK facility four times. Of the eleven FDA audits, five were
without findings.  Where the FDA had findings, which have not been
significant to our operations, we have taken actions to address the
findings.  The UK facility was found to be compliant with GLP and
GCP.




We have
not experienced any significant problems to date in complying with the
regulations of such agencies and do not believe that any existing or proposed
regulations will require material capital expenditures or changes in our method
of operation.




Analytical
Services




Laboratories
that provide information included in INDs, NDAs and PLAs must conform to
regulatory requirements that are designed to ensure the quality and integrity of
the testing process. Most of our contract research services are subject to
government standards for laboratory practices that are embodied in guidelines
for GLP. The FDA and other regulatory authorities require that test results
submitted to such authorities be based on studies conducted in accordance with
GLP. These guidelines are set out to help the researcher perform work in
compliance with a pre-established plan and standardized procedures. These
guidelines include but are not restricted to:




·
            Resources
      – organization, personnel, facilities and
  equipment




·
            Rules
      – protocols and written procedures




·
            Characterization
      – test items and test systems




7


·
            Documentation
      – raw data, final report and
archives




·
            Quality
      assurance unit – formalized internal audit
  function




We must
also maintain reports for each study for specified periods for auditing by the
study sponsor and by the FDA or similar regulatory authorities in other parts of
the world. Noncompliance with GLP can result in the disqualification of data
collection during the preclinical trial.




Preclinical
Services




Our
animal research facilities are subject to a variety of federal and state laws
and regulations, including The Animal Welfare Act and the rules and regulations
enforced by the United States Department of Agriculture ("USDA") and the
National Institutes of Health ("NIH"). These regulations establish the standards
for the humane treatment, care and handling of animals by dealers and research
facilities. Our animal research facilities maintain detailed standard operating
procedures and other documentation necessary to comply with applicable
regulations for the humane treatment of the animals in our custody. Besides
being licensed by the USDA as a research facility, we are also accredited by the
Association for Assessment and Accreditation of Laboratory Animal Care
International ("AAALAC") and have registered assurance with the
NIH.




Quality Assurance and
Information Technology




To assure compliance with applicable
regulations, we have established quality assurance programs at our facilities
that audit test data, train personnel and review procedures and regularly
inspect facilities. In addition, FDA regulations and guidelines serve as a basis
for our Standard Operating Procedures (“SOPs”) where applicable. On an ongoing
basis, we endeavor to standardize SOPs across all relevant operations. In
addition, we have both developed and purchased software to ensure compliant
documentation, handling and reporting of all laboratory-generated study data. In
fiscal 2004, we purchased similar 21 CFR Part 11 (FDA guidelines on electronic
records andelectronic
signaturesthat define the
criteria under which electronic records and electronic signatures are considered
to be trustworthy, reliable and equivalent to paper records) compliant software
for our preclinical research group.  At the end of fiscal 2010, the
majority of our laboratory operations in the U.S. were fully in compliance with
21 CFR Part 11, in our analytical, bioanalytical, toxicology, lab information
management, and document management systems. Systems compliant with 21 CFR Part
11 were formally validated and released for use in regulated
studies.




We manage
our business systems through the use of an Enterprise Resource Planning ("ERP")
system. We are continually refining and adjusting our ERP system to improve
efficiency, provide better management tools and address changes in our
business.  These changes are appropriately documented and tested
before implementation.  We also test these systems in connection with
management’s annual review of our internal control
systems.  Management’s assessment and report on internal controls over
financial reporting is included in Item 9A.




Controlled, Hazardous, and
Environmentally Threatening Substances




Some of
our development and testing activities are subject to the Controlled Substances
Act administered by the Drug Enforcement Agency ("DEA"), which strictly
regulates all narcotic and habit-forming substances. We maintain
restricted-access facilities and heightened control procedures for projects
involving such substances due to the level of security and other controls
required by the DEA. In addition, we are subject to other federal and state
regulations concerning such matters as occupational safety and health and
protection of the environment.




Our U.S.
laboratories are subject to licensing and regulation under federal, state and
local laws relating to hazard communication and employee right-to-know
regulations, the handling and disposal of medical specimens and hazardous waste,
as well as the safety and health of laboratory employees. All of our
laboratories are subject to applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens, including the
regulations of the Environmental Protection Agency, the Department of
Transportation, the National Fire Protection Agency and the Resource
Conservation and Recovery Act. Although we believe that we are currently in
compliance in all material respects with such federal, state and local laws,
failure to comply could subject us to denial of the right to conduct business,
fines, criminal penalties and other enforcement actions.




The
regulations of the U.S. Department of Transportation, the U.S. Public Health
Service and the U.S. Postal Service apply to the surface and air transportation
of laboratory specimens. Our laboratories also comply with the International Air
Transport Association regulations which govern international shipments of
laboratory specimens. Furthermore, when materials are sent to a foreign country,
the transportation of such materials becomes subject to the laws, rules and
regulations of such foreign country.


8


Safety




In
addition to comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. These regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations and
other measures designed to minimize exposure to chemicals, and transmission of
blood-borne and airborne pathogens. Furthermore, relevant employees receive
initial and periodic training focusing on compliance with applicable hazardous
materials regulations and health and safety guidelines.




HIPAA




The U.S.
Department of Health and Human Services has promulgated final regulations under
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") that
govern the disclosure of confidential medical information in the United States.
We have had a global privacy policy in place since January 2001 and believe that
we are in compliance with the current European Union and HIPAA requirements. We
continue to monitor our compliance with these regulations, and we intend to take
appropriate steps to ensure compliance as these and other privacy regulations
are revised or come into effect.




Product
Liability and Insurance




We
maintain product liability and professional errors and omissions liability
insurance, providing approximately $3.0 million in coverage on a claims-made
basis. Additionally, in certain circumstances, we seek to manage our liability
risk through contractual provisions with clients requiring us to be indemnified
by the client or covered by the client’s product liability insurance policies.
Also, in certain types of engagements, we seek to limit our contractual
liability to clients to the amount of fees received. The contractual
arrangements are subject to negotiation with clients, and the terms and scope of
such indemnification, liability limitation and insurance coverage vary by client
and project.




Research
and Development




In fiscal
2010 and 2009, we spent $546 and $762, respectively, on research and
development. Separate from our contract research services business, we maintain
applications research and development to enhance our products
business.




Expenditures
cover hardware and software engineering costs, laboratory supplies, labor,
prototype development and laboratory demonstrations of new products and
applications for those products.




Intellectual
Property




We
believe that our patents, trademarks, copyrights and other proprietary rights
are important to our business and, accordingly, we actively seek protection for
those rights both in the United States and abroad. Where we deem it to be an
appropriate course of action, we will vigorously prosecute patent infringements.
We do not believe, however, that the loss of any one of our patents, trademarks,
copyrights or other proprietary rights would be material to our consolidated
revenues or earnings.




We
currently hold three federally registered trademarks, as well as one copyright
registration for software. We also have two pending patents, one on the Dried
Blood Spot (DBS) sampling card for the Culex Automated Blood Sampling
Instrumentation and the second for the No Blood Waste technology also for the
Culex instrument. The former (DBS) reduces the cost of bio-sample collection,
shipment and storage and the latter is important for precisely sampling of
bio-fluids of very small volume from animals such as mice. We also generate
client value through continuing client support, hardware and software upgrades,
system reliability and accuracy. In addition to these formal intellectual
property rights, we rely on trade secrets, unpatented know-how and continuing
applications research which we seek to protect through means of reasonable
business procedures, such as confidentiality agreements. We believe that the
greatest value that we generate for our clients comes from these trade secrets,
know-how and applications research.


9




Raw
Materials




There are
no specialized raw materials that are particularly essential to our
business.  We have a variety of alternative suppliers for our
essential components.




Employees




At
September 30, 2010, we had 233 full-time employees and 15 part-time employees.
All employees enter into confidentiality agreements intended to protect our
proprietary information. We believe that our relations with our employees are
good. None of our employees are represented by a labor union. Our performance
depends on our ability to attract and retain qualified professional, scientific
and technical staff. The level of competition among employers for skilled
personnel is high. We believe that our employee benefit plans enhance employee
morale, professional commitment and work productivity and provide an incentive
for employees to remain with the Company.





Executive
Officers of the Registrant





The
following table illustrates information concerning the persons who served as our
executive officers as of September 30, 2010. Except as indicated in the
following paragraphs, the principal occupations of these persons have not
changed in the past three years. Officers are elected annually at the annual
meeting of the board of directors.




Name
                      
                      Age
                      
                      PositionAnthony
      S. Chilton, Ph.D.
                      
                      54
                      
                      President,
      Chief Executive OfficerMichael
      R. Cox
                      
                      63
                      
                      Vice
      President, Finance; Chief Financial and Administrative Officer;
      TreasurerAlberto
      Hidalgo
                      
                      45
                      
                      Vice
      President, Business Development and MarketingCraig
      S. Bruntlett, Ph.D.
                      
                      61
                      
                      Senior
      Vice President, Instruments DivisionLina
      L. Reeves-Kerner
                      
                      59
                      
                      Senior
      Vice President, Human
Resources




Anthony S. Chilton, Ph.D.was
named as the Chief Executive Officer, effective May 13, 2010.  Dr.
Chilton had previously served as Chief Operating Officer since December 1, 2008
and interim President since January 27, 2010.  Dr. Chilton has over 30
years of experience as a scientist and executive in leading life sciences
companies in England, Canada and the United States.  For the two years
prior to joining the Company, Dr. Chilton was in charge of early development
programs at Atherogenics, Inc. of Alpharetta, Ga.  In the two years
prior to that, Dr. Chilton provided consulting and advisory services to various
pharmaceutical companies.  Prior to that, he was Vice President of the
Biopharmaceutical Development Division of Cardinal Health Inc., which he joined
through a predecessor company in 1998 that was acquired by Cardinal in 2002.
Previously, Dr. Chilton spent three years with life sciences companies in
Canada, prior to which he held positions in his native United
Kingdom.  Dr. Chilton received his bachelor’s degree in Chemistry from
the University of East Anglia in 1981, and his Ph.D. in Analytical Chemistry
from the University of Hertfordshire in 1993.




Michael R. Cox has been Vice
President, Finance, Chief Financial Officer and Treasurer since April 2004. In
October 2007, he assumed the additional duties of Chief Administrative
Officer.  He was Vice President, Finance and CFO of Integrity
Pharmaceutical Corporation, a private specialty pharmaceutical company, from
October 2003 until its acquisition and merger in March 2004. Prior to that he
was Senior Vice President, Finance of Intergen Company, a private biotech
manufacturing and research products company, from 1997 until its acquisition in
2001, and continued with the acquirer, Serologicals Corporation, on special
projects until joining Integrity. Prior to that, Mr. Cox held various executive
positions in two environmental services firms and an investment firm. He was a
partner in Touche Ross & Co., where he began his career after obtaining a BS
in business administration from the University of North Carolina.




Alberto Hildagowas hired as
the Vice President of Business Development and Marketing, effective August 18,
2010.  Mr. Hidalgo has over 15 years of senior-level sales experience
in both domestic and international markets including 13 years in the CRO Market.
Most recently he consulted with companies to develop and implement new sales and
marketing strategies. Prior to that he served as Area Director of Sales with
Covance Central Laboratory Services and held various positions including
Director of Sales, for Eli Lilly Export, Puerto Rico.He has a strong history
of developing new business relationships and sales strategies resulting in
exceptional sales growth.


10





Craig S. Bruntlett, Ph.D. has
been Senior Vice President of the Instruments Division since September 2005.
Prior to that, he was Senior Vice President of International Sales from
1999.  From 1992 to 1999 he was Vice President, Electrochemical
Products. From 1980 to 1990, Dr. Bruntlett was Director of New Products
Development for the Company. Dr. Bruntlett has a Bachelor of Arts degree in
Chemistry and Mathematics from St. Cloud State University in Minnesota and a
Ph.D. in Chemistry from Purdue University.




Lina L. Reeves-Kerner has been
Vice President, Human Resources since 1995 and is responsible for the
administrative support functions of the Company, including shareholder
relations, human resources and community relations. From 1980 to 1990, Ms.
Reeves-Kerner served as an Administrative Assistant with the Company. Ms.
Reeves-Kerner has a Bachelor of Science degree in Business Administration from
Indiana Wesleyan University.




Investor
Information




We file
various reports with, or furnish them to, the Securities and Exchange Commission
(the “SEC”), including our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to such
reports.  These reports are available free of charge upon written
request or by visiting www.BASInc.com/invest.  Other
media inquiries and requests for reports or investor’s kits should be directed
to:




Corporate Communications Director,
Corporate Center




2701 Kent Avenue, West Lafayette,
IN  47906   USA




Inquiries
from shareholders, security analysts, portfolio managers, registered
representatives and other interested parties should be directed to:




BASi Investor Relations,
NASDAQ:  BASi




Phone 765-463-4527, Fax
765-497-1102,




basi@BASInc.com,
www.BASInc.com




ITEM
1A - RISK FACTORS




Our
business is subject to many risks and uncertainties, which may affect our future
financial performance.  If any of the events or circumstances
described below occurs, our business and financial performance could be
adversely affected, our actual results could differ materially from our
expectations and the market value of our stock could decline. The risks and
uncertainties discussed below are not the only ones we face.  There
may be additional risks and uncertainties not currently known to us or that we
currently do not believe are material that may adversely affect our business and
financial performance.




We
have limited ability to raise additional cash.





Substantially
all of our assets are encumbered as security for our existing
indebtedness.  It could be difficult to raise additional debt without
additional collateral for security.  There is also a limited market
for our common shares, which could make it difficult to issue additional
equity.  It could therefore be difficult to raise additional cash if
our revolving line of credit and operations do not generate sufficient cash to
fund our operations.


11




Noncompliance with debt covenants
contained in our credit agreements could adversely affect our ability to borrow
under our credit agreements and could ultimately render a substantial portion of
our outstanding indebtedness immediately due and payable.




Certain
of the Company’s credit agreements contain certain affirmative and negative
financial covenants. A breach of any of these covenants or our inability to
comply with any required financial ratios could result in a default under one or
more credit agreements, unless we are able to obtain the necessary waivers or
amendments to the credit agreements. Upon the occurrence of an event of default
that is not waived, and subject to any appropriate cure periods, the lenders
under the affected credit agreements could elect to exercise any of their
available remedies, which may include the right to not lend any additional
amounts to us or, in certain instances, to declare all outstanding borrowings,
together with accrued interest and other fees, to be immediately due and
payable. If we are unable to repay the borrowings with respect to such credit
facility when due the lenders could be permitted to proceed against their
collateral. The election to exercise any such remedy could have a material
adverse effect on our business and financial condition.





The
global credit crisis and market downturn has had a negative impact on our
ability to obtain additional financing. The inability to obtain additional
financing could have a significant adverse effect on our
operations.





The
global credit crisis destabilized the global economy and adversely impacted
consumer confidence and spending. We believe this global credit crisis has also
negatively impacted our ability to obtain additional financing. Our inability to
obtain additional financing could have a significant adverse effect on our
operations.  Uncertainty about current global economic conditions
could also continue to increase the volatility of the Company’s stock
price.




Although
we currently meet the listing requirements for the NASDAQ Capital Market, our
common stock could be de-listed from the NASDAQ Capital Market.





The
National Association of Securities Dealers, Inc. has certain standards for the
continued listing of a security on The NASDAQ Capital Market.  These
standards require, among other things, that a listed issuer have either
(i) listed securities with a market value of at least $1.0 million and
(ii) a bid price of at least $1 per share, and either (i) minimum
stockholders’ equity of $2.5 million, (ii) net income from continuing
operations of $500,000 in the most recently competed fiscal year or in two of
the three most recently completed fiscal years, or (iii) market value of the
listed securities of at least $35.0 million.




If we are
unsuccessful in maintaining our NASDAQ listing, then we may pursue listing and
trading of our common stock on the Over-The-Counter Bulletin Board or another
securities exchange or association with different listing standards than NASDAQ.
We anticipate the change in listings may result in a reduction in some or all of
the following, each of which could have a material adverse effect on our
shareholders:




•
            the
      liquidity of our common stock;





•
            the
      market price of our common stock;





•
            our
      ability to obtain financing for the continuation of our
      operations;





•
            the
      number of institutional and general  investors that will
      consider investing in our common
stock;





•
            the
      number of investors in general that will consider investing in our common
      stock;





•
            the
      number of market makers in our common
stock;





•
            the
      availability of information concerning the trading prices and volume of
      our common stock; and





•
            the
      number of broker-dealers willing to execute trades in shares of our common
      stock.




Our
business is affected by macroeconomic conditions.




Various
macroeconomic factors could affect our business and the results of our
operations. For instance, slower economic activity, inflation, volatility in
foreign currency exchange rates, decreased consumer confidence and other factors
could increase our business costs, lower our revenues or affect the ability of
our customers to purchase and pay for our products and services. Interest rates
and the liquidity of the credit markets could also affect the value of our
investments.


12




A
reduction in research and development budgets at pharmaceutical and
biotechnology companies may adversely affect our business.




Our
customers include researchers at pharmaceutical and biotechnology companies. Our
ability to continue to grow and win new business is dependent in large part upon
the ability and willingness of the pharmaceutical and biotechnology industries
to continue to spend on research and development and to outsource the products
and services we provide. Fluctuations in the research and development budgets of
these researchers and their organizations could have a significant effect on the
demand for our products and services. Research and development budgets fluctuate
due to changes in available resources, mergers of pharmaceutical and
biotechnology companies, spending priorities and institutional budgetary
policies. Our business could be adversely affected by any significant decrease
in life sciences research and development expenditures by pharmaceutical and
biotechnology companies. Similarly, economic factors and industry trends that
affect our clients in these industries also affect our business.




Since
October 1, 2008, we have seen evidence that suggests that many customers have
reduced their research and development budgets.  We believe that this
is in connection with the general economic slowdown.  While this
condition continues, our revenues will be negatively impacted.




Our
future success depends on our ability to keep pace with rapid technological
changes that could make our services and products less competitive or
obsolete.




The
biotechnology, pharmaceutical and medical device industries generally, and
contract research services more specifically, are subject to increasingly rapid
technological changes. Our competitors or others might develop technologies,
services or products that are more effective or commercially attractive than our
current or future technologies, services or products, or that render our
technologies, services or products less competitive or obsolete. If competitors
introduce superior technologies, services or products and we cannot make
enhancements to ours to remain competitive, our competitive position, and in
turn our business, revenues and financial condition, would be materially and
adversely affected.




We
operate in a highly competitive industry.




