Exhibit 13

vir-tuo-so: a brilliant, skillful performer
BASi: a company of virtuosos

TABLE OF CONTENTS

|Financial Data                                         | 1 
|------------------------------------------------------ | --
|President's Podium                                     | 2 
|Prelude                                                | 3 
|Quarterly Financial Data                               | 6 
|Analysis of Financial Condition, Results of Operations | 7 
|Balance Sheets                                         | 14
|Statements of Operations                               | 15
|Statements of Shareholders' Equity                     | 16
|Statements of Cash Flows                               | 17
|Notes to Financial Statements                          | 18
|Report of Independent Auditors                         | 28
|Corporation Information                                | 30

"Music is the universal language of mankind."- Henry Wadsworth Longfellow (1807-1882)

photo  on  preceding  page:  Long  Center  for  The  Performing  Arts,
Lafayette, Indiana

SELECTED CONSOLIDATED FINANCIAL DATA

`Year Ended September 30,
                                      --------------------------------------------------------
                                        2002        2001        2000         1999        1998
                                      --------------------------------------------------------
                                               (in thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
  Service revenue                     $ 16,140    $ 15,202    $ 10,999    $  9,993    $  7,609
  Product revenue                       10,373      10,073       8,224       9,858      10,616
                                      --------    --------    --------    --------    --------
     Total revenue                      26,513      25,275      19,223      19,851      18,225
  Cost of service revenue               11,556       9,660       9,245       6,499       4,598
  Cost of product revenue                4,393       3,495       2,974       3,943       3,911
                                      --------    --------    --------    --------    --------
     Total cost of revenue              15,949      13,155      12,219      10,442       8,509
                                      --------    --------    --------    --------    --------
  Gross profit                          10,564      12,120       7,004       9,409       9,716
                                      --------    --------    --------    --------    --------
  Operating expenses:
  Selling                                2,940       3,204       3,400       3,943       4,524
  Research and development               1,521       1,611       1,806       1,955       2,165
  General and administrative             4,476       3,815       2,990       2,550       2,336
                                      --------    --------    --------    --------    --------
     Total operating expenses            8,937       8,630       8,196       8,448       9,025
                                      --------    --------    --------    --------    --------
  Operating income (loss)                1,627       3,490      (1,192)        961         691
  Other income (expense), net              (80)       (383)       (621)       (114)        (25)
                                      --------    --------    --------    --------    --------
  Income (loss) before income taxes      1,547       3,107      (1,813)        847         666
  Income taxes (benefit)                   481       1,340        (431)        277         254
                                      --------    --------    --------    --------    --------
  Net income (loss)                   $  1,066    $  1,767    $ (1,382)   $    570    $    412
                                      ========    ========    ========    ========    ========
   Net income (loss) per share
     Basic                            $    .23    $    .39    $   (.30)   $    .13    $    .10
     Diluted                          $    .23    $    .38    $   (.30)   $    .12    $    .09
  Weighted average common
  Shares outstanding
     Basic                               4,576       4,565       4,550       4,506       4,117
     Diluted                             4,625       4,600       4,550       4,676       4,403


                                                           September 30,
                                      --------------------------------------------------------
                                        2002        2001        2000         1999        1998
                                      --------------------------------------------------------
                                                          (in thousands)

BALANCE SHEET DATA:
  Working capital (deficit)           $   (911)   $  2,535    $    931    $  4,275    $  3,286
  Property and equipment, net           22,824      18,922      18,913      17,355      14,551
  Total assets                          33,463      27,977      26,897      26,321      22,280
  Long-term debt, less
     Current portion                     3,247       3,144       3,638       4,112       1,124
  Convertible preferred shares             ---         ---         ---         ---         ---
  Shareholders' equity                  18,898      17,830      16,062      17,421      16,844`

| | The above is selected audited consolidated financial data of the Company for the
five years ended September 30, 2002. The data should be read in conjunction
with Managements  Discussion and Analysis of Financial Condition and
Results of  Operations  found on page ten and the  consolidated  financial
statements of Bioanalytical Systems, Inc. and notes contained in this report.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 1 

My band is my instrument." - Duke Ellington (1899-1974)

FROM THE PRESIDENTS PODIUM

This is the spot in the annual  report where the  conductor is asked to toot his
horn.  However,  I  believe  the  preponderance  of  evidence  is that  CEOs are
overrated.  Great  companies  result  primarily from great products and services
coming  together with great  customers at the right time.  This takes people who
are engaged,  and who anticipate change and make it happen. They then start over
because  complacency  is the  worst  enemy of a  technology  business  in a free
market.  We can never get  comfortable  and put down our spyglass to the future.

I like the current environment.  When there is discomfort, there is opportunity.
We are expanding aggressively but with focus and cost controls to allow for some
setbacks.   FY02  brought  surprises  from  terrorist  threats,   creative
accounting and  disappointments  in the  pharmaceutical/biotech  sectors.  These
environmental  factors required us to make adjustments  along the way. We missed
our sales and earnings targets,  but we stay the course. The allegro movement is
yet to come.

Developing  drugs that are safe and effective is an arduous  process,  made more
complicated  by the reality  that nothing is entirely  safe or effective  and we
must make some choices and manage  risk.  It is clear that many  disagree  about
these choices and their relationships to healthcare costs. Nevertheless, we need
to charge  ahead and do our best,  because  doing  nothing is the worst  choice.
While many life science  companies  have been  adversely  affected in the recent
slow-down  of equity  markets,  I believe  the basic  concept  remains the same.
Greater understanding of the causes of disease will result from the new tools to
study genetics and proteins,  and this greater understanding will result in more
potent, safer and more effective pharmaceuticals.  Coupled to this trend are the
increasing collaborations between companies of all sizes, as knowledge surpasses
things in the definition of value.  Outsourcing  and licensing  (both inward and
outward) replace vertical integration.  While it has been an unsettling time for
many, these  fundamentals seem irreversible over the next five years and beyond.

Our  services  and  products  are  designed to  participate  in the life science
revolution and take it across the bridge from theory to clinical  practice while
maintaining  the highest level of regulatory  compliance.  What we do at BASi is
not highly  speculative.  It must be done in order to move a new drug  substance
toward  approval as weak  candidates are discarded.  We are fortunate to be paid
for such a significant cause that impacts millions of lives.

As I have been  reporting to  shareholders  all year, our repertoire of services
has been prudently expanded both by internal investments and by acquisitions. We
are ready to be a much larger company in the years ahead.  As you will note from
the embellishment of our logo, we transition from BAS to the new BASi,  denoting
our growth and evolution  into a mid-size  provider of tools and services to the
pharmaceutical industry.

| | Peter T Kissinger
President, Chairman and CEO
| | ---------------------------------------------

Dr. Peter T. Kissinger, trumpeter, scientist and CEO

Our MissionWe will advance  health care through  innovative  science.  Alliances,  research
services  and  unique  products  define  our  role in the  worldwide  effort  to
understand disease and develop therapeutic solutions.

 2 

"To play great music, you must keep your eyes on a distant star."
- Yehudi Menuhin (1916-1999)

PRELUDE

The Garage Band

In musical
terms,  BASi  started out as a garage  band,  has  developed  into a  harmonious
chamber ensemble and is now well on its way to becoming a full-fledged  symphony
orchestra.  The company  began with Pete  Kissingers  winning  high school
science  project,  an analytical tool to monitor trace  chemicals.  That evolved
into a career and a  corporation  and earned  Pete a worldwide  reputation  as a
virtuoso scientist. As a young professor,  Pete combined a few novel discoveries
into  an  invention  that  revolutionized   neuroscience,   the  electrochemical
detector,  which enabled researchers to monitor chemicals in the brain at barely
discernable  levels.  It is still  widely  used  today to monitor  patients  for
adrenal cancers and  hypertension  and to aid researchers in  understanding  the
underlying causes of central nervous system disorders.

Originally
working in his garage, Pete and a very small staff designed and built a striking
array of chemical separation tools, electrochemical analyzers, membrane sampling
probes and animal research tools.  From that small  beginning,  BASi grew into a
respected manufacturer of equipment used largely for research and development in
the pharmaceutical industry.

In the mid-80s,  we coined the trade name BAS  Analytics to denote a small group
within our instrument  applications department who provided fee-based analytical
services. Later, in 1988, several major pharmaceutical companies encouraged BASi
to create a contract research business, building on our instrument manufacturing
legacy.  That  business has grown  rapidly,  fueled by  strategic  acquisitions,
until, in 2002, it represents 60 percent of our total business.  BASi focuses on
pharmaceutical  development.  We carry drugs from discovery, when a new molecule
is first thought to have potential as a drug,  through clinical  trials,  when a
new drug is  introduced  to  humans  and  where  safety  and  effectiveness  are
established.  We have targeted early,  technically challenging steps in the drug
development  process and are paid for our work whether a drug ultimately reaches
the market or not.

In 2000, BASi
introduced  the  Culex®  robotic  containment  system for animal  models of
disease that streamlines some outmoded early screening systems and methods.  The
process  of  developing  a new drug is long and can  easily  cost more than $500
million. The pharmaceutical industry is under pressure to deliver more new drugs
faster  and at lower  cost  while  meeting  stringent  FDA  requirements.  Culex
simplifies and  accelerates  the  first-in-life  step of the process and reduces
cost  significantly,  operating  24/7 with minimal human input.  It improves the
quality and  efficiency of early animal  research and reduces use of, and stress
to, laboratory animals. It helps a pharmaceutical  company learn much earlier in
the development  process whether a drug will ever be viable in the  marketplace,
potentially saving tens of millions of research dollars. The BASi approach is to
obtain more  information in parallel rather than in a series of studies that are
often poorly coordinated.

Culex® is a registered trademark of Bioanalytical Systems, Inc.