The CRO
services industry is highly competitive. We often compete for business not only
with other, often larger and better capitalized, CRO companies, but also with
internal discovery and development departments within our clients, some of which
are large pharmaceutical and biotechnology companies with greater resources than
we have. If we do not compete successfully, our business will suffer. The
industry is highly fragmented, with numerous smaller specialized companies and a
handful of full-service companies with global capabilities much larger than
ours. Increased competition might lead to price and other forms of competition
that might adversely affect our operating results. As a result of competitive
pressures, our industry experienced consolidation in recent years. This trend is
likely to produce more competition among the larger companies for both clients
and acquisition candidates. In addition, there are few barriers to entry for
smaller specialized companies considering entering the industry. Because of
their size and focus, these companies might compete effectively against larger
companies such as us, which could have a material adverse impact on our
business.





The
loss of our key personnel could adversely affect our business.




Our
success depends to a significant extent upon the efforts of our senior
management team and other key personnel. The loss of the services of such
personnel could adversely affect our business.  Also, because of the
nature of our business, our success is dependent upon our ability to attract,
train, manage and retain technologically qualified personnel.  There
is substantial competition for qualified personnel, and an inability to recruit
or retain qualified personnel may impact our ability to grow our business and
compete effectively in our industry.





Any
failure by us to comply with existing regulations could harm our reputation and
operating results.





Any
failure on our part to comply with existing regulations could result in the
termination of ongoing research or the disqualification of data for submission
to regulatory authorities. For example, if we were to fail to properly monitor
compliance with study protocols, the data collected could be
disqualified.  If this were to happen, we could be contractually
required to repeat a study at no further cost to the customer, but at
substantial cost to us.  This would harm our reputation, our prospects
for future work and our operating results. Furthermore, the issuance of a notice
from the FDA based on a finding of a material violation by us of good clinical
practice, good laboratory practice or good manufacturing practice requirements
could materially and adversely affect our business and financial
performance.


13




Our
business uses biological and hazardous materials, which could injure people or
violate laws, resulting in liability that could adversely impact our financial
condition and business.




Our
activities involve the controlled use of potentially harmful biological
materials, as well as hazardous materials, chemicals and various radioactive
compounds. We cannot completely eliminate the risk of accidental contamination
or injury from the use, storage, handling or disposal of these materials. In the
event of contamination or injury, we could be held liable for damages that
result, and any liability could exceed our insurance coverage and ability to
pay. Any contamination or injury could also damage our reputation, which is
critical to getting new business. In addition, we are subject to federal, state
and local laws and regulations governing the use, storage, handling and disposal
of these materials and specified waste products. The cost of compliance with
these laws and regulations is significant and if changes are made to impose
additional requirements, these costs could increase and have an adverse impact
on our financial condition and results of operations.




The
majority of our customers’ contracts can be terminated upon short
notice.




Most of
our contracts for CRO services are terminable by the client upon 30 to 90 days’
notice. Clients terminate or delay their contracts for a variety of reasons,
including but not limited to:





•
            products being tested fail to
      satisfy safety requirements;





•
            products have undesired clinical
      results;





•
            the client decides to forego a
      particular study;





•
            inability to enroll enough
      patients in the study;





•
            inability to recruit enough
      investigators;





•
            production problems cause
      shortages of the drug; and





•
            actions
      by regulatory authorities.





The loss, reduction in scope or delay
of a large contract or the loss or delay of multiple contracts could materially
adversely affect our business, although our contracts frequently entitle us to
receive the costs of winding down the terminated projects, as well as all fees
earned by us up to the time of termination. Some contracts also entitle us to a
termination fee.





We
may bear financial risk if we under price our contracts or overrun cost
estimates.





Since some of our contracts are
structured as fixed price or fee-for-service, we bear the financial risk if we
initially under price our contracts or otherwise overrun our cost estimates.
Such under pricing or significant cost overruns could have a material adverse
effect on our business, results of operations, financial condition, and cash
flows.





Our
Products business depends on our intellectual property.





Our
products business is dependent, in part, on our ability to obtain patents in
various jurisdictions on our current and future technologies and products, to
defend our patents and protect our trade secrets and to operate without
infringing on the proprietary rights of others. There can be no assurance that
our patents will not be challenged by third parties or that, if challenged,
those patents will be held valid. In addition, there can be no assurance that
any technologies or products developed by us will not be challenged by third
parties owning patent rights and, if challenged, will be held not to infringe on
those patent rights. The expense involved in any patent litigation can be
significant. We also rely on unpatented proprietary technology, and there can be
no assurance that others will not independently develop or obtain similar
products or technologies.




We
might incur substantial expense to develop products that are never successfully
developed and commercialized.




We have incurred and expect to continue
to incur substantial research and development and other expenses in connection
with our products business. The potential products to which we devote resources
might never be successfully developed or commercialized by us for numerous
reasons, including:




•
            inability to develop products
      that address our customers’
needs;





•
            competitive products with
      superior performance;





•
            patent conflicts or unenforceable
      intellectual property
rights;




14




•
            demand for the particular
      product; and





•
            other factors that could make the
      product uneconomical.





Incurring
significant expenses for a potential product that is not successfully developed
and/or commercialized could have a material adverse effect on our business,
financial condition, prospects and stock price.





Providing
CRO services creates a risk of liability.





In
certain circumstances, we seek to manage our liability risk through contractual
provisions with clients requiring us to be indemnified by the clients or covered
by the clients’ product liability insurance policies. Although most of our
clients are large, well-capitalized companies, the financial performance of
these indemnities is not secured. Therefore, we bear the risk that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations or the liability would exceed the amount of
applicable insurance. Furthermore, we could be held liable for errors and
omissions in connection with the services we perform. There can be no assurance
that our insurance coverage will be adequate, or that insurance coverage will
continue to be available on acceptable terms, or that we can obtain
indemnification arrangements or otherwise be able to limit our liability
risk.





We
may expand our business through acquisitions.





We
occasionally review acquisition candidates and acquisitions which we have
already made.  We have faced substantial problems integrating
acquisitions in the past.  Factors which may affect our ability to
grow successfully through acquisitions include:





·
            inability
      to obtain financing due to our financial condition and recent
      performance;


·
            difficulties
      and expenses in connection with integrating the acquired companies and
      achieving the expected benefits;


·
            diversion
      of management’s attention from current
  operations;


·
            the
      possibility that we may be adversely affected by risk factors facing the
      acquired companies;


·
            acquisitions
      could be dilutive to earnings, or in the event of acquisitions made
      through the issuance of our common stock to the shareholders of the
      acquired company, dilutive to the percentage of ownership of our existing
      stockholders;


·
            potential
      losses resulting from undiscovered liabilities of acquired companies not
      covered by the indemnification we may obtain from the seller;
      and


·
            loss
      of key employees of the acquired
companies.





Changes
in government regulation or in practices relating to the pharmaceutical industry
could change the need for the services we provide.





Governmental
agencies throughout the world, but particularly in the United States, strictly
regulate the drug development process. Our business involves helping
pharmaceutical and biotechnology companies comply with the regulatory drug
approval process. Changes in regulation, such as a relaxation in regulatory
requirements or the introduction of simplified drug approval procedures, or an
increase in regulatory requirements that we have difficulty satisfying, or that
make our services less competitive, could substantially change the demand for
our services. Also, if the government increases efforts to contain drug costs
and pharmaceutical and biotechnology company profits from new drugs, our
customers may spend less, or reduce their growth in spending on research and
development.





Privacy
regulations could increase our costs or limit our services.





The US
Department of Health and Human Services has issued regulations under the Health
Insurance Portability and Accountability Act of 1996 (“HIPAA”). These
regulations demand greater patient privacy and confidentiality. Some state
governments are considering more stringent regulations. These regulations might
require us to increase our investment in security or limit the services we
offer. We could be found legally liable if we fail to meet existing or proposed
regulation on privacy and security of health information.





15




We
may be affected by health care reform.





In
March 2010, the United States Congress enacted health care reform
legislation intended over time to expand health insurance coverage and impose
health industry cost containment measures.  This legislation may
significantly impact the pharmaceutical and biotechnology industries.  In
addition, the U.S. Congress, various state legislatures and European and Asian
governments may consider various types of health care reform in order to control
growing health care costs. We are presently uncertain as to the effects of the
recently enacted legislation on our business and are unable to predict what
legislative proposals will be adopted in the future, if any.





Implementation
of health care reform legislation may have certain benefits but also may contain
costs that could limit the profits that can be made from the development of new
drugs. This could adversely affect research and development expenditures by
pharmaceutical and biotechnology companies, which could in turn decrease the
business opportunities available to us both in the United States and abroad. In
addition, new laws or regulations may create a risk of liability, increase our
costs or limit our service offerings.





We
rely on air transportation to serve our customers.





Our
laboratories and certain of our other businesses are heavily reliant on air
travel for transport of samples and other material, products and people. A
significant disruption to the air travel system, or our access to it, could have
a material adverse effect on our business.





We
have experienced periods of losses on our operating activities.





Our
overall strategy includes increasing revenue and reducing/controlling operating
expenses. We have concentrated our efforts in ongoing, Company-wide efficiency
activities intended to increase productivity and reduce costs including
personnel reductions, reduction or elimination of non-personnel expenses and
realigning and streamlining operations. We cannot assure that our efforts will
result in any increased profitability, or if our efforts result in profit, that
profits will continue, for any meaningful period of time.





We
depend on the pharmaceutical and biotechnology industries.




Over the past several years, some areas
of our businesses have grown significantly as a result of the increase in
pharmaceutical and biotechnology companies outsourcing their preclinical and
clinical research support activities. We believe that due to the significant
investment in facilities and personnel required to support drug development,
pharmaceutical and biotechnology companies look to outsource some or all of
those services. By doing so, they can focus their resources on their core
competency of drug discovery, while obtaining the outsourced services from a
full-service provider like us. Our revenues depend greatly on the expenditures
made by these pharmaceutical and biotechnology companies in research and
development. In some instances, companies in these industries are reliant on
their ability to raise capital in order to fund their research and development
projects. Accordingly, economic factors and industry trends that affect our
clients in these industries also affect our business. If companies in these
industries were to reduce the number of research and development projects they
conduct or outsource, our business could be materially adversely
affected.





Unfavorable
general economic conditions may materially adversely affect our
business.




Unfavorable global economic conditions,
including the recent recession in the United States and the recent financial
crisis affecting the banking system and financial markets, could negatively
affect our business. While it is difficult for us to predict the impact of
general economic conditions on our business, these conditions could reduce
customer demand for some of our services, which could cause our revenue to
decline. Also, our customers, particularly smaller biotechnology companies which
are especially reliant on the credit and capital markets, may not be able to
obtain adequate access to credit or equity funding, which could affect their
ability to make timely payments to us. Moreover, we rely on credit facilities to
provide working capital to support our operations.  We regularly
evaluate alternative financing sources.  Further changes in the
commercial credit market or in the financial stability of our creditors may
impact the ability of our creditors to provide additional financing. In
addition, the financial condition of our credit facility providers, which is
beyond our control, may adversely change. Any decrease in our access to
borrowings under our credit facility, tightening of lending standards and other
changes to our sources of liquidity could adversely impact our ability to obtain
the financing we need to continue operating the business in our current
manner.  For these reasons, among others, if the economic conditions
stagnate or decline, our operating results and financial condition could be
adversely affected.




16




ITEM
1B- UNRESOLVED STAFF COMMENTS




Not
applicable.




ITEM
2-PROPERTIES




We
operate in the following locations, all of which we own, except as otherwise
indicated:




•            
Our principal executive
offices are located at 2701 Kent Avenue, West Lafayette, Indiana 47906,
and constitute multiple buildings with approximately 117,000 square feet of
operations, manufacturing, and administrative space. Both the services segment
and the products segment conduct operations at this facility. The buildings have
been financed by mortgages.




•            
BAS Evansville Inc., is
in Evansville, Indiana. Weoccupy 10 buildings with
roughly 92,000 square feet of operating and administrative space on 52 acres.
Most of this site is engaged in preclinical toxicology testing of developmental
drugs in animal models. A recent addition was financed by a
mortgage.




•            
Bioanalytical Systems,
Ltd. is in Warwickshire, UK.  This facility contains our
contract services and instruments operations for laboratories, sales and
technical support services in the U.K.  During fiscal 2008, we moved
into a newly constructed laboratory space in the same office park as the
previous leased space.  Our space of approximately 8,000 square feet
is specifically designed for laboratory use and will allow us to potentially
double capacity over the previous space.




•            
BASi Northwest Laboratoryis in McMinnville, Oregon, approximately 40 miles from Portland. We lease
roughly 8,600 square feet of laboratory and administrative space, principally
used for bioanalytical services.




We
believe that our facilities are adequate for our operations and that suitable
additional space will be available if and when needed. The terms of any
mortgages and leases for the above properties are detailed in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, and Notes 6 and 7 to the Notes to Consolidated Financial
Statements.





ITEM
3-LEGAL PROCEEDINGS





We
currently do not have any material pending legal proceedings.




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





Not
applicable.




17




PART
II




ITEM
5-MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS




Market
Information




As of
September 30, 2010, our common stock was traded on NASDAQ Capital Markets under
the symbol “BASi”.  The following table sets forth the quarterly high
and low sales price per share of our common stock from October 1, 2008 through
September 30, 2010.




High
                  
                  
                  LowFiscal
      Year Ended September 30, 2009First
      Quarter
                  
                  $
                  5.13
                  
                  
                  $
                  1.00Second
      Quarter
                  
                  
                  1.82
                  
                  
                  
                  0.60Third
      Quarter
                  
                  
                  1.81
                  
                  
                  
                  0.70Fourth
      Quarter
                  
                  
                  1.15
                  
                  
                  
                  0.60Fiscal
      Year Ended September 30, 2010First
      Quarter
                  
                  $
                  2.42
                  
                  
                  $
                  0.81Second
      Quarter
                  
                  
                  1.42
                  
                  
                  
                  0.65Third
      Quarter
                  
                  
                  1.50
                  
                  
                  
                  0.74Fourth
      Quarter
                  
                  
                  1.22
                  
                  
                  
                  0.77


Holders




There
were approximately 2,700 holders of record of our common stock as of
January 7, 2011.




Dividends




We did
not pay any cash dividends on our common shares in fiscal years 2009 or 2010 and
do not anticipate paying cash dividends in the foreseeable future.




18




Equity
Compensation Plan Information




We
maintain a stock option plan that allows for the granting of options to certain
key employees and directors. The following table gives information about equity
awards under our stock option plans (in thousands except per share
amounts):




Plan Category
                          
                          Number of Securities to be
                            Issued upon Exercise of
                            Outstanding Options
                          
                          
                          Weighted Average
                            Exercise Price per share
                            of Outstanding Options
                          
                          
                          Number of Securities
                            Remaining Available for Future
                            Issuance under the Equity
                            Compensation Plan
                            (Excluding Securities Reflected
                            in First Column)Equity
      compensation plans approved by security holders
                          
                          
                          680
                          
                          
                          $
                          2.59
                          
                          
                          
                          3Equity
      compensation plans not approved by security holders (1)
                          
                          
                          25
                          
                          
                          $
                          4.58
                          
                          
                          
                          —Total
                          
                          
                          705
                          
                          
                          $
                          2.66
                          
                          
                          
                          3





(1)
Includes option to purchase 25 shares at $4.58 granted to Michael R. Cox on
April 1, 2004.




For
additional information regarding our stock option plans approved by security
holders, please see Note 8 to the Notes to Consolidated Financial Statements
included in Item 8 of this report.




ITEM
6 – SELECTED FINANCIAL DATA




Not
applicable.




[Remainder
of page intentionally left blank.]




19




ITEM
7-MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




This
report contains statements that constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Those
statements appear in a number of places in this Report and may include
statements regarding our intent, belief or current expectations with respect to,
but are not limited to (i) our strategic plans; (ii) trends in the demand for
our products and services; (iii) trends in the industries that consume our
products and services; (iv) our ability to develop new products and services;
(v) our ability to make capital expenditures and finance operations; (vi) global
economic conditions, especially as they impact our markets; (vii) our cash
position; and (viii) our ability to integrate a new marketing team. Readers are
cautioned that any such forward looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those in the forward looking statements as a result of various
factors, many of which are beyond our control.




In
addition, we have based these forward-looking statements on our current
expectations and projections about future events. Although we believe that the
assumptions on which the forward-looking statements contained herein are based
are reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based upon those assumptions also could
be incorrect. The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included or incorporated by reference elsewhere in this Report. In addition to
the historical information contained herein, the discussions in this Report may
contain forward-looking statements that may be affected by risks and
uncertainties, including those discussed in Item 1A, Risk Factors. Our actual
results could differ materially from those discussed in the forward-looking
statements.




The
following amounts are in thousands unless otherwise indicated.




Business
Overview




We
provide contract drug development services and research equipment to many
leading global pharmaceutical, medical research and biotechnology companies and
institutions that advance the drug discovery and development process. We offer
an efficient, variable-cost alternative to our clients' internal product
development programs. Outsourcing development work to reduce overhead and speed
drug approvals through the Food and Drug Administration ("FDA") is an
established alternative to in-house development among pharmaceutical companies.
We derive our revenues from sales of our research services and drug development
tools, both of which are focused on determining drug safety and
efficacy.  Since its formation in 1974, the Company’s products and
services have been utilized in the research of drugs to treat central nervous
system disorders, diabetes, osteoporosis and other diseases.




We
support the preclinical and clinical development needs of researchers and
clinicians for small molecule and large biomolecule drug candidates. We believe
our scientists have the skills in analytical instrumentation development,
chemistry, computer software development, physiology, medicine, analytical
chemistry and toxicology to make the services and products we provide
increasingly valuable to our current and potential clients. Our principal
clients are scientists engaged in analytical chemistry, drug safety evaluation,
clinical trials, drug metabolism studies, pharmacokinetics and basic
neuroscience research at many of the small start-up biotechnology companies and
the largest global pharmaceutical companies.




Our
business is largely dependent on the level of pharmaceutical and biotechnology
companies' efforts in new drug discovery and approval. Our services segment is a
direct beneficiary of these efforts, through outsourcing by these companies of
research work. Our products segment is an indirect beneficiary of these efforts,
as increased drug development leads to capital expansion, providing
opportunities to sell the equipment we produce and the consumable supplies we
provide that support our products.




Developments
within the industries we serve have a direct, and sometimes material, impact on
our operations. Currently, many large pharmaceutical companies have major
"block-buster" drugs that are nearing the end of their patent protections. This
puts significant pressure on these companies both to develop new drugs with
large market appeal, and to re-evaluate their cost structures and the
time-to-market of their products. Contract research organizations ("CRO's") have
benefited from these developments, as the pharmaceutical industry has turned to
out-sourcing to both reduce fixed costs and to increase the speed of research
and data development necessary for new drug applications.  The number
of significant drugs that have reached or are nearing the end of their patent
protection has also benefited the generic drug industry. Generic drug companies
provide a significant source of new business for CRO's as they develop, test and
manufacture their generic compounds.