The Chamber Ensemble

BASi has a
staff of dedicated virtuoso scientists,  engineers and other professionals,  all
working in harmony,  and we have  strategic  alliances  with other life  science
companies and universities in the U. S. and Europe. We are recognized  worldwide
for our  contributions to drug development.  BASi has provided  technologies and
services to most of the top 25  pharmaceutical  companies  who relied upon us in
their  development  of  drugs.  BASi  has  contributed  to  the  realization  of
treatments  for  psychiatric  and  neurological  disorders  such as  depression,
schizophrenia,  Parkinsons and Alzheimers  diseases,  as well as for
diabetes, HIV and infectious diseases.  These drugs offer relief to more than 40
million  people  in the U.S.  alone who are  afflicted  with  these  conditions.

BASi is  unique  in that we are  both a  manufacturer  and a  contract  research
organization  (CRO).  This duet makes us stronger in both areas.  We
supply many of the core analytical  instruments used in contract research.  Much
of what we learn in our contract  research is applied to develop and improve the
products we manufacture, and vice versa. The Culex is the most recent example of
this synergy.  Sales of Culex disposables have grown by over 50 percent, and new
variations of the Culex have just been introduced to the market.

 3 

"If only the whole world could feel the power of harmony. "
- Wolfgang Amadeus Mozart (1756-1791)

The Symphony Orchestra

Our business
model is simple. We believe the new discovery tools of the last decade, combined
with  patent  challenges  for many  leading  drugs,  are the prelude to many new
opportunities  and a robust  future for BASi.  Our  unique  role is our focus on
developing  innovative services and products that increase efficiency and reduce
costs associated with taking new drugs to market.  We have a strong  acquisition
program to supplement  sustained growth and will continue our associations  with
other life  sciences  companies  through the  Pharmaceutical  Industry  Contract
Research Alliance and new strategic alliances in the U.S. and Europe. In 2002 we
expanded capacity in two of our locations,  and another purpose-built  expansion
is under way in West Lafayette.  In 2003 BASi will offer greater  capacity and a
broader range of services and products,  quickly moving closer and closer toward
establishing  the company as a mid-size  provider of tools and services for drug
development.

A Duet Pushing the Limits of Science

Two of BASis talented scientists conducted a study in 2002 that absolutely
pushed the limits of science  and  analytical  techniques,  using the newest and
most sensitive equipment  currently  available.  Senior Scientist  Dr. Mark
Gehrke  developed the method,  and Project  Director Brian Engel managed a study
that analyzed nearly 10,000 melatonin specimens from more than 200 subjects over
a period of three months. The study required  measurements as small as 0.5 parts
per trillion. Such a concentration is hard to imagine, but putting it in another
perspective,  that  is the  equivalent  of  locating  1 apple  out of 4  billion
barrels, or moving 1 inch in a journey of 32 million miles!

This study required tremendous imagination and knowledge in its development, and
hard work, skill and very careful management in its execution.  Such work builds
on our past  experience  and  creates  greater  expectations,  requirements  and
challenges for the future.  BASi is indeed among those leading the way in moving
the pharmaceutical industry ahead further and faster.

Mark Gehrke and Brian Engel are always striving
to get the greatest results from their instruments.

The Culex Crescendo

The  Culex®  Automated  Blood Sampler was  developed  using input from BASi
customers and from our own in-house research teams. Through ongoing research, we
continue  to broaden  Culex  capabilities,  using it in  combination  with other
equipment,  such as the BASi Vetronics ECG monitor,  and by exploring previously
untried  techniques  which take us to higher and higher notes.  Every day we are
learning  ways to get more and better  data from  fewer  animals.  Our  research
scientists are working with our design engineers to translate what we learn into
refining and  improving  the product.  Along with growing  sales of  Culex®
units and support  equipment and supplies,  there is a dramatic  increase in the
number  of  clients  who  have  asked  BASi  to  conduct   their   Culex-related
pharmacokinetic  research projects for them in our laboratories.  The demand for
such work has pushed us well beyond  current  capacity,  and so in 2002 we began
building new laboratories at our West Lafayette  Corporate Center.  The facility
is dedicated to Culex contract work and internal exploratory  research.  This is
another example of the synergy between instrument and contract research business
groups, complementing one another for a stronger BASi.

| | Clarinetist,  horsewoman,  lover of animals and outdoor activities,  and in vivo
research  technician,  Rita Hilt is a woman of varied talents and interests.  At
BASi,  she is one of our  Culex  virtuosos,  conducting  and  managing  research
projects,  installing new units in customers  labs and training new users.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An Upbeat Tempo in Evansville

Currently
there are no completely satisfactory alternatives to animal models that simulate
the  overwhelming  complexity of living systems in the development of new drugs.
Experts say it will be many years before new drugs can be  introduced  to humans
without first monitoring their effectiveness and safety in animals.  BASi excels
in animal  science and analytical  science,  and our focus is always on reducing
the number of animals  used,  increasing  the quality of the data  obtained  and
using alternative methods whenever possible. At the same time, humane treatment,
health and  welfare are  primary  concerns  of all BASi  animal  care  staff.  A
tremendous   number  of  new  potential  drugs,   plus  a  growing  trend  among
pharmaceutical  companies to outsource research work, and increasingly stringent
regulatory   requirements   have   combined  to  push   BASis   Evansville
laboratories to their limits,  resulting in a construction  program in 2002 that
doubled capacity to meet growing demand.