20




A
significant portion of innovation in the pharmaceutical industry is now being
driven by biotech and small, venture capital funded, drug development companies.
Many of these companies are "single-molecule" entities, whose success depends on
one innovative compound. While several of the biotech companies have reached the
status of major pharmaceuticals, the industry is still characterized by smaller
entities. These developmental companies generally do not have the resources to
perform much of the research within their organizations, and are therefore
dependent on the CRO industry for both their research and for guidance in
preparing their FDA submissions. These companies have provided significant new
opportunities for the CRO industry, including us. They do, however, provide
challenges in selling, as they frequently have only one product in development,
which causes CRO's to be unable to develop a flow of projects from a single
company. These companies may expend all their available funds and cease
operations prior to fully developing a product. Additionally, the funding of
these companies is subject to investment market fluctuations, which changes as
the risk profiles and appetite of investors change.




Research
services are capital intensive. The investment in equipment and facilities to
serve our markets is substantial and continuing. While our physical facilities
are adequate to meet market needs for the near term, rapid changes in
automation, precision, speed and technologies necessitate a constant investment
in equipment and software to meet market demands. We are also impacted by the
heightened regulatory environment and the need to improve our business
infrastructure to support our increasingly diverse operations, which will
necessitate additional capital investment. Our ability to generate capital to
reinvest in our capabilities, both through operations and financial
transactions, is critical to our success. While we are currently committed to
fully utilizing recent additions to capacity, sustained growth will require
additional investment in future periods.  Our financial position could
limit our ability to make such investments.




In fiscal 2009, there were several
announcements of large mergers in the pharmaceutical industry. Pfizer Inc. and
Eli Lilly and Co. have both announced significant acquisitions.  Also,
Merck and Roche announced mergers with Schering-Plough and Genentech,
respectively. We believe that such merger and consolidation activity reduced the
demand and increased competition for CRO services and was a distraction for the
research and development arms of these companies as they awaited finalization of
new drug development portfolios.  With the closing of these major
mergers, the pharmaceutical industry can now return to focusing on driving drugs
and therapies through the development pipeline.We believe that as larger
pharmaceutical companies become leaner and more efficient, generally focusing on
their core competencies of fundamental research and development and
commercialization, they will also continue to be conservative in their staffing
and further reduce their in-house expertise. This should lead to reinvigoration
of outsourcing as they assess their key internal priorities.




Our primary market, the
contract research organization (“CRO”) market, is experiencing serious economic
pressures.  Pharmaceutical development companies have delayed the
initiation of CRO studies and reduced their total spending for CRO
services.  The combination of reduced customer demand, cost
containment initiatives pursued by our customers and excess capacity within our
industry generally, resulted in significant pricing pressure in 2010. This resulted in a
significant negative impact on our revenues for fiscal 2010 as compared to our
prior fiscal year.In response, we have taken a number of
steps to better support our customers in today's challenging environment,
identify new strategies to enhance client satisfaction, improve operating
efficiencies and generally strengthen our business model.





Patient
Protection and Affordable Care Act





In March 2010, the Patient Protection
and Affordable Care Act (the “Act”) was enacted by the U.S. Congress and signed
into law by the President.  The purpose of the legislation is to
extend medical insurance coverage to a higher percentage of U.S.
citizens.  Many of the provisions in the Act have delayed effective
dates over the next decade, and will require extensive regulatory
guidance.  Companies in our principal client industry,
pharmaceuticals, will be required under the Act to provide additional discounts
on medicines provided under Medicare and Medicaid to assist in the funding of
the program; however, government estimates are that over 31 million additional
citizens will eventually be covered by medical insurance as a result of the Act,
which should expand the markets for their products.  It is premature
to accurately predict the impacts these and other competing forces will have on
our basic client market, drug development.  Additionally, the Act does
not directly impact spiraling health care costs in the U.S., which could lead to
additional legislation impacting our target markets in the future.





We maintain an optional health benefits
package for all of our full-time employees, which is largely paid by our
contributions with employees paying a portion of the cost, generally less than
20% of the total.  Based on our current understanding of the Act, we
do not anticipate significant changes to our programs or of their costs to the
Company or our employees as a result of the Act.




21




We have experienced increases in the
costs of our health benefit programs in excess of inflation rates, and expect
those trends to continue.  We are exploring options in plan funding,
delivery of benefits and employee wellness in our continuing effort to obtain
maximum benefit for our health care expenditures, while maintaining quality
programs for our employees.  We do not expect these efforts to have a
material financial impact on the Company.




Executive
Overview




Our revenues are dependent on a
relatively small number of industries and clients. As a result, we closely
monitor the market for our services. In fiscal 2010, we experienced lower demand
for our products and services and significant project delays. We believe this
was primarily due to the current general economic conditions and the global
financial crisis, increased competition, and consolidation of several large
pharmaceutical and biotechnology companies, which delayed decisions on research
and development spending. Despite these conditions and uncertainties about the
level of and delays in R&D spending by pharmaceutical and biotechnology
companies, we continue to believe in the fundamentals of the market and that it
will rebound in future periods. For fiscal 2011, we plan to focus on sales
execution, operational performance and building strategic partnerships with
pharmaceutical and biotechnology companies.




We review various metrics to evaluate
our financial performance, including period-to-period changes in new orders,
revenue, margins and earnings. In fiscal 2010, we had new authorizations of
$38.4 million, an increase of 14.3% over the same period in 2009. Though the new
authorizations increased, pricing declines along with study delays contributed
to an overall decline in revenues of approximately 10% versus the prior fiscal
year.  Gross margin declined as well from the prior fiscal year, but
earnings increased in the current fiscal year due to savings in operating
expenses of approximately 24%.  For a detailed discussion of our
revenue, margins, earnings and other financial results for the fiscal year ended
September 30, 2010, see “Results of Operations – 2010 Compared to 2009”
below.




As of September 30, 2010, we had
$1,422 of cash and cash equivalents as compared to $870 of cash and cash
equivalents at the end of fiscal 2009. In fiscal 2010, we generated $2,441 in
cash from operations.  Our accounts receivable and unbilled revenues
balances decreased $650 from the prior fiscal year primarily due to the decline
in sales and increased efforts to collect outstanding receivables. We plan to
continue to monitor accounts receivable and the various factors that affect it,
including contract terms, the mix of contracts performed and our success in
collecting receivables. We will also continue to limit unnecessary spending, and
continue our freeze on wage rates until increases can be supported by improved
operations.




[Remainder
of page intentionally left blank.]




22




Results
of Operations




The
following table summarizes the consolidated statement of operations as a
percentage of total revenues:




Year Ended September 30,2010
                                            
                                            
                                            2009Service
      revenue
                                            
                                            
                                            76.0
                                            %
                                            
                                            
                                            76.0
                                            %Product
      revenue
                                            
                                            
                                            24.0
                                            
                                            
                                            
                                            24.0Total
      revenue
                                            
                                            
                                            100.0
                                            %
                                            
                                            
                                            100.0
                                            %Cost
      of service revenue (a)
                                            
                                            
                                            85.0
                                            
                                            
                                            
                                            86.8Cost
      of product revenue (a)
                                            
                                            
                                            41.6
                                            
                                            
                                            
                                            42.2Total
      cost of revenue
                                            
                                            
                                            74.5
                                            
                                            
                                            
                                            76.1Gross
      profit
                                            
                                            
                                            25.5
                                            
                                            
                                            
                                            23.9Total
      operating expenses
                                            
                                            
                                            32.4
                                            
                                            
                                            
                                            38.4Operating
      loss
                                            
                                            
                                            (6.9
                                            )
                                            
                                            
                                            (14.5
                                            )Other
      expense
                                            
                                            
                                            (3.6
                                            )
                                            
                                            
                                            (3.3
                                            )Loss
      before income taxes
                                            
                                            
                                            (10.5
                                            )
                                            
                                            
                                            (17.8
                                            )Income
      tax benefit
                                            
                                            
                                            (1.2
                                            )
                                            
                                            
                                            (0.6
                                            )Net
      loss
                                            
                                            
                                            (9.3
                                            )%
                                            
                                            
                                            (17.2
                                            )%





(a)
Percentage of service and product revenues, respectively.




2010 Compared to
2009





Service
and Product Revenues




Overall,
our Services and Product revenues continued to be negatively impacted by the
U.S. and European economic recession.  Revenues for the year ended
September 30, 2010 declined 9.5% to $28,781 compared to $31,784 for the year
ended September 30, 2009.  A substantial portion of the decline was in
the first half of the current fiscal year.




Our
Services revenue declined 9.5% to $21,864 compared to $24,158 for the prior
fiscal year primarily as a result of lower bioanalytical analysis,
pharmaceutical analysis and toxicology revenues.  Our bioanalytical
analysis revenues decreased $904 (a 6.6% decline from fiscal 2009), mainly due
to study delays by clients and price declines.  While volumes of
studies and samples continue to show an increase, pricing still lags
pre-recession levels.    Our Oregon facility experienced the
majority of the decline in bioanalytical analysis revenues, or $1,049. Likewise,
the decrease in toxicology revenues of $411, or 5.2%, from prior the fiscal year
is mainly due to study delays and cancellations.  Further, other
laboratory services declined from fiscal 2009 by $979, or 38.8%, due in part to
customers bringing these services in house.




23




Fiscal Year Ended
                                    September 30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  Change
                                  
                                  
                                  %Bioanalytical
      analysis
                                  
                                  $
                                  12,779
                                  
                                  
                                  $
                                  13,683
                                  
                                  
                                  $
                                  (904
                                  )
                                  
                                  
                                  -6.6
                                  %Toxicology
                                  
                                  
                                  7,543
                                  
                                  
                                  
                                  7,954
                                  
                                  
                                  
                                  (411
                                  )
                                  
                                  
                                  -5.2
                                  %Other
      laboratory services
                                  
                                  
                                  1,542
                                  
                                  
                                  
                                  2,521
                                  
                                  
                                  
                                  (979
                                  )
                                  
                                  
                                  -38.8
                                  %




Sales in
our Products segment decreased 9.3% from $7,626 to $6,917 when compared to the
prior fiscal year.  The majority of that decrease stems from lower
grant revenue in fiscal 2010 as the grant funded by the NIH expired in January
2010.  Also contributing to the decline in Products revenues are lower
sales of our Culex automated in vivo sampling systems,
which declined 3.5% to $3,150 from $3,263, and a decline in the sales of our
mature analytical instruments, which declined $186 or 5.7%.  Though we
continue to experience sluggish demand for higher priced capital assets as
customers reduce spending as part of their overall cost savings initiatives, a
few customers have begun to release capital funds for larger
projects.




Fiscal Year Ended
                                  September 30,2010
                                
                                
                                2009
                                
                                
                                Change
                                
                                
                                %Culex,
      in-vivo sampling systems
                                
                                $
                                3,150
                                
                                
                                $
                                3,263
                                
                                
                                $
                                (113
                                )
                                
                                
                                -3.5
                                %Analytical
      instruments
                                
                                
                                3,070
                                
                                
                                
                                3,256
                                
                                
                                
                                (186
                                )
                                
                                
                                -5.7
                                %




Although
our revenues for the current fiscal year were less than our prior fiscal year,
our revenues increased 16% in the second half of the current fiscal year from
the first half.  This increase is the result of increased proposal
opportunities and acceptance rates for our Service revenues in our current
fiscal year as well as slightly increased capital spending by Product customers
in the second half of the current fiscal year.




Cost of Revenue




Cost of
revenue for the year ended September 30, 2010 was $21,448 or 74.5% of revenue
compared to $24,180, or 76.1% of revenue for the comparable prior
period.




Cost of
Service revenue as a percentage of Service revenue decreased to 85.0% in the
current fiscal year from 86.8% in the prior year.  The principal cause
of this decrease was a reduction of our work force in January 2010 and other
cost containment measures.




Cost of
Product revenue as a percentage of Product revenue in the current fiscal year
decreased to 41.6% from 42.2% in the prior fiscal year.  This decrease
is mainly due to headcount and other expense reductions, as well as a reduction
in the cost of obsolete and slow moving inventory in the current fiscal year
compared to the cost recognized in the prior fiscal year.




Operating
Expenses




Selling
expenses for the year ended September 30, 2010 decreased by 19.1% to $2,665 from
$3,296 for the year ended September 30, 2009.   This decrease was
primarily driven by a decrease in salary expense resulting from the reduction in
work force and other departures, lower commissions due to the decline in sales
and reduced spending on marketing.  The reduction in marketing
expenditures is related to the initial costs of our branding and marketing
campaign in fiscal 2009.




Research
and development expenses for the year ended September 30, 2010 decreased 28.3%
to $546 from $762 for the year ended September 30, 2009. The decrease was
partially due to a decrease in salaries from the reduction in work force as well
as reduced spending on temporary labor, operating supplies and consulting
services.




24




General
and administrative expenses for the current fiscal year decreased 20.3% to
$6,119 from $7,674 for the prior year.  The decrease is mainly due to
the following:  1) severance expenses for former employees recorded in
the first quarter of fiscal 2009 exceeded those recorded in the second quarter
of fiscal 2010; 2) a decline in stock based compensation expense as grants
became fully vested; and 3) company-wide efforts at cost
containment.  This decline was after incurring $216 in the current
fiscal year for lease settlement costs.




Other
Income/Expense




Other
income (expense), net, was $(1,027) for the year ended September 30, 2010 as
compared to $(1,060) for the year ended September 30, 2009. The primary reason
for the decrease is a $103 non-cash charge on our interest rate swaps in fiscal
2009, slightly offset by increased interest expense from our new line of credit
agreement in fiscal 2010.




Income
Taxes




Our
effective tax rate for continuing operations for the year ended September 30,
2010 was (11.0%) compared to (3.5%) for the prior fiscal year.  In
fiscal 2009, a valuation allowance was recorded against the entire US deferred
income tax balance, adjusting the rate from (36.4%) to (3.5%) due to the
uncertainty of the benefit realization.  The benefit in fiscal 2010 is
the result of resolving an uncertain state tax liability for less than the
recorded amount.  No net benefits have been provided on taxable losses
in the current fiscal year.




Liquidity
and Capital Resources




Comparative
Cash Flow Analysis




Since
inception, our principal sources of cash have been cash flow generated from
operations and funds received from bank borrowings and other financings. At
September 30, 2010, we had cash and cash equivalents of $1,422 compared to $870
at September 30, 2009.




Net cash
provided by continuing operating activities was $2,441 for the year ended
September 30, 2010, compared to $1,999 for the year ended September 30, 2009.
The increase in cash provided by operating activities in the current fiscal year
partially results from a decrease in our operating loss.  Other
contributing factors to our cash from operations were $2,323 of depreciation and
amortization, net collections on accounts receivable of $650, an increase in
customer advances of $1,719 as we booked new business and the recording of a
$216 long-term liability in settlement of a contingent lease liability on our
former Baltimore facility.  Included in operating activities for
fiscal 2009 are non-cash charges of $2,645 for depreciation and amortization,
$103 recorded to reflect the fair value of our interest rate swaps and $472 for
impairment of goodwill for our UK operations.  The impact on operating
cash flow of other changes in working capital was not material.




In
January 2010, we completed a reduction in work force, through both attrition and
terminations, which impacted all areas of operations and reduced our annual
compensation expense by approximately 10%.




Investing
activities used $450 in fiscal 2010, primarily for capital
expenditures.  Our principal investments were for laboratory equipment
replacements and upgrades in all of our facilities as well as general building
and information technology infrastructure expenditures at all
sites.  The 46% reduction in capital spending from fiscal 2009 is a
result of our efforts to contain cash commitments throughout the organization,
funding only necessary expenditures.  We intend to increase capital
expenditures, particularly for laboratory equipment, in our next fiscal year
when financing becomes available to fund our purchases.




Financing
activities used $1,458 in the current fiscal year as compared to $1,476 used for
fiscal 2009. The main use of cash in fiscal 2010 was for long term debt and
capital lease payments of $1,325, as well as net payments on our line of credit
of $564.  We also conducted a sale and leaseback of some of our
unencumbered laboratory equipment which netted $431 in cash.  In
fiscal 2009, our net payments on our line of credit were $264 with long term
debt and capital lease payments of $1,212.




25




During
fiscal 2009, cash provided by operating activities for discontinued operations
of $588 was mainly due to the collection of outstanding
receivables.




Capital
Resources




Property
and equipment spending totaled $450 and $834 in fiscal 2010 and 2009,
respectively. The decrease in spending in fiscal 2010 is the result of cash
savings initiatives, funding only necessary expenditures. Capital investments
for the purchase of additional laboratory equipment are driven by anticipated
increases in research services, and by the replacement or upgrading of our
equipment. Although we may consider strategic acquisition opportunities, we do
not intend to aggressively pursue additional acquisitions until we fully utilize
existing capacity.




We have
notes payable to Regions Bank (“Regions”) aggregating approximately $8,147 and a
$3,000 line of credit with Entrepreneur Growth Capital LLC (EGC), which is
subject to qualifying collateral that may substantially reduce or eliminate our
borrowing capacity at any time. Regions notes payable include three outstanding
mortgages on our facilities in West Lafayette and Evansville, Indiana, which
total $7,051.  Two of the mortgages mature in November 2012 with an
interest rate fixed at 7.1%, while the other matures in February 2011 with an
interest rate of 6.1%.  In addition to the mortgages, we also have a
note payable with Regions totaling $1,096, maturing December 18,
2010.  Interest on this term loan is equal to 6.1%. Monthly payments
are $9 plus interest. The loan is collateralized by real estate at our West
Lafayette and Evansville, Indiana locations.




On
November 29, 2010, we executed an amendment to loans with
Regions.  Regions agreed to accept a $500 principal payment on the
note payable with $1.1 million of principal maturing on December 18, 2010 and a
$500 principal payment on one mortgage with $1.3 million of principal maturing
on February 11, 2011.  The principal payments are to be made on or
before December 18, 2010 and February 11, 2011,
respectively.  Thereafter, the unpaid principal on the note payable
and the mortgage will then be incorporated into a replacement note maturing in
November 1, 2012.The
replacement note will bear interest at LIBOR plus 300 basis points (minimum of
4.5%) with monthly principal amortization.  See Note 6 to the
Consolidated Financial Statements for additional information.  On
December 17, 2010, we made the $500 principal payment on the $1.1 million
note.




We have
interest rate swap agreements with respect to the note payable and mortgage
mentioned in the above paragraph to fix the interest rate at 6.1%.  We
entered into the derivative transactions to hedge interest rate risk of this
debt obligation and not to speculate on interest rates.  The notional
values of the swaps as of September 30, 2010 and 2009 were $2,442 and $2,701,
respectively.  The fair value of the swaps was determined with a level
two analysis.  As a result of recent declines in short term interest
rates, the swaps had a negative fair value of $31 at September 30, 2010 and $103
at September 30, 2009, with the decline in the liability being recorded in our
consolidated financial statements as a reduction in interest expense in the
current fiscal year and the increase in liability recorded as an increase in
interest expense in the prior fiscal year.  The terms of the interest
rate swaps match the scheduled principal outstanding under the
loans.  We do not intend to prepay the loans, and expect the swaps to
expire under their terms in fiscal 2011 without payment by us.  Upon
expiration of the swaps, the net fair value recorded in the consolidated
financial statements is expected to be zero.




As part
of the amendment, Regions also agreed to amend the loan covenants for all of the
debt to be more favorable to us beginning with our fiscal quarter ending
December 31, 2010.  Regions requires us to maintain certain ratios
including a fixed charge coverage ratio and total liabilities to tangible net
worth ratio.  The fixed charge coverage ratio calculation has been
adjusted with an ending ratio required of not less than 1.25 to
1.00.  Also, the total liabilities to tangible net worth ratio has
been adjusted to not greater than 2.10 to 1.00.  Provided we comply
with the revised covenant ratios, the amendment removes limitations on the
Company’s purchase of fixed assets. Based on projections for fiscal 2011, we
expect to be in compliance with the adjusted covenants.  The first
compliance test under this amendment will be on the balance sheet and trailing
twelve months at March 31, 2011.




Borrowings
under our credit agreements are collateralized by substantially all assets
related to our operations and all common stock of our U.S. subsidiaries and 65%
of the common stock of our non-United States subsidiaries. Under the terms of
our credit agreements, we have agreed to restrict advances to subsidiaries and
limit additional indebtedness. The Regions loan agreements both contain
cross-default provisions with each other and with the revolving line of credit
with EGC described below.  At September 30, 2010, we were in
compliance with these covenants.




In fiscal
2011, we expect to see slow but continued improvement in the volume of new
bookings, but little improvement in pricing.  We also expect improved
gross profit margins due to the cost controls implemented.  Based on
our expectation of a small increase in revenue, the availability on our line of
credit, and the impact of the cost reductions implemented, we project that we
will have the liquidity required to meet our fiscal 2011 operations and debt
obligations.  Should
operations materially fail to meet our expectations for the coming fiscal year,
we may not be able to comply with all of our debt covenants.




26




Revolving Line of
Credit




On
January 13, 2010, we entered into a new $3,000 revolving line of credit
agreement (“Credit Agreement”), with EGC, which we use for working capital and
other purposes, to replace a line of credit that expired on January 15, 2010. On
January 18, 2010, we used this facility to repay our prior line of
credit.  Borrowings under the Credit Agreement are secured by a
blanket lien on our personal property, including certain eligible accounts
receivable, inventory, and intellectual property assets, and a second mortgage
on our West Lafayette and Evansville real estate. Borrowings are calculated
based on 75% of eligible accounts receivable.  Under the Credit
Agreement, the Company has agreed to restrict advances to subsidiaries, limit
additional indebtedness and capital expenditures and comply with certain
financial covenants outlined in the Credit Agreement. The initial term of the
Credit Agreement terminates January 31, 2011. If we
prepay prior to the expiration of the renewal term, then we are subject to an
early termination fee equal to the minimum interest charges of $15 for each of
the months remaining until expiration.









The
covenants in the Credit Agreement required that we maintain a minimum tangible
net worth of $9,000. The Credit Agreement also contains cross-default provisions
with the Regions loans and any future EGC loans.  At September 30,
2010, we were not in compliance with the minimum tangible net worth covenant
requirement.




On December
23, 2010, we negotiated an amendment to this Credit Agreement.  As
part of the amendment, the maturity date was extended to January 31,
2013.  The amendment reduced the minimum tangible net worth covenant
requirement to $8,500 and waived all non-compliances with this covenant through
the date of the amendment.




Based
on our current business activities and cash on hand, we expect to borrow on our
revolving credit facility in fiscal 2011 to finance working
capital.  To conserve cash, we instituted a freeze on non-essential
capital expenditures.  As of September 30, 2010, we had $1,774 of
total borrowing capacity with the line of credit, of which $1,195 was
outstanding, and $1,422 of cash on hand.




We had a
decrease in our total borrowing capacity of $1,226, from $3,000 to $1,774, from
the fiscal year ended September 30, 2009 primarily as a result of inventories
not being included in our current collateral base, whereas they provided $500 of
borrowing base in the prior fiscal year.




The
following table summarizes the cash payments under our contractual term debt and
other obligations at September 30, 2010 and the effect such obligations are
expected to have on our liquidity and cash flows in future fiscal periods
(amounts in thousands). The table does not include our revolving line of
credit.  Additional information on the debt is described in Note 6,
Debt Arrangements.




2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    2015
                    
                    
                    After
      2015
                    
                    
                    TotalNotes
      payable
                    
                    $
                    1,855
                    
                    
                    $
                    888
                    
                    
                    $
                    5,589
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    8,332Capital
      lease obligations
                    
                    
                    701
                    
                    
                    
                    565
                    
                    
                    
                    159
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,425Operating
      leases
                    
                    
                    435
                    
                    
                    
                    430
                    
                    
                    
                    416
                    
                    
                    
                    413
                    
                    
                    
                    340
                    
                    
                    
                    2,579
                    
                    
                    
                    4,613$
                    2,991
                    
                    
                    $
                    1,883
                    
                    
                    $
                    6,164
                    
                    
                    $
                    413
                    
                    
                    $
                    340
                    
                    
                    $
                    2,579
                    
                    
                    $
                    14,370




We
anticipate spending approximately $1.0 million in fiscal 2011 on capital assets,
primarily laboratory equipment which will be financed using capital
leases.




Inflation




We do not
believe that inflation has had a material adverse effect on our business,
operations or financial condition.




27




Critical
Accounting Policies




"Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Liquidity and Capital Resources" discusses the consolidated financial
statements of the Company, which have been prepared in accordance with
accounting principles generally accepted in the United States. Preparation of
these financial statements requires management to make judgments and estimates
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosures of contingent assets and liabilities. Certain significant
accounting policies applied in the preparation of the financial statements
require management to make difficult, subjective or complex judgments, and are
considered critical accounting policies. We have identified the following areas
as critical accounting policies.




Revenue
Recognition




The
majority of our service contracts involve the processing of bioanalytical
samples for pharmaceutical companies. These contracts generally provide for a
fixed fee for each assay method developed or sample processed and revenue is
recognized under the specific performance method of accounting. Under the
specific performance method, revenue and related direct costs are recognized
when services are performed. Other service contracts generally consist of
preclinical studies for pharmaceutical companies. Service revenue is recognized
based on the ratio of direct costs incurred to total estimated direct costs
under the proportional performance method of accounting. Losses on contracts are
provided in the period in which the loss becomes determinable. Revisions in
profit estimates are reflected on a cumulative basis in the period in which such
revisions become known. The establishment of contract prices and total contract
costs involves estimates made by the Company at the inception of the contract
period. These estimates could change during the term of the contract which could
impact the revenue and costs reported in the consolidated financial statements.
Projected losses on contracts are provided for in their entirety when known.
Revisions to estimates have not been material. Service contract fees received
upon acceptance are deferred and classified within customer advances, until
earned. Unbilled revenues represent revenues earned under contracts in advance
of billings.




Product
revenue from sales of equipment not requiring installation, testing or training
is recognized upon shipment to customers. One product includes internally
developed software and requires installation, testing and training, which occur
concurrently. Revenue from these sales is recognized upon completion of the
installation, testing and training when the services are bundled with the
equipment sale.




Long-Lived
Assets, Including Goodwill




Long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.




Goodwill
is tested annually for impairment, and more frequently if events and
circumstances indicate that the asset might be impaired, using a two-step
process.  In the first step, we compare the fair value of each
reporting unit, as computed primarily by present value cash flow calculations,
to its book carrying value, including goodwill. We do not believe that market
value is indicative of the true fair value of the Company mainly due to average
daily trading volumes of less than 1%.  If the fair value exceeds the
carrying value, no further work is required and no impairment loss is
recognized. If the carrying value exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we would then complete step 2 in
order to measure the impairment loss. In step 2, the implied fair value is
compared to the carrying amount of the goodwill. If the implied fair value of
goodwill is less than the carrying value of goodwill, we would recognize an
impairment loss equal to the difference. The implied fair value is calculated by
allocating the fair value of the reporting unit (as determined in step 1) to all
of its assets and liabilities (including unrecognized intangible assets) and any
excess in fair value that is not assigned to the assets and liabilities is the
implied fair value of goodwill.




28




The discount rate and sales growth
rates are the two material assumptions utilized in our calculations of the
present value cash flows used to estimate the fair value of the reporting units
when performing the annual goodwill impairment test. Our reporting units with
goodwill at September 30, 2010 are Vetronics, Oregon and Evansville, based on
the discrete financial information available which is reviewed by
management.  We utilize a cash flow approach in estimating the fair
value of the reporting units, where the discount rate reflects a weighted
average cost of capital rate. The cash flow model used to derive fair value is
sensitive to the discount rate and sales growth assumptions used. Due to fiscal
year 2009 operating losses and lowered expectations for the near future, we
performed an impairment test for our UK reporting unit as of June 30,
2009.  As a result of this test, we recorded a $472 impairment loss
equal to the total value of the UK goodwill in fiscal 2009.




We performed our annual impairment test
for all other reporting units mentioned above at September 30,
2010.  Using a discount rate of 22% and a revenue growth rate of 0%,
the fair value of our Vetronics, Oregon and Evansville reporting units is
greater than the carrying value by approximately $2,500.




Considerable management judgment is
necessary to evaluate the impact of operating and macroeconomic changes and to
estimate future cash flows. Assumptions used in our impairment evaluations, such
as forecasted sales growth rates and our cost of capital or discount rate, are
based on the best available market information. Changes in these estimates or a
continued decline in general economic conditions could change our conclusion
regarding an impairment of goodwill and potentially result in a non-cash
impairment loss in a future period.  The assumptions used in our
impairment testing could be adversely affected by certain of the risks discussed
in “Risk Factors” in Item 1A of this report.  There have been no
significant events since the timing of our impairment tests that have triggered
additional impairment testing.




At
September 30, 2010, remaining recorded goodwill was $1,383, and the net balance
of other intangible assets was $84.




Stock-Based
Compensation




We recognize the cost resulting from
all share-based payment transactions in our financial statements using a
fair-value-based method.  We measure compensation cost for all
share-based awards based on estimated fair values and recognize compensation
over the vesting period for awards. We recognized stock-based compensation
related to stock options of $226 and $570 during the fiscal years ended
September 30, 2010 and 2009, respectively.





We use
the binomial option valuation model to determine the grant date fair value. The
determination of fair value is affected by our stock price as well as
assumptions regarding subjective and complex variables such as expected employee
exercise behavior and our expected stock price volatility over the term of the
award. Generally, our assumptions are based on historical information and
judgment is required to determine if historical trends may be indicators of
future outcomes. We estimated the following key assumptions for the binomial
valuation calculation:





•
            Risk-free interest
      rate. The risk-free interest rate is based on U.S. Treasury
      yields in effect at the time of grant for the expected term of the
      option.





•
            Expected volatility. We
      use our historical stock price volatility on our common stock for our
      expected volatility assumption.





•
            Expected term. The
      expected term represents the weighted-average period the stock options are
      expected to remain outstanding. The expected term is determined based on
      historical exercise behavior, post-vesting termination patterns, options
      outstanding and future expected exercise
  behavior.





•
            Expected dividends. We
      assumed that we will pay no
dividends.




Employee
stock-based compensation expense recognized in fiscal 2010 and 2009 was
calculated based on awards ultimately expected to vest and has been reduced for
estimated forfeitures. Forfeitures are revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates and an adjustment will
be recognized at that time.





Changes
to our underlying stock price, our assumptions used in the binomial option
valuation calculation and our forfeiture rate as well as future grants of equity
could significantly impact compensation expense recognized in future
periods.





29




Income
Tax Accounting




As
described in Note 7 to the consolidated financial statements, we use the asset
and liability method of accounting for income taxes.  We recognize deferred
tax assets and liabilities for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. We measure deferred tax assets and liabilities using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We recognize the effect on
deferred tax assets and liabilities of a change in tax rates in income in the
period that includes the enactment date.  We record valuation
allowances based on a determination of the expected realization of tax
assets.




We
recognize the tax benefit from an uncertain tax position only if it is more
likely than not to be sustained upon examination based on the technical merits
of the position. We measure the amount of the accrual for which an exposure
exists as the largest amount of benefit determined on a cumulative probability
basis that we believe is more likely than not to be realized upon ultimate
settlement of the position.




We record
interest and penalties accrued in relation to uncertain income tax positions as
a component of income tax expense.Any changes in the accrued
liability for uncertain tax positions would impact our effective tax rate. Over
the next twelve months we do not anticipate resolution to the carrying value of
our reserve.  Interest and penalties are included in the
reserve.




As of
September 30, 2010 and 2009, we had a $30 and $473 liability for uncertain
income tax positions, respectively.




We file
income tax returns in the U.S., several U.S. states, and the foreign
jurisdiction of the United Kingdom.  We remain subject to examination
by taxing authorities in the jurisdictions in which we have filed returns for
years after 2005.





In April 2010, we settled state tax
litigation relating to our fiscal tax years 2003 through 2006 by agreeing to pay
$35 and foregoing a refund claim for $63.  Because we had previously
recorded a $443 liability for this uncertain tax position, we recognized a net
tax benefit of $345 in our second fiscal quarter ended March 31,
2010.




We have
an accumulated net deficit in our UK subsidiaries. Consequently, United States
deferred tax assets on such earnings have not been recorded.  Also, a
valuation allowance was established in fiscal 2009 against the US deferred
income tax balance.  We had previously recorded a valuation allowance
on the UK subsidiary deferred income tax balance.




Inventories




Inventories
are stated at the lower of cost or market using the first-in, first-out (FIFO)
cost method of accounting.




New
Accounting Pronouncements




In August
2008, the SEC announced that it will issue for comment a proposed roadmap
regarding the potential use by U.S. issuers of financial statements prepared in
accordance with IFRS (International Financial Reporting Standards). IFRS is a
comprehensive series of accounting standards published by the IASB
(International Accounting Standards Board). Under the proposed roadmap, we could
be required to prepare financial statements in accordance with IFRS beginning in
fiscal 2014. The SEC has indicated it will make a determination in 2011
regarding mandatory adoption of IFRS.





In October 2009, the FASB issued
an Accounting Standards Update on the accounting for revenue recognition to
specifically address how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting.  This guidance is
applicable to revenue arrangements entered into or materially modified during
our next fiscal year that begins October 1, 2010.  The guidance may be
applied either prospectively from the beginning of the fiscal year for new or
materially modified arrangements or retrospectively.  We are currently
reviewing this authoritative guidance to determine the potential impact, if any,
that it may have on our consolidated financial statements.





ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.


30


ITEM
8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Index to Consolidated
Financial Statements





PageConsolidated
      Financial Statements of Bioanalytical Systems, Inc.Consolidated
      Balance Sheets as of September 30, 2010 and 2009
                              
                              32Consolidated
      Statements of Operations for the Years Ended September 30, 2010 and
      2009
                              
                              33Consolidated
      Statements of Shareholders’ Equity and Comprehensive Loss for the Years
      Ended September 30, 2010 and 2009
                              
                              34Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2010 and
      2009
                              
                              35Notes
      to Consolidated Financial Statements
                              
                              36Report
      of Independent Registered Public Accounting Firm
                              
                              53Financial
      Statement Schedules:Schedules
      are not required, are not applicable or the information is shown in the
      Notes to the Consolidated Financial Statements.





31




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands)





As of September 30,2010
                                
                                
                                2009AssetsCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                1,422
                                
                                
                                $
                                870Accounts
      receivableTrade
                                
                                
                                3,670
                                
                                
                                
                                3,996Unbilled
      revenues and other
                                
                                
                                1,298
                                
                                
                                
                                1,684Inventories
                                
                                
                                1,673
                                
                                
                                
                                1,847Refundable
      income taxes
                                
                                
                                16
                                
                                
                                
                                544Prepaid
      expenses
                                
                                
                                555
                                
                                
                                
                                622Total
      current assets
                                
                                
                                8,634
                                
                                
                                
                                9,563Property
      and equipment, net
                                
                                
                                19,439
                                
                                
                                
                                21,282Deferred
      income taxes
                                
                                
                                —
                                
                                
                                
                                12Goodwill
                                
                                
                                1,383
                                
                                
                                
                                1,383Intangible
      assets, net
                                
                                
                                84
                                
                                
                                
                                114Debt
      issue costs
                                
                                
                                123
                                
                                
                                
                                145Other
      assets
                                
                                
                                80
                                
                                
                                
                                86Total
      assets
                                
                                $
                                29,743
                                
                                
                                $
                                32,585Liabilities
      and shareholders’ equityCurrent
      liabilities:Accounts
      payable
                                
                                $
                                1,911
                                
                                
                                $
                                1,997Accrued
      expenses
                                
                                
                                1,848
                                
                                
                                
                                2,113Customer
      advances
                                
                                
                                4,582
                                
                                
                                
                                2,863Income
      tax accruals
                                
                                
                                30
                                
                                
                                
                                473Revolving
      line of credit
                                
                                
                                1,195
                                
                                
                                
                                1,759Fair
      value of interest rate swaps
                                
                                
                                31
                                
                                
                                
                                103Current
      portion of capital lease obligation
                                
                                
                                524
                                
                                
                                
                                650Current
      portion of long-term debt
                                
                                
                                1,855
                                
                                
                                
                                524Total
      current liabilities
                                
                                
                                11,976
                                
                                
                                
                                10,482Capital
      lease obligation, less current portion
                                
                                
                                623
                                
                                
                                
                                792Long-term
      debt, less current portion
                                
                                
                                6,477
                                
                                
                                
                                8,191Shareholders’
      equity:Preferred
      Shares:Authorized
      1,000 shares; none issued and outstanding
                                
                                
                                —
                                
                                
                                
                                —Common
      shares, no par value:Authorized
      19,000 shares; issued and outstanding 4,915 at September 30, 2010 and 2009
      December, 2007
                                
                                
                                1,191
                                
                                
                                
                                1,191Additional
      paid-in capital
                                
                                
                                13,357
                                
                                
                                
                                13,131Accumulated
      deficit
                                
                                
                                (3,981
                                )
                                
                                
                                (1,290
                                )Accumulated
      other comprehensive income
                                