 4 

"...hot or cool man, jazz is jazz."- Louis Armstrong (1900-1971)

BASi is  committed  to both  human and animal  health.  Our  Vetronics  Division
develops and sells  instruments  used in veterinary  clinics and  pharmaceutical
research facilities to ensure the health of companion animals and to monitor the
safety and effectiveness of new drugs for both animals and humans. The Vetronics
ventilator,  for  instance,  is used in surgery  for a wide  variety of animals,
including exotics such as sea turtles and boa constrictors.

| | Guitarist,  marathon  runner,  attending  veterinarian  and  study  director  at
BASi-Evansville,  Dr. Robert  Rose worked 16 years in  clinical  veterinary
practice where he gained a strong understanding of peoples  commitment to,
and concern about, animals.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Reaching for the High Notes in Pharmaceutical Research

Contract
service  providers  such as BASi who support the  pharmaceutical  industry  face
enormous  challenges in satisfying clients while meeting all relevant regulatory
requirements and accreditation  standards.  Analytical  science needed to create
and develop new drugs is evolving quickly,  becoming ever more complex. BASi and
the service providers like us have the foresight,  knowledge and ability to lead
the way.

Housed in
what was once a U.S. World War II military hospital in Warwickshire,  England is
BASis new state-of-the-art  biomarker laboratory,  developed in 2002 under
the direction of John Allinson. Biomarkers are naturally-occurring substances in
humans that signal the bodys  response to a drug, or drugs.  The number of
possible biomarkers in our bodies is virtually  limitless.  Measuring biomarkers
is  critical to  pharmaceutical  research  and  development  because  biomarkers
indicate  whether  disease is present,  how effective a drug is in controlling a
disease and whether a drug has any toxic  effects on the body.  One example of a
biomarker is glucose, which shows the effects of insulin.

Specific
biomarkers are related to specific diseases.  One biomarker in particular may be
a better  indicator  than  other  biomarkers  for each  disease.  Glucose is the
preferred biomarker for diabetes,  and monitoring glucose  communicates how well
that disease is being controlled.  The BASi biomarker laboratory  identifies the
one  biomarker  that best  indicates  success  of a  specific  drug.  That means
researchers  will quickly  learn how effective  the drug is in  controlling  the
targeted disease. Some other biomarkers can also indicate any toxic effects at a
very  early  stage.  This  information  gives  the  pharmaceutical  company  the
opportunity to make a decision earlier in the development  process about whether
a drug will become viable in the market,  potentially saving tens of millions of
research  dollars.   Unlike  glucose,   most  biomarkers  are  complex  proteins
determined  by  sophisticated   immunoassay  methods.  Thus,  BASi  adds  a  new
instrument to our ensemble.

| | A maestro of more than one area,  John  Allinson used his 30 years of experience
in  analytical  and  clinical  pathology to get the BASi  biomarkers  lab up and
running.  He has used those same skills to develop the first  genetic  screening
service for German  Shepherds  which he runs from his home. John also judges dog
shows and appears on British telly as a pet rescue consultant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 5 

QUARTERLY FINANCIAL DATA
        
UNAUDITED (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

`FOR THE QUARTER ENDED IN FISCAL 2002
------------------------------------
                                             December 31          March 31           June 30          September 30
                                             -----------          --------           -------          ------------
Total revenue                                 $ 6,023             $ 7,385           $ 6,576             $ 6,529
Gross profit                                    2,556               3,147             2,492               2,369
Net income                                        247                 519               281                  19
Basic net income per common share                 .05                 .11               .06                 0.0
outstanding(1)
Diluted net income per common share               .05                 .11               .06                 0.0
outstanding(1)


FOR THE QUARTER ENDED IN FISCAL 2001
------------------------------------
                                             December 31          March 31           June 30          September 30
                                             -----------          --------           -------          ------------
Total revenue                                 $ 5,426             $ 6,842           $ 6,400             $ 6,607
Gross profit                                    2,422               3,472             3,100               3,126
Net income                                        195                 582               515                 475
Basic net income per common share                 .04                 .13               .11                 .10
outstanding(1)
Diluted net income per common share               .04                 .13               .11                 .10
outstanding(1)`

(1)   
The sum of the net income  per common  share may not equal the annual net income
per share due to interim quarter rounding.

"People  who make music  together  cannot be enemies,  at least not while the
music lasts." - Paul Hindemith (1895-1963)

 6 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The  following  discussion  and  analysis  should  be read in  conjunction  with
Selected  Consolidated  Financial Data and  BASis  Consolidated  Financial
Statements and notes thereto included  elsewhere in this Report.  In addition to
the historical  information contained herein, the discussions in this Report may
contain  forward-looking  statements that involve risks and uncertainties  which
are discussed in Exhibit 99 to  BASis  Form 10-K filed with the Securities
Exchange  Commission.  BASis  actual results could differ  materially from
those discussed herein.

Overview

BASi  provides a broad range of  value-added  services and  products  focused on
chemical   analysis  to  the  worldwide   pharmaceutical,   medical  device  and
biotechnology   industries.   BASis   customer-focused  approach  and  its
high-quality  services and products enable it to serve as a value-added  partner
in solving complex scientific  problems by providing  cost-effective  results to
its customers on an accelerated basis. Founded in 1974 in Lansing,  Michigan and
relocated  to West  Lafayette,  Indiana  in 1975,  BASi has  experienced  growth
primarily through internal expansion supplemented by strategic acquisitions.  As
part of its internal growth strategy,  BASi has developed technical  specialties
in such areas as  chromatography,  electrochemistry,  in vivo  sampling and mass
spectrometry.  BASis  growth  has  strategically  positioned  it  to  take
advantage of  globalization  in the  marketplace and to provide new services and
areas of technical expertise to its customers.

Throughout  its  history,  BASi has taken steps to  position  itself as a global
leader  in  the   analytical   chemistry   field.   Development  of  BASis
infrastructure  began in 1975 when it  established  relationships  with  several
customers and multiple international  distributors.  In 1981, BASi increased its
sphere of  influence  to  include  Japan  with the  creation  of BAS  Japan,  an
independent distributor.  In 1988, BASi enhanced its computer software expertise
by acquiring  Interactive  Microware,  Inc. in State College,  Pennsylvania.  In
1988, BASi began offering contract services to customers that lacked the time or
expertise to perform certain analyses using BASis  analytical products. In
1995, BASi acquired a distributor, BAS Instruments Ltd., to further solidify its
presence  in the  United  Kingdom.  In 1998,  BASi  acquired a  manufacturer  of
veterinary  monitoring  and  diagnostic  equipment,  BAS  Vetronics,  to provide
additional preclinical support. In 1998, BASi acquired a contract services firm,
BAS Analytics Ltd., to offer local service in the United Kingdom.  In 2000, BASi
also acquired a contract  services firm, BAS  Evansville,  to offer  preclinical
services.  In  December  2002,  BASi  acquired a contract  services  firm,  BASi
Northwest Laboratories.  In June 2002, BASi entered into a merger agreement with
PharmaKinetics Laboratories, Inc.

Revenues  are  derived  principally  from (i)  analytical  services  provided to
customers,  and (ii) the sale of BASis  analytical  instruments  and other
products.  Both methods of generating  revenue  utilize  BASis  ability to
identify,  isolate and resolve  client  problems  relating to the separation and
quantification of individual  substances in complex mixtures.  BASi supports the
pharmaceutical  industry by  focusing on  analytical  chemistry  for  biomedical
research,  diagnostics,  electrochemistry and separations  science.  BASis
analytical  products  are sold  primarily to  pharmaceutical  firms and research
organizations. Principal customers include scientists engaged in drug metabolism
studies, as well as those engaged in basic neuroscience  research.  BASi was the
first to commercialize the liquid chromatograph and electrochemistry  technology
which is now the worldwide  standard for the  determination of  neurotransmitter
substances.   Research  products  include  in  vivo  sampling  devices,  reagent
chemicals, electrochemical apparatus and sensors.

BASis  management  believes that  fluctuations  in  BASis  quarterly
results  are caused by a number of  factors,  including  BASis  success in
attracting new business, the size and duration of service contracts,  the timing
of its clients  decisions to enter into new contracts, the cancellation or
delays of ongoing contracts,  the timing of acquisitions and other factors, many
of which are beyond  BASis  control.  In fiscal 2002,  24% of  BASis
total  revenue was derived from  customers  located  outside the United  States.
These  markets  tend to be much more  volatile  than the United  States  market.
Significant governmental, regulatory, political, economic and cultural issues or
changes could adversely  affect the growth or  profitability  of BASi's business
activities in any such market.

 7 

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 BASi,  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 by BASi. BASi
has identified the following areas as critical accounting policies.

Revenue Recognition

The  majority  of  BASis  service  contracts  involve  the  processing  of
bioanalytical  samples for pharmaceutical  companies.  These contracts generally
provide for a fixed fee for each  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. BASis other service contracts generally consist of
pre-clinical  trial 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 BASi 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.

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.

BASi product revenue is derived  primarily from sales of equipment  utilized for
analytical testing.  Revenue from equipment not requiring installation,  testing
and  training,  is  recognized  upon  shipment to  customers.  One BASi  product
includes internally  developed software and requires  installation,  testing and
training, which occur concurrently. Revenue is recognized upon completion of the
installation, testing and training.