                                
                                100
                                
                                
                                
                                88Total
      shareholders’ equity
                                
                                
                                10,667
                                
                                
                                
                                13,120Total
      liabilities and shareholders’ equity
                                
                                $
                                29,743
                                
                                
                                $
                                32,585




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


32




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





For the Years Ended
                      September 30,2010
                    
                    
                    2009Service
      revenue
                    
                    $
                    21,864
                    
                    
                    $
                    24,158Product
      revenue
                    
                    
                    6,917
                    
                    
                    
                    7,626Total
      revenue
                    
                    
                    28,781
                    
                    
                    
                    31,784Cost
      of service revenue
                    
                    
                    18,574
                    
                    
                    
                    20,959Cost
      of product revenue
                    
                    
                    2,874
                    
                    
                    
                    3,221Total
      cost of revenue
                    
                    
                    21,448
                    
                    
                    
                    24,180Gross
      profit
                    
                    
                    7,333
                    
                    
                    
                    7,604Operating
      expenses:Selling
                    
                    
                    2,665
                    
                    
                    
                    3,296Research
      and development
                    
                    
                    546
                    
                    
                    
                    762General
      and administrative
                    
                    
                    6,119
                    
                    
                    
                    7,674Impairment
      loss
                    
                    
                    —
                    
                    
                    
                    472Total
      operating expenses
                    
                    
                    9,330
                    
                    
                    
                    12,204Operating
      loss
                    
                    
                    (1,997
                    )
                    
                    
                    (4,600
                    )Interest
      income
                    
                    
                    —
                    
                    
                    
                    2Interest
      expense
                    
                    
                    (1,028
                    )
                    
                    
                    (1,063
                    )Other
      income
                    
                    
                    1
                    
                    
                    
                    1Loss
      before income tax benefit
                    
                    
                    (3,024
                    )
                    
                    
                    (5,660
                    )Income
      tax benefit
                    
                    
                    (333
                    )
                    
                    
                    (197
                    )Net
      loss
                    
                    $
                    (2,691
                    )
                    
                    $
                    (5,463
                    )Basic
      net loss per share:
                    
                    $
                    (0.55
                    )
                    
                    $
                    (1.11
                    )Diluted
      net loss per share:
                    
                    $
                    (0.55
                    )
                    
                    $
                    (1.11
                    )Weighted
      common shares outstanding:Basic
                    
                    
                    4,915
                    
                    
                    
                    4,915Diluted
                    
                    
                    4,915
                    
                    
                    
                    4,915




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


33




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS


(In
thousands)





Common shares
                      
                      
                      Additional
                        paid-in-
                      
                      
                      Accumulated
                      
                      
                      Accumulated
                        other
                        comprehensive
                      
                      
                      Total
                        shareholders'Number
                      
                      
                      Amount
                      
                      
                      capital
                      
                      
                      deficit
                      
                      
                      Income (loss)
                      
                      
                      equityBalance
      at October 1, 2008
                      
                      
                      4,915
                      
                      
                      $
                      1,191
                      
                      
                      $
                      12,561
                      
                      
                      $
                      4,173
                      
                      
                      $
                      (130
                      )
                      
                      $
                      17,795Comprehensive
      loss:Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (5,463
                      )
                      
                      
                      —
                      
                      
                      
                      (5,463
                      )Other
      comprehensive income (loss):Foreign
      currency translation adjustments
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      218
                      
                      
                      
                      218Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,245
                      )Stock
      compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      570
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      570Balance
      at September 30, 2009
                      
                      
                      4,915
                      
                      
                      $
                      1,191
                      
                      
                      $
                      13,131
                      
                      
                      $
                      (1,290
                      )
                      
                      $
                      88
                      
                      
                      $
                      13,120Comprehensive
      loss:Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,691
                      )
                      
                      
                      —
                      
                      
                      
                      (2,691
                      )Other
      comprehensive income (loss):Foreign
      currency translation adjustments
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      12
                      
                      
                      
                      12Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,679
                      )Stock
      compensation
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      226
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      226Balance
      at September 30, 2010
                      
                      
                      4,915
                      
                      
                      $
                      1,191
                      
                      
                      $
                      13,357
                      
                      
                      $
                      (3,981
                      )
                      
                      $
                      100
                      
                      
                      $
                      10,667




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


34




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





Years Ended September 30,2010
                    
                    
                    2009Operating
      activities:Net
      loss
                    
                    $
                    (2,691
                    )
                    
                    $
                    (5,463
                    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    2,323
                    
                    
                    
                    2,645Impairment
      loss
                    
                    
                    —
                    
                    
                    
                    472Employee
      stock compensation expense
                    
                    
                    226
                    
                    
                    
                    570Provision
      for doubtful accounts
                    
                    
                    61
                    
                    
                    
                    (2
                    )Liability
      incurred on settlement of lease
                    
                    
                    216
                    
                    
                    
                    —(Gain)
      loss on interest rate swaps
                    
                    
                    (72
                    )
                    
                    
                    103(Gain)
      loss on sale of property and equipment
                    
                    
                    (1
                    )
                    
                    
                    37Deferred
      income taxes
                    
                    
                    12
                    
                    
                    
                    160Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    
                    650
                    
                    
                    
                    3,680Inventories
                    
                    
                    174
                    
                    
                    
                    338Refundable
      income taxes
                    
                    
                    529
                    
                    
                    
                    739Prepaid
      expenses and other assets
                    
                    
                    90
                    
                    
                    
                    49Accounts
      payable
                    
                    
                    (86
                    )
                    
                    
                    (212
                    )Accrued
      expenses
                    
                    
                    (709
                    )
                    
                    
                    52Customer
      advances
                    
                    
                    1,719
                    
                    
                    
                    (1,169
                    )Net
      cash provided by operating activities
                    
                    
                    2,441
                    
                    
                    
                    1,999Investing
      activities:Capital
      expenditures
                    
                    
                    (450
                    )
                    
                    
                    (834
                    )Net
      cash used by investing activities
                    
                    
                    (450
                    )
                    
                    
                    (834
                    )Financing
      activities:Payments
      of long-term debt
                    
                    
                    (599
                    )
                    
                    
                    (491
                    )Payments
      on revolving line of credit
                    
                    
                    (28,948
                    )
                    
                    
                    (19,052
                    )Borrowings
      on revolving line of credit
                    
                    
                    28,384
                    
                    
                    
                    18,788Proceeds
      from sale and leaseback
                    
                    
                    431
                    
                    
                    
                    —Payments
      on capital lease obligations
                    
                    
                    (726
                    )
                    
                    
                    (721
                    )Net
      cash used by financing activities
                    
                    
                    (1,458
                    )
                    
                    
                    (1,476
                    )Cash
      flow of discontinued operations:Cash
      provided by operating activities
                    
                    
                    —
                    
                    
                    
                    588Net
      cash provided by discontinued operations
                    
                    
                    —
                    
                    
                    
                    588Effect
      of exchange rate changes
                    
                    
                    19
                    
                    
                    
                    258Net
      increase in cash and cash equivalents
                    
                    
                    552
                    
                    
                    
                    535Cash
      and cash equivalents at beginning of year
                    
                    
                    870
                    
                    
                    
                    335Cash
      and cash equivalents at end of year
                    
                    $
                    1,422
                    
                    
                    $
                    870




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


35




BIOANALYTICAL SYSTEMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(Amounts
in thousands unless otherwise listed)




1.   DESCRIPTION OF THE
BUSINESS




Bioanalytical
Systems, Inc. and its subsidiaries (the “Company” or “BASi” or “we”) engage in
research services and other services related to pharmaceutical development. We
also manufacture scientific instruments for medical research, which we sell with
related software for use in industrial, governmental and academic laboratories.
We conduct our businesses through our research facilities in Indiana, Oregon,
and the United Kingdom and our manufacturing facility in Indiana. Our customers
are located throughout the world.




2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES




(a)
            Principles
      of Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.




(b)
            Revenue
      Recognition




The
majority of our service contracts involve the development of analytical methods
and the processing of bioanalytical samples for pharmaceutical companies and
generally provide for a fixed fee for each sample processed. Revenue is
recognized under the specific performance method of accounting and the related
direct costs are recognized when services are performed. Our research service
contracts generally consist of preclinical studies, and revenue is recognized
based on the ratio of direct costs incurred to total estimated direct costs
under the proportional performance method of accounting. Losses on both types of
contracts are provided in the period in which the loss becomes determinable.
Revisions in profit estimates, if any, are reflected on a cumulative basis in
the period in which such revisions become known. The establishment of contract
prices and total contract costs involves estimates we make at the inception of
the contract. These estimates could change during the term of the contract and
impact the revenue and costs reported in the consolidated financial statements.
Revisions to estimates have generally not been material. Research service
contract fees received upon acceptance are deferred until earned, and classified
within customer advances. Unbilled revenues represent revenues earned under
contracts in advance of billings.




Product
revenue from sales of equipment not requiring installation, testing or training
is recognized upon shipment to customers. One product includes internally
developed software and requires installation, testing and training, which occur
concurrently. Revenue from these sales is recognized upon completion of the
installation, testing and training when the services are bundled with the
equipment sale.




(c)
            Cash
      Equivalents




We
consider all highly liquid investments with an original maturity of three months
or less when purchased to be cash equivalents.




(d)
            Financial
      Instruments




Our
credit risk consists principally of trade accounts receivable. We perform
periodic credit evaluations of our customers’ financial conditions and generally
do not require collateral on trade accounts receivable. We account for trade
receivables based on the amounts billed to customers. Past due receivables are
determined based on contractual terms. We do not accrue interest on any of our
trade receivables.  The allowance for doubtful accounts is determined
by management based on our historical losses, specific customer circumstances,
and general economic conditions.  Periodically, management reviews
accounts receivable and adjusts the allowance based on current circumstances and
charges off uncollectible receivables when all attempts to collect have
failed. Our allowance for doubtful accounts was $165 and $110 at September
30, 2010 and 2009, respectively.


36




A summary
of activity in our allowance for doubtful accounts is as
follows:




2010
                  
                  
                  2009Opening
      balance
                  
                  $
                  110
                  
                  
                  $
                  83Charged
      to expense, net
                  
                  
                  61
                  
                  
                  
                  39Accounts
      written off
                  
                  
                  (6
                  )
                  
                  
                  (12
                  )Ending
      balance
                  
                  $
                  165
                  
                  
                  $
                  110




(e)
            Inventories




Inventories
are stated at the lower of cost or market using the first-in, first-out (FIFO)
cost method of accounting.




(f)
            Property
      and Equipment




We record
property and equipment at cost, including interest capitalized during the period
of construction of major facilities. We compute depreciation, including
amortization on capital leases, using the straight-line method over the
estimated useful lives of the assets, which we estimate to be: buildings and
improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office
furniture and fixtures, 10 years. Depreciation expense was $2,287 in fiscal 2010
and $2,609 in fiscal 2009. Expenditures for maintenance and repairs are expensed
as incurred.





Property
and equipment, net, as of September 30, 2010 and 2009 consisted of the
following:





2010
                      
                      
                      2009Land and improvements
                      
                      $
                      488
                      
                      
                      $
                      490Buildings
      and improvements
                      
                      
                      21,296
                      
                      
                      
                      21,298Machinery
      and equipment
                      
                      
                      20,652
                      
                      
                      
                      20,462Office
      furniture and fixtures
                      
                      
                      952
                      
                      
                      
                      972Construction
      in progress
                      
                      
                      109
                      
                      
                      
                      4043,497
                      
                      
                      
                      43,262Less:
      accumulated depreciation
                      
                      
                      (24,058
                      )
                      
                      
                      (21,980
                      )Net
      property and equipment
                      
                      $
                      19,439
                      
                      
                      $
                      21,282




(g)
            Long-Lived
      Assets including Goodwill




Long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized of the amount by which the carrying amount of the asset exceeds the
fair value of the asset.




We carry
goodwill at cost. Other intangible assets with definite lives are stated at cost
and are amortized on a straight-line basis over their estimated useful lives.
All intangible assets acquired that are obtained through contractual or legal
right, or are capable of being separately sold, transferred, licensed, rented,
or exchanged, are recognized as an asset apart from goodwill. Goodwill is not
amortized.


37


Goodwill
is tested annually for impairment, and more frequently if events and
circumstances indicate that the asset might be impaired, using a two-step
process.  In the first step, we compare the fair value of each
reporting unit, as computed primarily by present value cash flow calculations,
to its book carrying value, including goodwill. We do not believe that market
value is indicative of the true fair value of the Company mainly due to average
daily trading volumes of less than 1%.  If the fair value exceeds the
carrying value, no further work is required and no impairment loss is
recognized. If the carrying value exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and we would then complete step 2 in
order to measure the impairment loss. In step 2, the implied fair value is
compared to the carrying amount of the goodwill. If the implied fair value of
goodwill is less than the carrying value of goodwill, we would recognize an
impairment loss equal to the difference. The implied fair value is calculated by
allocating the fair value of the reporting unit (as determined in step 1) to all
of its assets and liabilities (including unrecognized intangible assets) and any
excess in fair value that is not assigned to the assets and liabilities is the
implied fair value of goodwill.




The discount rate and sales growth
rates are the two material assumptions utilized in our calculations of the
present value cash flows used to estimate the fair value of the reporting units
when performing the annual goodwill impairment test. Our reporting units with
goodwill at September 30, 2010 are Vetronics, Oregon and Evansville, based on
the discrete financial information available which is reviewed by
management.  We utilize a cash flow approach in estimating the fair
value of the reporting units, where the discount rate reflects a weighted
average cost of capital rate. The cash flow model used to derive fair value is
sensitive to the discount rate and sales growth assumptions used. Due to fiscal
year 2009 operating losses and lowered expectations for the near future, we
performed an impairment test for our UK reporting unit as of June 30,
2009.  As a result of this test, we recorded a $472 impairment loss
equal to the total value of the UK goodwill in fiscal 2009.




We performed our annual impairment test
for all other reporting units mentioned above at September 30,
2010.  Using a discount rate of 22% and a revenue growth rate of 0%,
the fair values of our Vetronics, Oregon and Evansville reporting units is
greater than the carrying values by approximately $2,500.




Considerable management judgment is
necessary to evaluate the impact of operating and macroeconomic changes and to
estimate future cash flows. Assumptions used in our impairment evaluations, such
as forecasted sales growth rates and our cost of capital or discount rate, are
based on the best available market information. Changes in these estimates or a
continued decline in general economic conditions could change our conclusion
regarding an impairment of goodwill and potentially result in a non-cash
impairment loss in a future period.  The assumptions used in our
impairment testing could be adversely affected by certain of the risks discussed
in “Risk Factors” in Item 1A of this report.  There have been no
significant events since the timing of our impairment tests that would have
triggered additional impairment testing.




At
September 30, 2010, remaining recorded goodwill was $1,383, and the net balance
of other intangible assets was $84.




A summary
of activity in our goodwill account is as follows:




2010
                    
                    
                    2009Opening
      balance
                    
                    $
                    1,383
                    
                    
                    $
                    1,855UK
      impairment charge
                    
                    
                    —
                    
                    
                    
                    (472
                    )Ending
      balance
                    
                    $
                    1,383
                    
                    
                    $
                    1,383





The
components of intangible assets subject to amortization are as
follows:




September 30, 2010Weighted
                      average life
                      (years)
                    
                    
                    Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      AmortizationFDA
      compliant facility
                    
                    10
                    
                    
                    $
                    302
                    
                    
                    $
                    218





September 30, 2009Weighted
                      average life
                      (years)
                    
                    
                    Gross Carrying
                      Amount
                    
                    
                    Accumulated
                      AmortizationFDA
      compliant facility
                    
                    10
                    
                    
                    $
                    302
                    
                    
                    $
                    188


38


Amortization
expense for intangible assets for fiscal years ended September 30, 2010 and
2009 was $30.  The following table provides information regarding
estimated amortization expense for the next five fiscal years:





2011
                  
                  $
                  302012
                  
                  
                  302013
                  
                  
                  242014
                  
                  
                  —2015
                  
                  
                  —




(h)
            Advertising
      Expense




We
expense advertising costs as incurred. Advertising expense was $180 and $219 for
the years ended September 30, 2010 and 2009, respectively.




(i)
            Stock-Based
      Compensation




We have a
stock-based employee compensation plan and a stock-based employee and outside
director compensation plan, which are described more fully in Note
8.  All options granted under these plans have an exercise price equal
to the market value of the underlying common shares on the date of
grant.  We expense the estimated fair value of stock options over the
vesting periods of the grants.  Our policy is to recognize expense for
awards subject to graded vesting using the straight-line attribution method,
reduced for estimated forfeitures. Forfeitures are revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates and an
adjustment is recognized at that time.




We use a
binomial option-pricing model as our method of valuation for share-based awards,
requiring us to make certain assumptions about the future, which are more fully
described in Note 8.  Stock-based compensation expense for employee
stock options for the years ended September 30, 2010 and 2009 was $226 and $570,
respectively.




(j)
            Income
      Taxes




Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.  We record valuation allowances based on a determination of the
expected realization of tax assets.




We may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not to be sustained upon examination based on the technical merits
of the position. The amount of the accrual for which an exposure exists is
measured as the largest amount of benefit determined on a cumulative probability
basis that we believe is more likely than not to be realized upon ultimate
settlement of the position.




We record interest and penalties
accrued in relation to uncertain income tax positions as a component of income
tax expense.  Any changes in the liability for
uncertain tax positions would impact our effective tax rate. We do not expect
the total amount of unrecognized tax benefits to significantly change in the
next twelve months.




(k)
            New
      Accounting Pronouncements




In August
2008, the SEC announced that it will issue for comment a proposed roadmap
regarding the potential use by U.S. issuers of financial statements prepared in
accordance with IFRS (International Financial Reporting Standards). IFRS is a
comprehensive series of accounting standards published by the IASB
(International Accounting Standards Board). Under the proposed roadmap, we could
be required to prepare financial statements in accordance with IFRS beginning in
fiscal 2014. The SEC has indicated it will make a determination in 2011
regarding mandatory adoption of IFRS.


39





In October 2009, the FASB issued
an Accounting Standards Update on the accounting for revenue recognition to
specifically address how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting.  This guidance is
applicable to revenue arrangements entered into or materially modified during
our next fiscal year that begins October 1, 2010.  The guidance may be
applied either prospectively from the beginning of the fiscal year for new or
materially modified arrangements or retrospectively.  We are currently
reviewing this authoritative guidance to determine the potential impact, if any,
that it may have on our consolidated financial statements.