Impairment of Long-Lived Assets, Including Goodwill

The carrying value of long-lived  assets,  including  goodwill,  is periodically
reviewed by management.  If managements review indicates that the carrying
value  may be  impaired,  then  the  impairment  amount  will  be  written  off.
Impairment accounting is governed by Statement of Financial Accounting Standards
(SFAS)  No. 121,  Accounting  for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of. Significant subjective
estimates  are  required to  calculate  expected  future cash flows and the fair
market values to which asset net book values are compared. SFAS No. 121 requires
that  whenever  events or  circumstances  indicate  that BASi may not be able to
recover the net book value of its  long-lived  assets through future cash flows,
an assessment must be performed of expected future cash flows,  and undiscounted
estimated  future  cash  flows must be  compared  to the net book value of these
assets to determine if  impairment  is  indicated.  Application  of SFAS No. 121
requires the use of significant judgment and preparation of numerous significant
estimates.  Although  BASi  believes  that its  estimates  of cash  flows in the
application  of SFAS No. 121 were  reasonable  and were based upon all available
information,  including extensive  historical cash flow data about the prior use
of its assets, such estimates  nevertheless  required substantial  judgments and
were based upon material assumptions about future events.

In June 2001,  the FASB issued SFAS No. 141,  Business  Combinations
and No. 142,  Goodwill  and Other Intangible  Assets.  Under the new
rules, goodwill and indefinite-lived  intangible assets are no longer amortized,
but are reviewed annually for impairment.  Separable  intangible assets that are
not deemed to have an indefinite  life will continue to be amortized  over their
useful lives.  BASi will apply the new  accounting  rules  beginning  October 1,
2002,  and will perform the first of the required  impairment  tests of goodwill
and  indefinite-lived  intangible  assets as of October 1, 2002, and has not yet
determined  what the effect of these tests will be on the earnings and financial
position of BASi.

 8 

Income Tax Accounting

Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income  Taxes.  SFAS No. 109  requires  recognition  of  deferred  tax
liabilities and assets for the expected  future tax  consequences of events that
have been  included  in the  financial  statements  or tax  returns.  Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
difference  between  the  financial  statement  and  tax  bases  of  assets  and
liabilities. These deferred taxes are measured by applying the provisions of tax
laws in effect at the balance sheet date.

BASi  recognizes  deferred  tax  assets in its  balance  sheet  which  typically
represent  items  deducted  currently in the financial  statements  that will be
deducted in future  periods in tax returns.  In accordance  with SFAS No. 109, a
valuation  allowance is recorded against these deferred tax assets to reduce the
total  deferred  tax assets to an amount  that will,  more  likely  than not, be
realized in future  periods.  The  valuation  allowance  is based,  in part,  on
managements estimate of future taxable income, the expected utilization of
tax loss  carryforwards  and the  expiration  dates  of tax loss  carryforwards.
Significant  assumptions  are used in developing  the analysis of future taxable
income for purposes of  determining  the  valuation  allowance  for deferred tax
assets  which,  in  the  opinion  of  management,   are  reasonable   under  the
circumstances.

Undistributed  earnings in BASis  foreign  subsidiaries  are considered by
management  to be  permanently  reinvested in such  subsidiaries.  Consequently,
United States  deferred tax liabilities on such earnings have not been recorded.
Management  believes  that such United  States taxes would be largely  offset by
foreign net operating loss carryforwards in applicable foreign jurisdictions.

Results of Operations

The following table sets forth, for the periods indicated,  certain statement of
operations data as a percentage of total revenue.

`Percentage of Revenue Year Ended September 30,
                  ----------------------------------------------

                                        2002             2001              2000
                                       -----------------------------------------
Service revenue                         60.9%            60.1%             57.2%
Product revenue                         39.1             39.9              42.8
                                       -----------------------------------------
     Total revenue                     100.0            100.0             100.0
Cost of service revenue                 43.6             38.2              48.1
Cost of product revenue                 16.6             13.8              15.5
                                       -----------------------------------------
     Total cost of revenue              60.2             52.0              63.6
                                       -----------------------------------------
Gross profit                            39.8             48.0              36.4
Operating expenses:
Selling                                 11.1             12.7              17.7
Research and development                 5.7              6.4               9.4
General and administrative              16.9             15.1              15.6
                                       -----------------------------------------
     Total operating expenses           33.7             34.2              42.7
Operating income (loss)                  6.1             13.8              (6.3)
Other income (expense), net             (0.3)            (1.5)             (3.2)
                                       -----------------------------------------
Income (loss) before
     Income taxes                        5.8             12.3              (9.5)
Income taxes (benefit)                   1.8              5.3              (2.2)
                                       -----------------------------------------
Net income (loss)                        4.0%             7.0%             (7.3)%
                                       =========================================`

 9 

Year Ended September 30, 2002, Compared with Year Ended September 30, 2001

Total revenue for the year
ended  September 30, 2002 increased 4.9% to $26.5 million from $25.3 million for
the year ended September 30, 2001.  Service  revenue  increased to $16.1 million
for the year ended  September  30,  2002 from $15.2  million  for the year ended
September 30, 2001,  primarily as a result of additional  bioanalytical  service
contracts.  Product  revenue  increased  to $10.4  million  for the  year  ended
September  30, 2002 from $10.1  million for the year ended  September  30, 2001,
primarily  due to European  product  sales of the  Culex®  Automated  Blood
Sampling System.