(l)
            Fair
      Value




The
provisions of the Fair Value Measurements and Disclosure Topic defines fair
value, establishes a consistent framework for measuring fair value and provides
the disclosure requirements about fair value measurements. This Topic also
establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. Observable
inputs are inputs that market participants would use in pricing the asset or
liability developed based on market data obtained from sources independent of
the Company. Unobservable inputs are inputs that reflect the Company’s judgment
about the assumptions market participants would use in pricing the asset or
liability based on the best information available in the circumstances. The
hierarchy is broken down into three levels based on the inputs as
follows:




•
            Level 1 – Valuations based on
      quoted prices for identical assets or liabilities in active markets that
      the Company has the ability to
access.




•
            Level 2 – Valuations based on
      quoted prices in markets that are not active or for which all significant
      inputs are observable, either directly or
    indirectly.




•
            Level 3 – Valuations based on
      inputs that are unobservable and significant to the overall fair value
      measurement.




The
carrying amounts for cash and cash equivalents, accounts receivable,
inventories, prepaid expenses and other assets, accounts payable and other
accruals approximate their fair values because of their nature and respective
duration.  The fair value of the revolving credit facility and certain
long-term debt is equal to their carrying values due to the variable nature of
their interest rates.  Our long-term fixed rate debt was adjusted to a
market rate on June 30, 201, which approximates market rates for similar debt
instruments at September 30, 2010. See Note 6 for further discussion of the fair
value of our interest rate swap.




(m)
            Use
      of Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying
notes. Significant estimates as part of the issuance of these consolidated
financial statements include but are not limited to the determination of fair
values, allowance for doubtful accounts, inventory obsolescence, deferred tax
valuations, depreciation, impairment charges and stock
compensation.  Our actual results could differ from those
estimates.




(n)
            Research
      and Development




In fiscal
2010 and 2009, we spent $546 and $762, respectively, on research and
development. Separate from our contract research services business, we maintain
applications research and development to enhance our products
business.




(o)
            Comprehensive
      Loss




We report comprehensive income (loss)
in the consolidated statement of shareholders’ equity and comprehensive
loss.  Other comprehensive income (loss) represents changes in
shareholders’ equity and is comprised of foreign currency translation
adjustments.  At September 30, 2010 and 2009, accumulated other
comprehensive income consisted of foreign currency translation adjustments of
$100 and $88, respectively.


40




(p)
            Foreign
      Currency




For our subsidiary outside of the
United States that operates in a local currency environment, income and expense
items are translated to United States dollars at the monthly average rates of
exchange prevailing during the year, assets and liabilities are translated at
year-end exchange rates and equity accounts are translated at historical
exchange rates. Translation adjustments are accumulated in a separate component
of shareholders' equity in the consolidated balance sheets and are included in
the determination of comprehensive income (loss) in the consolidated statements
of shareholders' equity. Transaction gains and losses are included in the
determination of net income (loss) in the consolidated statements of
operations.




3.  LOSS
PER SHARE




We
compute basic loss per share using the weighted average number of common shares
outstanding.  We compute diluted loss per share using the weighted
average number of common and potential common shares outstanding. Potential
common shares include the dilutive effect of shares issuable upon exercise of
options to purchase common shares.  At September 30, 2010 and 2009, we
had 705 and 620 shares, respectively, issuable upon exercise of stock options
that are not included in our outstanding share calculation as they are
anti-dilutive.




The following table reconciles our computation of basic net loss per
share to diluted net loss per share:




Years Ended
                    September 30,2010
                  
                  
                  2009Basic
      net loss per share:Net
      loss applicable to common shareholders
                  
                  $
                  (2,691
                  )
                  
                  $
                  (5,463
                  )Weighted
      average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,915Basic
      net loss per share
                  
                  $
                  (0.55
                  )
                  
                  $
                  (1.11
                  )Diluted
      net loss per share:Diluted
      net loss applicable to common shareholders
                  
                  $
                  (2,691
                  )
                  
                  $
                  (5,463
                  )Weighted
      average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,915Dilutive
      stock options/shares
                  
                  
                  —
                  
                  
                  
                  —Diluted
      weighted average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,915Diluted
      net loss per share
                  
                  $
                  (0.55
                  )
                  
                  $
                  (1.11
                  )


41


4.  INVENTORIES




Inventories
at September 30 consisted of the following:




2010
                    
                    
                    2009Raw materials
                    
                    $
                    1,534
                    
                    
                    $
                    1,732Work
      in progress
                    
                    
                    283
                    
                    
                    
                    131Finished
      goods
                    
                    
                    218
                    
                    
                    
                    271$
                    2,035
                    
                    
                    $
                    2,134Obsolescence
      reserve
                    
                    
                    (362
                    )
                    
                    
                    (287
                    )$
                    1,673
                    
                    
                    $
                    1,847





5.  LEASE
ARRANGEMENTS




The total
amount of equipment capitalized under capital lease obligations as of September
30, 2010 and 2009 was $4,334 and $3,884, respectively. Accumulated amortization
on capital leases at September 30, 2010 and 2009 was $2,736 and $1,981,
respectively. Amortization of assets acquired through capital leases is included
in depreciation expense.




During
fiscal years 2010 and 2009, we did not acquire any new equipment through capital
lease arrangements. On February 1, 2010, we conducted a sale and leaseback of
some of our unencumbered laboratory equipment with a term of 36 months and a
monthly payment of $19.  This accounts for the increase in equipment
capitalized under capital leases.  Future minimum lease payments on
capital leases at September 30, 2010 are as follows:





Principal
                      
                      
                      Interest
                      
                      
                      Total2011
                      
                      $
                      524
                      
                      
                      $
                      177
                      
                      
                      $
                      7012012
                      
                      
                      476
                      
                      
                      
                      89
                      
                      
                      
                      5652013
                      
                      
                      147
                      
                      
                      
                      12
                      
                      
                      
                      1592014
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —$
                      1,147
                      
                      
                      $
                      278
                      
                      
                      $
                      1,425




We lease
office space and equipment under noncancelable operating leases that terminate
at various dates through 2013. The UK building lease expires in 2023 but
includes an opt out provision after 7 years. Certain of these leases contain
renewal options. Total rental expense under these leases was $439 and $485 in
fiscal 2010 and 2009, respectively.




Future
minimum lease payments for the following fiscal years under operating leases at
September 30, 2010 are as follows:




2011
                    
                    $
                    4352012
                    
                    
                    4302013
                    
                    
                    4162014
                    
                    
                    4132015
                    
                    
                    340After
      2015
                    
                    
                    2,579$
                    4,613


42




6.  DEBT
ARRANGEMENTS




Long-term
debt consisted of the following at September 30:




2010
                                    
                                    
                                    2009Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $40. Interest is fixed at 7.1% through June 30, 2010, and
      thereafter fixed at 4.1%. Collateralized by underlying property. Due
      November, 2012.
                                    
                                    $
                                    3,896
                                    
                                    
                                    $
                                    4,117Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $19. The interest rate is 6.1%. Collateralized by
      underlying property. Due February, 2011. (a)
                                    
                                    
                                    1,346
                                    
                                    
                                    
                                    1,489Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $17. Interest is fixed at 7.1% through June 30, 2010, and
      thereafter fixed at 4.1%. Collateralized by underlying property. Due
      November, 2012.
                                    
                                    
                                    1,809
                                    
                                    
                                    
                                    1,897Note
      payable to a bank, payable in monthly principal installments of $9 plus
      interest. The interest rate is 6.1%. Collateralized by West Lafayette and
      Evansville properties. Due December, 2010. (a)
                                    
                                    
                                    1,095
                                    
                                    
                                    
                                    1,212Note
      payable to Algo Holdings, payable in monthly installments of $10. There is
      no interest on this note if paid within terms. Due May 1, 2012. See Note
      11.
                                    
                                    
                                    185
                                    
                                    
                                    
                                    —$
                                    8,332
                                    
                                    
                                    $
                                    8,715Less
      current portion
                                    
                                    
                                    1,855
                                    
                                    
                                    
                                    524$
                                    6,477
                                    
                                    
                                    $
                                    8,191




The
following table summarizes our principal payment obligations for the years
ending September 30:




2011
                    
                    $
                    1,8552012
                    
                    
                    8882013
                    
                    
                    5,589$
                    8,332





Cash interest payments of $1,067 and
$917 were made in 2010 and 2009, respectively.





Mortgages
and note payable





(a) On
November 29, 2010, we executed an amendment to the loans with
Regions.  Regions agreed to accept a $500 principal payment on the
note payable with $1.1 million of principal maturing on December 18, 2010 and a
$500 principal payment on one mortgage with $1.3 million of principal maturing
on February 11, 2011.  The principal payments are to be made on or
before December 18, 2010 and February 11, 2011,
respectively.  Thereafter, the unpaid principal on the note payable
and the mortgage will then be incorporated into a replacement note maturing on
November 1, 2012.The
replacement note will bear interest at a monthly LIBOR plus 300 basis points
(minimum of 4.5%) with monthly principal amortization.  On December
17, 2010, we made the $500 principal payment on the $1.1 million
note.  Since we have made the first payment and expect to
have the financial capacity to make the additional $500 payment in
February 2011, we have classified this debt, to the extent of the amount of debt
that will be reset to a due date past September 30, 2011, as
non-current.


43




We
entered into interest rate swap agreements with respect to the above loans noted
by (a) to fix the interest rate at 6.1%.  We entered into these
derivative transactions to hedge interest rate risk of the related debt
obligation and not to speculate on interest rates. The notional values of the
swaps as of September 30, 2010 and 2009 were $2,442 and $2,701, respectively.
The fair value of the swaps was determined with a level two
analysis.  As a result of recent declines in short term interest
rates, the swaps had a negative fair value of $31 at September 30, 2010 and $103
at September 30, 2009, with the decline in the liability being recorded in our
consolidated financial statements as a reduction in interest expense in the
current fiscal year and the increase in liability recorded as an increase in
interest expense in the prior fiscal year.  The terms of the interest
rate swaps match the scheduled principal outstanding under the
loans.  We do not intend to prepay the loans, and expect the swaps to
expire under their terms in fiscal 2011 without payment by us.  Upon
expiration of the swaps, the net fair value recorded in the consolidated
financial statements is expected to be zero.




As part
of the amendment, Regions also agreed to amend the loan covenants for the
related debt to be more favorable to us beginning with our fiscal quarter ending
December 31, 2010.  Regions requires us to maintain certain ratios
including a fixed charge coverage ratio and total liabilities to tangible net
worth ratio.  The fixed charge coverage ratio calculation has been
adjusted with an ending ratio required of not less than 1.25 to
1.00.  Also, the total liabilities to tangible net worth ratio has
been adjusted to not greater than 2.10 to 1.00.  Provided we comply
with the revised covenant ratios, the amendment removes limitations on the
Company’s purchase of fixed assets. Based on projections for fiscal 2011, we
expect to be in compliance with the adjusted covenants.  The first
compliance test under the amendment will be on the balance sheet and trailing
twelve months at March 31, 2011.




The
Regions loans contain both cross-default provisions with each other and with the
revolving line of credit with Entrepreneur Growth Capital described
below.  At September 30, 2010, we were in compliance with Region’s
covenant ratios.




Revolving Line of Credit




Through January 15, 2010, we had a revolving line of credit with PNC
Bank, which we used for working capital and other purposes. Borrowings under
this line were collateralized by substantially all assets related to our
operations, other than the real estate securing the Regions loans, all common
stock of our United States subsidiaries and 65% of the common stock of our
non-United States subsidiaries.




On
January 13, 2010, we entered into a new $3,000 revolving line of credit
agreement (“Credit Agreement”) with Entrepreneur Growth Capital LLC (EGC) to
replace the PNC Bank line of credit that expired on January 15,
2010.  The initial term of the Credit Agreement terminates on January
31, 2011.  If we prepay prior to the expiration of the initial term
(or any renewal term), then we are subject to an early termination fee equal to
the minimum interest charges of $15 for each of the months remaining until
expiration.




Borrowings
bear interest at an annual rate equal to Citibank’s Prime Rate plus five percent
(5%), or 8.25% as of September 30, 2010, with minimum monthly interest of
$15.  Interest is paid monthly.  The line of credit also
carries an annual facilities fee of 2% and a 0.2% collateral monitoring
fee.  Borrowings under the Credit Agreement are secured by a blanket
lien on our personal property, including certain eligible accounts receivable,
inventory, and intellectual property assets, and a second mortgage on our West
Lafayette and Evansville real estate. Borrowings are calculated based on 75% of
eligible accounts receivable.  Under the Credit Agreement, the Company
has agreed to restrict advances to subsidiaries, limit additional indebtedness
and capital expenditures and comply with certain financial covenants outlined in
the Credit Agreement. At September 30, 2010, we had available borrowings of $1.8
million on this line.




The
covenants in the Credit Agreement required that we maintain a minimum tangible
net worth of $9,000. The Credit Agreement also contains cross-default provisions
with the Regions loans and any future EGC loans.  At September 30,
2010, we were not in compliance with the minimum tangible net worth covenant
requirement.




On
December 23, 2010, we negotiated an amendment to this Credit
Agreement.  As part of the amendment, the maturity date was extended
to January 31, 2013.  The amendment reduced the minimum tangible net
worth covenant requirement to $8,500 and waived all non-compliances with this
covenant through the date of the amendment.


44




7.  INCOME TAXES




Significant
components of our deferred tax assets and liabilities as of September 30
are as follows:





2010
                    
                    
                    2009Long-term deferred tax assets:Tax
      over book depreciation
                    
                    $
                    (709
                    )
                    
                    $
                    (842
                    )Lower
      tax basis on assets of acquired company
                    
                    
                    (448
                    )
                    
                    
                    (418
                    )Domestic
      net operating loss carryforward
                    
                    
                    2,396
                    
                    
                    
                    1,440Stock
      compensation expense
                    
                    
                    416
                    
                    
                    
                    363Foreign
      net operating loss
                    
                    
                    1,592
                    
                    
                    
                    1,293Foreign
      tax credit carryover
                    
                    
                    119
                    
                    
                    
                    119AMT
      credit carryover
                    
                    
                    13
                    
                    
                    
                    13Total
      long-term deferred tax assets
                    
                    $
                    3,379
                    
                    
                    $
                    1,968Current
      deferred tax assets:Inventory
      pricing
                    
                    $
                    232
                    
                    
                    $
                    186Accrued
      compensation and vacation
                    
                    
                    283
                    
                    
                    
                    240Accrued
      expenses and other – net
                    
                    
                    35
                    
                    
                    
                    —Foreign
      net operating loss
                    
                    
                    —
                    
                    
                    
                    (1
                    )Total
      current deferred tax assets
                    
                    $
                    550
                    
                    
                    $
                    425Valuation
      allowance for deferred tax assets
                    
                    
                    (3,929
                    )
                    
                    
                    (2,381
                    )Net
      deferred tax assets
                    
                    $
                    —
                    
                    
                    $
                    12





Significant
components of the provision (benefit) for income taxes are as follows as of the
year ended September 30:





2010
                  
                  
                  2009Current:Federal
                  
                  $
                  —
                  
                  
                  $
                  (345
                  )State
                  
                  
                  (345
                  )
                  
                  
                  (11
                  )Foreign
                  
                  
                  —
                  
                  
                  
                  (1
                  )Total
      Current
                  
                  $
                  (345
                  )
                  
                  $
                  (357
                  )Deferred:Federal
                  
                  $
                  —
                  
                  
                  $
                  118State
                  
                  
                  —
                  
                  
                  
                  41Foreign
                  
                  
                  12
                  
                  
                  
                  1Total
      deferred
                  
                  $
                  12
                  
                  
                  $
                  160$
                  (333
                  )
                  
                  $
                  (197
                  )




45




The
effective income tax rate on continuing operations varied from the statutory
federal income tax rate as follows:




2010
                  
                  
                  2009Statutory
      federal income tax rate
                  
                  
                  (34.0
                  )%
                  
                  
                  (34.0
                  )%Increases
      (decreases):Nondeductible
      expenses
                  
                  
                  3.2
                  
                  
                  
                  2.6State
      income taxes, net of federal tax benefit
                  
                  
                  —
                  
                  
                  
                  (5.4
                  )Nontaxable
      foreign (gains) losses
                  
                  
                  4.6
                  
                  
                  
                  2.5Uncertain
      tax positions
                  
                  
                  (15.6
                  )
                  
                  
                  —Valuation
      allowance
                  
                  
                  33.3
                  
                  
                  
                  32.9Other
                  
                  
                  (2.5
                  )
                  
                  
                  (2.1
                  )(11.0
                  )%
                  
                  
                  (3.5
                  )%





We have
not provided any U.S. income taxes benefit on the accumulated losses of our UK
subsidiary. In fiscal 2010 and 2009, our foreign operations generated losses
before income taxes of $993 and $2,293, respectively.  We have foreign net
operating loss carryforwards of $4,975 that have an indefinite life under
current UK tax law.  Payments made in fiscal 2010 and 2009 for income taxes
amounted to $3 and $1, respectively.





Realization of deferred tax assets
associated with the net operating loss carryforward and credit carryforward is
dependent upon generating sufficient taxable income prior to their
expiration.  We have a valuation allowance for the deferred tax asset
related to the foreign net operating losses.  In fiscal 2009, a valuation
allowance of $1,088 was established for our domestic operations to reflect our
estimate of the temporary deductible differences that may expire prior to their
utilization.  The valuation allowance in fiscal 2010 was $2,337 for our
domestic operations.





At September 30, 2010, we had domestic
net operating loss carryforwards of approximately $4,691 for federal and $9,420
for state, which expire from September 30, 2028 through 2030.  Also, we
have a foreign tax credit carryforward of approximately $119, which expires on
September 30, 2016.  Further, we have an alternative minimum tax credit
carryforward of approximately $13 available to offset future federal income
taxes.  This credit has an unlimited expiration.




We may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not to be sustained upon regulatory examination based on the
technical merits of the position. The amount of the benefit for which an
exposure exists is measured as the largest amount of benefit determined on a
cumulative probability basis that we believe is more likely than not to be
realized upon ultimate settlement of the position. At September 30, 2010, a $30
liability remained for other uncertain income tax
positions.




A
reconciliation of the total amounts of unrecognized tax liability at September
30, 2009 and 2010 is as follows:




Beginning
      of year balance, October 1, 2008
                                  
                                  $
                                  473Changes
      during the year
                                  
                                  
                                  —End
      of year balance, September 30, 2009
                                  
                                  $
                                  473Changes
      during the year
                                  
                                  
                                  (443
                                  )End
      of year balance, September 30, 2010
                                  
                                  $
                                  30





As noted
in the table above, we had a reduction of $443 in our gross uncertain tax
positions during fiscal 2010.  This was a result of the settlement of our
state tax litigation.  We paid approximately $98 and released the remaining
$345 of unrecognized tax benefits associated with our state tax
litigation.  We file income tax returns in the U.S., several U.S. States,
and the foreign jurisdiction of the United Kingdom.  We remain subject to
examination by taxing authorities in the jurisdictions in which we have filed
returns for years after 2006.