Costs of revenue increased
21.3% to $15.9 million for the year ended  September 30, 2002 from $13.2 million
for the year ended September 30, 2001. This increase of $2.7 million was largely
due to an increase in both  staffing  costs and the number of employees on staff
in the  services  segment.  Costs of revenue for  BASis  services  segment
increased  to 71.6% as a  percentage  of  services  revenue  for the year  ended
September 30, 2002 from 63.5% of services  revenue for the year ended  September
30, 2001,  due,  again,  to an increase in both staffing costs and the number of
employees on staff in the  segment.  Costs of revenue for  BASis  products
segment increased to 42.3% as a percentage of product revenue for the year ended
September  30, 2002 from 34.7% of product  revenue for the year ended  September
30, 2001, due primarily to a change in product mix.

Selling expenses for the
year ended  September  30,  2002  decreased  by 8.2% to $2.9  million  from $3.2
million  during the year ended  September  30, 2001,  due to  decreased  foreign
commission expense.  Research and development  expenses,  which are net of grant
reimbursements,  for the year ended  September 30, 2002  decreased  5.6% to $1.5
million from $1.6 million for the year ended September 30, 2001. The decrease of
$90,000 is primarily due to an increase in grant reimbursements of $540,000 from
$240,000 for the years ended September 30, 2002 and 2001, respectively.  General
and  administrative  expenses, for the year ended  September  30, 2002  increased
17.3% to $4.5 million from $3.8 million for the year ended  September  30, 2001,
primarily  as a result of an increase on both  staffing  costs and the number of
employees on staff.

Other income (expense),
net,  was  $(80,000)  in the  year  ended  September  30,  2002 as  compared  to
$(384,000) in the year ended  September 30, 2001, as a result of the decrease in
interest expense due primarily to a decrease in interest rates.

BASis effective tax
rate for 2002 was 30.9%,  compared to 43.1% for fiscal 2001.  This  decrease was
primarily due to the utilization of foreign net operating losses.

Year Ended September 30, 2001, Compared with Year Ended September 30, 2000

Total revenue for the year
ended September 30, 2001 increased 31.5% to $25.3 million from $19.2 million for
the year ended September 30, 2000.  Service  revenue  increased to $15.2 million
for the year ended  September  30,  2001 from $11.0  million  for the year ended
September  30,  2000,  primarily  due to an increased  number of  bioanalytical,
preclinical  and  pharmaceutical  analysis  contract  services.  Product revenue
increased  to $10.1  million  for the year ended  September  30,  2001 from $8.2
million for the year ended September 30, 2000,  primarily due to the Culex®
Automated Blood Sampling System, epsilon and related products.

Costs of revenue  increased  7.7% to $13.2 million for the year ended  September
30, 2001 from $12.2 million for the year ended September 30, 2000. This increase
of $1.0  million was due to the  increase  in  corresponding  revenue.  Costs of
revenue for BASis  services decreased to 63.5% as a percentage of services
revenue for the year ended September 30, 2001 from 84.1% of services revenue for
the year ended September 30, 2000, due to additional bioanalytical,  preclinical
and  pharmaceutical  analysis  service revenue without a comparable  increase in
corresponding  labor costs. Costs of revenue for BASis  products decreased
to 34.7% as a percentage  of product  revenue for the year ended  September  30,
2001 from  36.2% of  product  revenue  for the year ended  September  30,  2000,
primarily due to a change in product mix.

Selling  expenses for the year ended  September 30, 2001  decreased 5.8% to $3.2
million  from $3.4 million  during the year ended  September  30,  2000,  due to
decreased foreign commission expense.  Research and development expenses,  which
are net of grant reimbursements, for the year ended September 30, 2001 decreased
10.8% to $1.6 million from $1.8 million for the year ended  September  30, 2000,
due to the increase in grant  reimbursements  of $240,000  from $125,000 for the
years   ended   September   30,  2001  and  2000,   respectively.   General  and
administrative expenses for the year ended September 30, 2001 increased 27.6% to
$3.8 million from $3.0 million for the year ended September 30, 2000,  primarily
due to  organizational  restructuring  of our preclinical  operation,  increased
health care costs and the increase in utilities.

Other income (expense), net, was $(384,000) in the year ended September 30, 2001
as compared to $(621,000)  in the year ended  September 30, 2000, as a result of
the  decrease in interest  expense due to  decreased  use of the line of credit.