46




8. 
STOCK-BASED COMPENSATION




Summary
of Stock Option Plans and Activity




In March
2008, our shareholders approved the 2008 Stock Option Plan (the “Plan”) to
replace the 1997 Outside Director Stock Option Plan and the 1997 Employee Stock
Option Plan.  Future common shares will be granted from the 2008 Stock
Option Plan.  The purpose of the Plan is to promote our long-term interests
by providing a means of attracting and retaining officers, directors and key
employees.  The Compensation Committee shall administer the Plan and
approve the particular officers, directors or employees eligible for
grants.  Under the Plan, employees are granted the option to purchase our
common shares at fair market value on the date of the grant.  Generally,
options granted vest and become exercisable in four equal installments
commencing one year from date of grant and expire upon the earlier of the
employee’s termination of employment with us, or ten years from the date of
grant.  This plan terminates in fiscal 2018.




The
maximum number of common shares that may be granted under the Plan is 500
shares.  At September 30, 2010, 3 shares remain available for grants under
the Plan.





The
weighted-average assumptions used to compute the fair value of options granted
for the fiscal years ended September 30 were as follows:





2010
                            
                            2009Risk-free
      interest rate
                            2.85%
                            
                            2.89%Dividend
      yield
                            0.00%
                            
                            0.00%Volatility
      of the expected market price of the Company's common stock
                            55.00%-96.00%
                            
                            55.00%-77.00%Expected
      life of the options (years)
                            8.0
                            
                            8.0





A summary
of our stock option activity and related information for the years ended
September 30, 2010 and 2009, respectively, is as follows (in thousands except
for share prices):





Options
                          (shares)
                        
                        
                        Weighted-
                          AverageExercise
                          Price
                        
                        
                        Weighted-
                          Average Grant
                          Date FairValue
                        
                        
                        Weighted-Average
                          Remaining
                          ContractualLife
                          (Years)
                        
                        
                        Aggregate
                          Intrinsic
                          ValueOutstanding
      - October 1, 2008
                        
                        
                        754
                        
                        
                        $
                        6.00Exercised
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        60
                        
                        
                        $
                        4.07
                        
                        
                        $
                        2.73Terminated
                        
                        
                        (194
                        )
                        
                        $
                        6.74Outstanding
      - September 30, 2009
                        
                        
                        620
                        
                        
                        $
                        5.97
                        
                        
                        $
                        3.36
                        
                        
                        
                        7.4
                        
                        
                        $
                        -Outstanding
      - October 1, 2009
                        
                        
                        620
                        
                        
                        $
                        5.97Exercised
                        
                        
                        -
                        
                        
                        $
                        -Granted
                        
                        
                        432
                        
                        
                        $
                        1.06
                        
                        
                        $
                        0.89Terminated
                        
                        
                        (347
                        )
                        
                        $
                        6.58Outstanding
      - September 30, 2010
                        
                        
                        705
                        
                        
                        $
                        2.66
                        
                        
                        $
                        1.82
                        
                        
                        
                        8.2
                        
                        
                        $
                        9Exercisable
      at September 30, 2010
                        
                        
                        185
                        
                        
                        $
                        5.22
                        
                        
                        $
                        3.36
                        
                        
                        
                        4.9
                        
                        
                        $
                        -


47





A summary
of non-vested options for the year ended September 30, 2010 is as
follows:





Numberof
                      Shares
                    
                    
                    Weighted-
                      Average Grant
                      Date Fair ValueNon-vested
      options at October 1, 2009
                    
                    
                    299
                    
                    
                    $
                    3.30Granted
                    
                    
                    432
                    
                    
                    $
                    0.89Vested
                    
                    
                    (158
                    )
                    
                    $
                    3.49Forfeited
                    
                    
                    (53
                    )
                    
                    $
                    3.02Non-vested
      options at September 30, 2010
                    
                    
                    520
                    
                    
                    $
                    1.27





No
options were exercised in fiscal years 2010 and 2009.   As of
September 30, 2010, our total unrecognized compensation cost related to
non-vested stock options was $441 and is expected to be recognized over a
weighted-average service period of 1.99 years.





The
following table summarizes outstanding and exercisable options as of
September 30, 2010 (in thousands except per share amounts):





Range of Exercise Prices
                
                
                Shares
                  Outstanding
                
                
                Weighted-
                  Average
                  Remaining
                  Contractual
                  Life (Years)
                
                
                Weighted-
                  Average
                  Exercise Price
                
                
                Shares
                  Exercisable
                
                
                Weighted-
                  Average
                  Exercise Price$
                0.79
      - 2.80
                
                
                
                432
                
                
                
                9.69
                
                
                $
                1.06
                
                
                
                —
                
                
                $
                —$
                2.81
      - 4.59
                
                
                
                114
                
                
                
                4.70
                
                
                $
                4.28
                
                
                
                94
                
                
                $
                4.44$
                4.60
      - 8.79
                
                
                
                159
                
                
                
                6.70
                
                
                $
                5.85
                
                
                
                91
                
                
                $
                6.03




9. 
RETIREMENT PLAN




We have
a 401(k) Retirement Plan (the “Plan”) covering all employees over
twenty-one years of age with at least one year of service. Under the terms of
the Plan, we contribute 1% of each participant’s total wages to the Plan and
match 22% of the first 10% of the employee contribution. The Plan also includes
provisions for various contributions which may be instituted at the discretion
of the Board of Directors. The contribution made by the participant may not
exceed 30% of the participant’s annual wages. We made no discretionary
contributions under the plan in 2010 and 2009. Contribution expense was $43 and
$296 in fiscal 2010 and 2009, respectively.  The decrease in contribution
expense in fiscal 2010 occurred because we suspended our match of the employee
contribution as part of our cost reduction efforts.




10. 
SEGMENT INFORMATION




We
operate in two principal segments – research services and research products. Our
Services segment provides research and development support on a contract basis
directly to pharmaceutical companies. Our Products segment provides liquid
chromatography, electrochemical and physiological monitoring products to
pharmaceutical companies, universities, government research centers, and medical
research institutions. We evaluate performance and allocate resources based on
these segments. Certain of our assets are not directly attributable to the
Services or Products segments. These assets are grouped into the Corporate
segment and include cash and cash equivalents, deferred income taxes, refundable
income taxes, debt issue costs and certain other assets. We do not allocate such
items to the principal segments because they are not used to evaluate their
financial position. The accounting policies of these segments are the same as
those described in the summary of significant accounting
policies.


48




(a)
            Operating
      Segments




Years Ended
                          September 30,2010
                        
                        
                        2009Revenue:Service
                        
                        $
                        21,864
                        
                        
                        $
                        24,158Product
                        
                        
                        6,917
                        
                        
                        
                        7,626$
                        28,781
                        
                        
                        $
                        31,784Operating
      loss:Service
                        
                        $
                        (2,350
                        )
                        
                        $
                        (3,884
                        )Product
                        
                        
                        353
                        
                        
                        
                        (716
                        )$
                        (1,997
                        )
                        
                        $
                        (4,600
                        )Corporate
      Expenses
                        
                        
                        1,027
                        
                        
                        
                        1,060Loss
      before income taxes
                        
                        $
                        (3,024
                        )
                        
                        $
                        (5,660
                        )




Years Ended
                        September 30,2010
                      
                      
                      2009Identifiable
      assets:Service
                      
                      $
                      17,309
                      
                      
                      $
                      19,102Product
                      
                      
                      7,406
                      
                      
                      
                      8,046Corporate
                      
                      
                      5,028
                      
                      
                      
                      5,437$
                      29,743
                      
                      
                      $
                      32,585Goodwill,
      net:Service
                      
                      $
                      1,009
                      
                      
                      $
                      1,009Product
                      
                      
                      374
                      
                      
                      
                      374$
                      1,383
                      
                      
                      $
                      1,383Intangible
      assets, net:Service
                      
                      $
                      84
                      
                      
                      $
                      114Product
                      
                      
                      —
                      
                      
                      
                      —$
                      84
                      
                      
                      $
                      114Depreciation
      and amortization:Service
                      
                      $
                      2,108
                      
                      
                      $
                      2,377Product
                      
                      
                      215
                      
                      
                      
                      268$
                      2,323
                      
                      
                      $
                      2,645Capital
      Expenditures:Service
                      
                      $
                      383
                      
                      
                      $
                      698Product
                      
                      
                      67
                      
                      
                      
                      136$
                      450
                      
                      
                      $
                      834


49




(b)
            Geographic
      Information




Years Ended
                        September 30,2010
                      
                      
                      2009Sales
      to External Customers:North
      America
                      
                      $
                      25,578
                      
                      
                      $
                      28,656Pacific
      Rim
                      
                      
                      500
                      
                      
                      
                      661Europe
                      
                      
                      2,495
                      
                      
                      
                      2,215Other
                      
                      
                      208
                      
                      
                      
                      252$
                      28,781
                      
                      
                      $
                      31,784Long-lived
      Assets:North
      America
                      
                      $
                      20,650
                      
                      
                      $
                      22,472Europe
                      
                      
                      459
                      
                      
                      
                      550$
                      21,109
                      
                      
                      $
                      23,022




(c)
            Major
      Customers




In 2010
and 2009, Pfizer accounted for approximately 7.0% and 7.0%, respectively, of our
total revenues and 4.7% and 3.2% of total trade accounts receivable,
respectively.





11. 
SETTLEMENT OF CONTINGENT LIABILITY




In June of 2008 as part of selling our
Baltimore Clinical Pharmacology Research Unit, we subleased the building space
it occupied to the purchaser of the assets.  We remained contingently
liable for the rent payments of $800 per year through 2015 in the event the
sublessor did not perform.  In 2009, the purchaser ceased operations in
Baltimore and sought to renegotiate the terms of its sublease.  In March of
2010, a settlement was reached with the landlord of the building which canceled
the sublessor’s and our obligations under the lease in exchange for a cash
payment from the sublessor.  We agreed to contribute $250 to the
settlement, payable in twenty-five monthly installments of $10 without
interest.  We recorded the discounted liability of $216 in March 2010 and
recognized the related expense in general and administrative expenses.At September 30, 2010,
the balance of this liability was $185.




[Remainder
of page intentionally left blank.]


50




12. 
CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)




The
following is a summary of the unaudited quarterly results of operations for
fiscal years 2010 and 2009 (in thousands except per share amounts).




First
                          Quarter
                        
                        
                        Second
                          Quarter
                        
                        
                        Third
                          Quarter
                        
                        
                        Fourth
                          Quarter2010Total
      Revenue
                        
                        $
                        6,377
                        
                        
                        $
                        6,935
                        
                        
                        $
                        8,064
                        
                        
                        $
                        7,405Gross
      Profit
                        
                        
                        1,196
                        
                        
                        
                        1,485
                        
                        
                        
                        2,671
                        
                        
                        
                        1,981Net
      income (loss)
                        
                        
                        (1,488
                        )
                        
                        
                        (1,212
                        )
                        
                        
                        288
                        
                        
                        
                        (279
                        )Basic
      net income (loss) per share
                        
                        
                        (0.30
                        )
                        
                        
                        (0.25
                        )
                        
                        
                        0.06
                        
                        
                        
                        (0.06
                        )Diluted
      net income (loss) per share
                        
                        
                        (0.30
                        )
                        
                        
                        (0.25
                        )
                        
                        
                        0.06
                        
                        
                        
                        (0.06
                        )2009Total
      Revenue
                        
                        $
                        8,076
                        
                        
                        $
                        7,066
                        
                        
                        $
                        8,121
                        
                        
                        $
                        8,521Gross
      Profit
                        
                        
                        2,047
                        
                        
                        
                        872
                        
                        
                        
                        2,135
                        
                        
                        
                        2,550Net
      loss
                        
                        
                        (1,584
                        )
                        
                        
                        (1,831
                        )
                        
                        
                        (632
                        )
                        
                        
                        (1,416
                        )Basic
      net loss per share
                        
                        
                        (0.32
                        )
                        
                        
                        (0.37
                        )
                        
                        
                        (0.13
                        )
                        
                        
                        (0.29
                        )Diluted
      net loss per share
                        
                        
                        (0.32
                        )
                        
                        
                        (0.37
                        )
                        
                        
                        (0.13
                        )
                        
                        
                        (0.29
                        )




13. 
 SUBSEQUENT EVENTS




On November 29, 2010, Regions agreed to
accept a $500 principal payment on a note with $1.1 million of principal
maturing on December 18, 2010 and a $500 principal payment on another note with
$1.3 million of principal maturing on February 11, 2011.  Thereafter, the
unpaid principal on the notes will then be incorporated into a replacement note
maturing on November 1, 2012. On December
17, 2010, we made the $500 principal payment on the $1.1 million
note.  On December
15, 2010,EGC agreed to provide back-up financing up to $300 towards the
second principal payment on the $1.3 million note.




On
December 23, 2010, we negotiated an amendment to our line of credit agreement
with EGC, extending the maturity date until January 31, 2013 and reducing the
minimum tangible net worth covenant requirement to $8,500.  See Note 6
for additional information.




No
additional matters were identified that would materially impact our consolidated
financial statements or require disclosure.





14. 
RISKS AND UNCERTAINTIES





Our
long-term strategic objective is to maximize the Company’s intrinsic value per
share.   However, in the second quarter of fiscal 2009, in response to
cancellations and delays of projects by our customers, we began to operate the
business in a manner designed to place more emphasis on cash flow
generation.  Thus, our short-term tactical objective is to maximize free
cash flow from operating activities.


51


The
overall economic downturn first began to negatively affect our operating results
in fiscal 2009 and continued to negatively impact revenues in fiscal 2010. 
Revenues for fiscal 2010 declined approximately 9.5% or $3 million from our
prior fiscal year due to study delays and cancellations initiated by the
sponsors as well as price declines for accepted work.  The lower sales
volume and a decrease in our operating expenses created a net loss of $2.7
million, which is a 51% improvement from the prior fiscal year’s net loss of
$5.5 million.  We experienced a 16% increase in revenue in the second half
versus the first half of fiscal 2010 as the volume of bookings improved and
products customers increased capital spending.   To improve cash flow
and reduce our break-even level, we implemented additional cost reductions
starting in the second quarter of fiscal 2010.  One such control was a
reduction in work force, through both attrition and terminations, impacting all
areas of operations.  This reduced our annual compensation expense and is
expected to save us approximately $2.4 million annually.  These and other
cost control measures resulted in the reduction of operating expenses, excluding
goodwill impairment, by approximately 20% ($2.4 million) in fiscal 2010 compared
to the prior fiscal year.  In addition, we reduced our capital expenditures
by 46% ($400) in fiscal 2010.





In fiscal
2011, we will continue to monitor and address the impact that the challenging
economy is having on our company and industry.   In fiscal 2011, we
expect to see slow but continued improvement in the volume of new bookings, but
little improvement in pricing.  We also expect improved gross profit
margins due to the cost controls implemented.  If current economic factors
and industry trends for the CRO industry continue or deteriorate in fiscal 2011,
our results of operations could be adversely affected.  We have
renegotiated our note payable and one mortgage, which were set to expire in
December 2010 and February 2011, respectively, to extend the maturity dates to
November 2012.  We will continue to assess the need for additional cost
controls such as freezing non-essential capital expenditures and current wage
rates, reducing employee costs through personnel reductions either by attrition
or reduction in workforce, reducing non-essential expenses, and monitoring our
operations for efficiencies to further reduce our break-even point.  We
have debt and lease obligations of approximately $3.0 million in fiscal
2011.  Based on our expectation of a small increase in revenue, the
availability on our line of credit, and the impact of the cost reductions
implemented, we project that we will have the liquidity required to meet our
fiscal 2011 operations and debt obligations.




[Remainder
of page intentionally left blank.]


52


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Bioanalytical
Systems Inc.





We have
audited the consolidated balance sheets of Bioanalytical Systems, Inc. as of
September 30, 2010 and 2009, and the related consolidated statements of
operations, shareholders' equity and comprehensive loss and cash flows for the
years then ended.  These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting.  Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bioanalytical Systems, Inc
as of September 30, 2010 and 2009, and the results of its operations and its
cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.





/s/ Crowe
Horwath LLP


Indianapolis,
Indiana


January
12, 2011


53




ITEM
9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




None.




ITEM
9A-CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures




We maintain disclosure controls and
procedures that are designed to provide reasonable assurance to our management
and board of directors that information required to be disclosed in the reports
we file or submit to the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Based on an evaluation conducted
under the supervision and with the participation of the Company’s management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2010, including those procedures described below,
we, including our Chief Executive Officer and our Chief Financial Officer,
determined that those controls and procedures were not effective for the reasons
discussed in the section below entitled, Management’s Report on Internal
Control over Financial Reporting.




Changes
in Internal Controls




There were no changes in our internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act, during fiscal 2010 that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting except as described in the following section entitled, Management’s Report on Internal
Control over Financial Reporting.


Management’s Report on Internal
Control over Financial Reporting


Our management is responsible for
establishing and maintaining adequate internal control over financial reporting.
Under the supervision and with the participation of our management, including
our Principal Executive Officer and Principal Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 A material weakness is a control
deficiency, or combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on a timely basis. Management’s assessment identified two material
weaknesses in the design and operating effectiveness of controls related to
accounting for income taxes and debt covenant compliance
monitoring.  Based on this assessment we concluded that we did not
maintain effective internal control over financial reporting as of September 30,
2010.   The matter relating to accounting for income taxes resulted
from the incorrect netting of a deferred  federal tax benefit against
the reserve for uncertain tax positions relating to state taxes due to an error
in reviewing our deferred tax assets at September 30, 2009. This resulted in us
not reflecting the write-off of this asset when we determined that all deferred
tax assets should be written off based on our assessment of realizability of
such deferred tax assets and this later affected the amount of the reversal of
the reserve for uncertain tax positions upon settlement.
 
 With respect to the monitoring of our
compliance with debt covenants, we have historically maintained our debt
financial covenant compliance monitoring on a quarterly basis as required by our
lenders.  On January 13, 2010, we entered into a replacement revolving
line of credit agreement with EGC, which necessitates monitoring of our net
tangible net worth on a continuous basis (monthly). We did not maintain
effective internal control over debt compliance management for the period ended
September 30, 2010 since we did not have procedures in place to effectively
monitor these covenants on a timely basis.
 
 Each of these circumstances could
result in a reasonable possibility that a material misstatement to our financial
statements may not be prevented or detected on a timely
basis.
 
 The liability for the uncertain tax
provision mentioned above was settled with the taxing authority in fiscal 2010
for substantially less than the recorded amount.  No further action
regarding this amount or its review is required.  We have also
initiated monthly review of requisite debt covenants in 2011.  With
the actions we have or intend to take, we believe that both material weaknesses
will be corrected in the near future.
  54




This annual report does not include
an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting.  Management’s report
was not subject to attestation by the Company’s registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the
Company to provide only Management’s report in this report.




ITEM
9B-OTHER INFORMATION




None.




PART
III




ITEM 10-DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT




The
following information concerns the persons who served as the directors of the
Company as of September 30, 2010. Except as indicated in the following
paragraphs, the principal occupations of these persons have not changed in the
past five years. Information concerning the executive officers of the Company
may be found in “Executive Officers of the Registrant” under Item 1 of this
report, which is incorporated herein by reference.  Information required by
Part III, Item 10 is incorporated herein by this reference from the Company’s
Proxy Statement for the 2011 Annual Meeting.




Name
              
              Age
              
              PositionJohn
      B. Landis, Ph.D.
              
              57
              
              ChairmanLarry
      S. Boulet
              
              64
              
              DirectorDavid
      W. Crabb, M.D.
              
              57
              
              DirectorLeslie
      B. Daniels
              
              63
              
              DirectorDavid
      L. Omachinski
              
              58
              
              DirectorA.
      Charlene Sullivan, Ph.D.
              
              61
              
              DirectorAnthony
      S. Chilton, Ph.D.
              
              54
              
              Director,
      President and Chief Executive
Officer





John B. Landis, Ph.D. was
elected as a director of the Company on November 12, 2009 and elected as the
Chairman of the Board on February 11, 2010.  Dr. Landis retired from his
position as Senior Vice President, Pharmaceutical Sciences of Schering-Plough in
October 2008 and is currently an Adjunct Professor at Purdue University's
Department of Chemistry.  Prior to joining Schering-Plough in 2003, Dr.
Landis served in various management positions with Pharmacia Corporation and The
Upjohn Company, including Director of Quality Control, Executive Director of
Quality Control, Vice President of Quality Control, Vice President of Analytical
Research, Vice President of CNS Psychiatry, and Senior Vice President of
Preclinical Development.  Dr. Landis received his Bachelor of Science in
Chemistry from Kent State University, his Masters in Analytical Chemistry from
Purdue University and his Ph.D. in Analytical Chemistry from Purdue
University.




Larry S. Boulethas served as
a director of the Company since May 2007.  Mr. Boulet was a Senior Audit
Partner with PriceWaterhouseCoopers (PWC) and a National Financial Services
Industry Specialist.  For the last five years of his career with PWC, Mr.
Boulet served as Partner-in-charge of the Indianapolis office’s Private Client
Group.  Prior to serving on our Board, he served on the Board of Directors
of Century Realty Trust, an Indiana based, real estate investment trust. 
He also served as Audit Committee Chairman until the Trust’s sale and
liquidation in 2007.  Currently, Mr. Boulet also serves on the Indiana
State University Foundation Board of Directors, where he is a past Chairman of
the Board.  He holds a Bachelor of Science degree in Accounting from
Indiana State University.




David W. Crabb, M.D. has
served as a director of the Company since February, 2004. He has been Chairman
of the Indiana University Department of Medicine since 2001. He has been a
member of the faculty of the Departments of Medicine and Biochemistry and
Molecular Biology since 1983.  He served as Vice Chairman for Research for
the department and as an Assistant Dean for Research from 1993 to 2000. Dr.
Crabb is the Director of the Indiana Alcohol Research Center, serves on several
editorial boards and is a member of the Boards of Directors of Polymer
Technology Sciences, Inc., The Regenstrief Institute, and the Health and
Hospital Corporation of Marion County. He was a recipient of a NIH Merit award
and numerous other research and teaching awards.


55




Leslie B. Daniels has served
as a director of the Company since June 2003. Mr. Daniels is a founding partner
of CAI, a private equity fund in New York City. He previously was President of
Burdge, Daniels & Co., Inc., a principal in venture capital and buyout
investments as well as trading of private placement securities, and before that,
a Senior Vice President of Blyth, Eastman, Dillon & Co. where he had
responsibility for the corporate fixed income sales and trading departments. Mr.
Daniels is a former Director of Aster-Cephac SA, IVAX Corporation, MIM
Corporation, Mylan Laboratories, Inc., NBS Technologies Inc. and MIST Inc. He
was also Chairman of Zenith Laboratories, Inc. and currently serves as a
Director of SafeGuard Health Enterprises, Inc.  On October 5, 2010, Mr.
Daniels resigned as a Director of the Company.





David L. Omachinski was
elected as a director of the Company on October 8, 2009.  Mr. Omachinski is
currently an executive management consultant.  From 1993 to 2005, he served
in various executive management positions with Oshkosh B'Gosh, Inc., including
President, Chief Operating Officer, Chief Financial Officer, Vice President of
Finance and Treasurer.  Mr. Omachinski also previously held various
executive roles with Schumaker, Romenesko & Associates, S.C., a
Wisconsin-based, full service, regional accounting firm. Mr. Omachinski also
serves on the board of Anchor BanCorp Wisconsin, Inc. since 1999, the University
of Wisconsin-Oshkosh Foundation since 2003, and Chamco, Inc. since 2002. 
Mr. Omachinski received his Bachelor of Business Administration from the
University of Wisconsin-Oshkosh and is a certified public
accountant.





A. Charlene Sullivan, Ph.D.
was elected as a director of the Company in January 2010.  Dr. Sullivan is
an Associate Professor of Management at the School of Management and the
Krannert Graduate School of Management at Purdue University since 1984 and has
been a faculty member at Purdue since 1978.  Throughout her career at
Purdue, Dr. Sullivan has taught undergraduate and graduate classes on corporate
finance, financial institutions and markets and financial and managerial
accounting and has received numerous awards and honors from the
university.  Since 2000 Dr. Sullivan also has served as the Management
Faculty Advisor for the Technical Assistance Program at Purdue, which consults
with small businesses in Indiana.  In addition, Dr. Sullivan has served as
a financial analyst for the Indiana Gaming Commission since 1995 and as a risk
management consultant for Edgar Dunn & Company (a strategy and consulting
firm) since 1994.  Dr. Sullivan has served on the boards of directors of
several private financial institutions and not-for-profit organizations,
including the Federal Reserve Bank of Chicago from 1990 until 1996 and the
Purdue Employees Federal Credit Union from 1997 until April 2009.  She
currently serves on the board of directors of the Greater Lafayette Community
Foundation and on the Asset-Liability Committee for the Purdue Employees Federal
Credit Union.  Dr. Sullivan earned a B.S. degree in Home Economics from the
University of Kentucky and a M.S. and Ph.D. in Management from Purdue
University.





Anthony S. Chilton, Ph.D.was
elected as a director of the Company on August 12, 2010.  Dr. Chilton
serves as the Chief Executive Officer, effective May 13, 2010.  Dr. Chilton
had previously served as Chief Operating Officer since December 1, 2008 and
interim President since January 27, 2010.  Dr. Chilton has over 30 years of
experience as a scientist and executive in leading life sciences companies in
England, Canada and the United States.  For the past two years, Dr. Chilton
was in charge of early development programs at Atherogenics, Inc. of Alpharetta,
Ga.  In the two years prior to joining the Company, Dr. Chilton provided
consulting and advisory services to various pharmaceutical companies. 
Prior to that, he was Vice President of the Biopharmaceutical Development
Division of Cardinal Health Inc., which he joined through a predecessor company
in 1998 that was acquired by Cardinal in 2002. Previously, Dr. Chilton spent
three years with life sciences companies in Canada, prior to which he held
positions in his native United Kingdom.  Dr. Chilton received his
bachelor’s degree in Chemistry from the University of East Anglia in 1981, and
his Ph.D. in Analytical Chemistry from the University of Hertfordshire in
1993.




The Board
of Directors has established an Audit Committee. The Audit Committee is
responsible for recommending independent auditors, reviewing, in connection with
the independent auditors, the audit plan, the adequacy of internal controls, the
audit report and management letter and undertaking such other incidental
functions as the board may authorize.  Larry S. Boulet, David W. Crabb,
David Omachinski and A. Charlene Sullivan are the members of the Audit
Committee. The Board of Directors has determined that each of Mr. Boulet and Mr.
Omachinski is an audit committee financial expert (as defined by Item 401(h) of
Regulation S-K). All of the members of the Audit Committee are “independent” (as
defined by Item 7(d)(3)(iv) of Schedule 14A).




The Board
of Directors has adopted a Code of Ethics (as defined by Item 406 of Regulation
S-K) that applies to the Company’s Officers, Directors and employees, a copy of
which is incorporated herein by reference to Exhibit 14 to Form 10-K for the
fiscal year ended September 30, 2006.




The
information contained under the caption “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement is incorporated herein by
reference.


56




ITEM
11-EXECUTIVE COMPENSATION




The
information included under the captions “Election of Directors – Compensation of
Directors,” “Executive Compensation” and “Compensation Committee Interlocks and
Insider Participation” in the Proxy Statement is incorporated herein by
reference in response to this item.




ITEM
12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




The
information contained under the caption “Compensation of Directors and Executive
Officers” in the Proxy Statement is incorporated herein by reference in response
to this item.




For
additional information regarding our stock option plans, please see Note 9 in
the Notes to Consolidated Financial Statements in this report.




ITEM
13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




The
information included under the caption “Certain Relationships and Related
Transactions” in the Proxy Statement is incorporated herein by reference in
response to this item.




ITEM
14-PRINCIPAL ACCOUNTING FEES AND SERVICES




The
information included under the caption “Selection of Independent Accountants” in
the Proxy Statement is incorporated herein by reference.




[Remainder
of page intentionally left blank.]


57




PART
IV




ITEM
15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




(a)
Documents filed as part of this Report.




1.
            Financial
      Statements:  See Index to Consolidated Financial Statements under
      Item 8 on Page 30 of this report.




2.
            Financial
      Statement Schedules:  Schedules are not required, are not
      applicable or the information is shown in the Notes to the Consolidated
      Financial Statements.




3.
            Exhibits:  The
      following exhibits are filed as part of, or incorporated by reference
      into, this report:





Number
                            
                            Description of Exhibits(3)
                            3.1
                            Second
      Amended and Restated Articles of Incorporation of Bioanalytical Systems,
      Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the
      quarter ended December 31, 1997).3.2
                            Second
      Amended and Restated Bylaws of Bioanalytical Systems, Inc., as
      subsequently amended (incorporated by reference to Exhibit 3.2 to Form
      10-K for the fiscal year ended September 30, 2009 ).(4)
                            4.1
                            Specimen
      Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to
      Registration Statement on form S-1, Registration No.
      333-36429).4.2
                            See
      Exhibits 3.1 and 3.2 to this Form 10-K.(10)
                            10.1
                            Loan
      Agreement between Bioanalytical Systems, Inc. and Regions Bank dated
      December 18, 2007 (incorporated by reference to Exhibit 10.7 of Form 10-K
      for the fiscal year ended September 30, 2007).10.2
                            Form
      of Grant of non-qualified stock options dated April 1, 2004 to Michael R.
      Cox (*) (incorporated by reference to Exhibit 10.3 to Form 10-Q for the
      fiscal quarter ended March 31, 2004).10.3
                            Agreement
      for Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems
      Limited and Pettifer Estates Limited, dated October 11, 2007 (incorporated
      by reference to Exhibit 10.1 to Form 8-K filed October 17,
      2007).10.4
                            Form
      of Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems
      Limited and Pettifer Estates Limited (incorporated by reference to Exhibit
      10.2 to Form 8-K filed October 17, 2007).10.5
                            Employment
      Agreement between Michael R. Cox and Bioanalytical Systems, Inc., dated
      November 6, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K
      filed November 13, 2007).10.6
                            Employee
      Incentive Stock Option Agreement between Michael R. Cox and Bioanalytical
      Systems, Inc., dated November 6, 2007 (incorporated by reference to
      Exhibit 10.2 to Form 8-K filed November 13,
  2007).


58





Number
              
              Description of Exhibits10.7
              Bioanalytical
      Systems, Inc. 2008 Director and Employee Stock Option Plan (incorporated
      by reference to Appendix A to the Revised Definitive Proxy Statement filed
      February 5, 2008, SEC File No. 000-23357).10.8
              Form
      of Bioanalytical Systems, Inc. 2008 Director and Employee Stock Option
      Plan (*) (incorporated by reference to Exhibit 10.31 to Form 10-K for the
      fiscal year ended September 30, 2008).10.9
              Employment
      Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc.,
      dated December 1, 2008 (incorporated by reference to Exhibit 10.1 to Form
      8-K filed November 14, 2008).10.10
              Employee
      Incentive Stock Option Agreement between Anthony S. Chilton and
      Bioanalytical Systems, Inc., dated December 1, 2008 (incorporated by
      reference to Exhibit 10.36 to Form 10-K for the fiscal year ended
      September 30, 2008).10.11
              Second
      amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, dated May 18, 2009 (incorporated by reference to Exhibit
      10.3 to Form 10-Q for the fiscal quarter ended March 31,
      2009).10.12
              Third
      amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, dated January 13, 2010 (incorporated by reference to Exhibit
      10.34 to Form 10-K for the fiscal year ended September 30,
      2009).10.13
              Loan
      and Security Agreement by and between Bioanalytical Systems, Inc., and
      Entrepreneur Growth Capital LLC, executed January 13, 2010 (incorporated
      by reference to Exhibit 10.35 to Form 10-K for the fiscal year ended
      September 30, 2009).10.14
              Agreement
      for Lease, by Bioanalytical Systems, Inc. and Forum Financial Services,
      dated January 22, 2010 (incorporated by reference to Exhibit 10.5 to Form
      10-Q for the fiscal quarter ended December 31, 2009).10.15
              Amendment
      to Employment Agreement between Anthony S. Chilton and Bioanalytical
      Systems, Inc., dated February 1, 2010 (incorporated by reference to
      Exhibit 10.6 to Form 10-Q for the fiscal quarter ended December 31,
      2009).10.16
              Employee
      Incentive Stock Option Agreement between Anthony S. Chilton and
      Bioanalytical Systems, Inc., dated February 1, 2010 (incorporated by
      reference to Exhibit 10.7 to Form 10-Q for the fiscal quarter ended
      December 31, 2009).10.17
              Amendment
      to Employment Agreement between Michael R. Cox and Bioanalytical Systems
      Inc., dated April 15, 2010 (incorporated by reference to Exhibit 10.1 to
      Form 10-Q for the fiscal quarter ended June 30, 2010).10.18
              Employee
      Incentive Stock Option Agreement between Michael R. Cox and Bioanalytical
      Systems Inc. dated April 15, 2010 (incorporated by reference to Exhibit
      10.2 to Form 10-Q for the fiscal quarter ended June 30,
    2010).10.19
              Promissory
      Note between Bioanalytical Systems, Inc. and Algorithme Holding Inc. dated
      April 30, 2010 (incorporated by reference to Exhibit 10.1 to Form 8-K
      filed April 30, 2010).10.20
              Employee
      Incentive Stock Option Agreement between Anthony S. Chilton and
      Bioanalytical Systems, Inc., dated May 12, 2010 (incorporated by reference
      to Exhibit 10.5 to Form 10-Q for the fiscal quarter ended June 30,
      2010).


59





Number
              
              Description of Exhibits10.21
              Amendment
      to Loan Agreement between Bioanalytical Systems, Inc., and Entrepreneur
      Growth Capital LLC, dated May 13, 2010 (incorporated by reference to
      Exhibit 10.9 to Form 10-Q for the fiscal quarter ended March 31,
      2010).10.22
              Employment
      Agreement between Alberto F. Hidalgo and Bioanalytical Systems Inc., dated
      August 18, 2010 (filed herewith).10.23
              Non-Qualified
      Employee Stock Option Agreement between Alberto F. Hidalgo and
      Bioanalytical Systems Inc., dated August 18, 2010 (filed
      herewith).10.24
              Fourth
      Amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, executed November 29, 2010 (incorporated by reference to
      Exhibit 10.1 for Form 8-K filed December 2, 2010).10.25
              Amendment
      to Loan Agreement between Bioanalytical Systems, Inc., and Entrepreneur
      Growth Capital LLC, dated December 23, 2010 (incorporated by reference to
      Exhibit 10.1 to Form 8-K filed December 30,
2010).10.26
              Fourth
      Amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, as amended on December 29, 2010 (incorporated by reference
      to Exhibit 10.1 for Form 8-K filed January 5,
  2011).(14)
              14.1
              Code
      of Ethics (incorporated by reference to Exhibit 14 to Form 10-K for the
      fiscal year ended September 30, 2006).(21)
              21.1
              Subsidiaries
      of the Registrant (filed herewith).(23)
              23.1
              Consent
      of Independent Registered Public Accounting Firm Crowe Horwath LLP (filed
      herewith).(31)
              31.1
              Certification
      of Chief Executive Officer (filed herewith).31.2
              Certification
      of Chief Financial Officer (filed herewith).(32)
              32.1
              Written
      Statement of Chief Executive Officer and Chief Financial Officer Pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
      (filed herewith)..




*    Management
contract or compensatory plan or arrangement.


60




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




BIOANALYTICAL
      SYSTEMS, INC.(Registrant)Date:  January
      12, 2011
                  By:  /s/  Anthony
      S. ChiltonAnthony
      S. ChiltonPresident
      and Chief Executive OfficerDate:  January
      12, 2011
                  By:  /s/  Michael
      R. CoxMichael
      R. CoxVice
      President, Finance and Administration,
                    Chief
      Financial Officer and
Treasurer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.




Signature
                            
                            Capacity
                            
                            Date/s/  Anthony
      S. Chilton
                            
                            Director,
      President and Chief Executive
                            
                            January
      12, 2011Anthony
      S. Chilton
                            
                            Officer
      (Principal Executive Officer)Vice
      President, Finance and
                            
                            January
      12, 2011Administration,
      Chief Financial Officer/s/  Michael
      R. Cox
                            
                            and
      Treasurer (Principal Financial andMichael
      R. Cox
                            
                            Accounting
      Officer)/s/  John
      B. Landis, Ph.D.
                            
                            Chairman
                            
                            January
      12, 2011John
      B. Landis, Ph.D./s/  Larry
      S. Boulet
                            
                            Director
                            
                            January
      12, 2011Larry
      S. Boulet/s/  David
      W. Crabb
                            
                            Director
                            
                            January
      12, 2011David
      W. Crabb/s/  David
      L. Omachinski
                            
                            Director
                            
                            January
      12, 2011David
      L. Omachinski/s/  A.
      Charlene Sullivan, Ph.D.
                            
                            Director
                            
                            January
      12, 2011A.
      Charlene Sullivan, Ph.D.


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