BASis effective tax
rate for 2001 was 43.1%,  compared to 23.8% for fiscal 2000.  This  increase was
primarily  due to the  increase  in  earnings  and the  impact of  nondeductible
foreign losses incurred in fiscal 2001.

 10 

Liquidity and Capital Resources

Comparative Cash Flow Analysis

Since its inception,
BASis  principal  sources  of cash  have been  cash  flow  generated  from
operations and funds  received from bank  borrowings  and other  financings.  At
September 30, 2002, BASi had cash and cash  equivalents of $826,000,  compared to
cash and cash  equivalents  of $374,000 at September  30, 2001.  The increase in
cash resulted primarily from increased borrowings.

BASis net cash
provided by operating activities was $2,032,000 for the year ended September 30,
2002.  Cash  provided by  operations  during the year ended  September  30, 2002
consisted of net income of $1,066,000,  non-cash charges of $1,987,000 and a net
decrease of $1,021,000 in operating assets and liabilities. The most significant
item affecting the change in operating assets and liabilities was an increase in
prepaid  expenses  and other  assets of  $438,000  at  September  30,  2002 from
$232,000 at September 30, 2001.

Cash used by investing
activities  increased to $5,262,000  for the year ended  September 30, 2002 from
$1,628,000  for the year ended  September  30,  2001,  primarily  due to capital
expenditures  for  construction  projects  in  Evansville  and  West  Lafayette,
Indiana.  Cash provided by financing activities for the year ended September 30,
2002 was  $3,697,000,  due to  additional  borrowings  on the line of credit and
increased long-term debt.

BASis  net cash provided by operating  activities  was  $4,028,000 for the
year ended September 30, 2001. Cash provided by operations during the year ended
September 30, 2001  consisted of net income of $1,767,000,  non-cash  charges of
$2,143,000,  and a net decrease of $118,000 in operating assets and liabilities.
The  most  significant  item  affecting  the  change  in  operating  assets  and
liabilities  was an increase in accounts  payable of $1,220,000 at September 30,
2001.

Cash used by investing
activities  decreased to $1.6 million for the year ended September 30, 2001 from
$2.0 million for the year ended  September  30, 2000,  primarily due to payments
relating to the  acquisition  of T.P.S.,  Inc. in the year ended  September  30,
2000.  Cash used by financing  activities for the year ended  September 30, 2001
was $2.5 million,  due to payments on the line of credit,  partially  off-set by
increased long-term debt.

Capital Resources

Total expenditures by BASi
for property and equipment  were $4.7 million,  $1.7 million and $1.6 million in
fiscal 2002, 2001 and 2000,  respectively.  Expenditures made in connection with
the  expansion  of  BASis  operating  facilities  in  West  Lafayette  and
Evansville,  Indiana  and in the United  Kingdom  and  purchases  of  laboratory
equipment  account for the largest portions of these  expenditures in each year.
The  capital  investments  relate  to  the  purchase  of  additional  laboratory
equipment  corresponding  to  anticipated  increases in research  services to be
provided  by  BASi.  BASi  expects  to make  other  investments  to  expand  its
operations  through  internal growth and strategic  acquisitions,  alliances and
joint ventures.

During 2001, BASi commenced
construction  to  expand  facilities  at its  preclinical  site  in  Evansville,
Indiana.  Construction  of  these  preclinical  facilities  is  expected  to  be
completed in February  2003 at a total cost of $3.5 million.  During 2002,  BASi
began expanding facilities at its site in West Lafayette,  Indiana. Construction
on the  West  Lafayette  facilities  is  expected  to have a total  cost of $4.0
million.  BASi obtained  financing for these  construction  projects with a bank
(discussed below).

On December 13, 2002, BASi
acquired LC Resources, Inc. (LCR), a privately-held company based in
Walnut Creek,  California.  BASi purchased all of the outstanding  shares of LCR
for $2.5  million,  subject to  adjustment  for certain  changes in net tangible
assets of LCR.  BASi paid cash of $125,000 at closing with the  remainder of the
purchase price to be paid through promissory notes,  bearing interest at 10% per
annum,  and maturing on October 1, 2007.  The holders of the notes will have the
option to require BASi to repay up to 20% of the outstanding  principal  balance
of the notes on each  October 1 prior to  maturity,  commencing  October 1,
2003.  These  notes are  subordinated  to senior  bank  debt  (discussed  below).

On June 20, 2002, BASi and
PharmaKinetics  Laboratories,  Inc.  (PKLB)  entered  into a  merger
agreement that will result in PKLB becoming a  wholly-owned  subsidiary of BASi.
In connection with the merger, BASi will issue 6% Subordinated Convertible Notes
in an aggregate principal amount of approximately $4.0 million to the holders of
PKLB Class A Preferred shares. No principal  payments will be due on these notes
until 2008. No interest will be paid on the notes for one year after the date of
issuance. The notes are convertible into BASi common shares at the option of the
holder at any time  after the first  anniversary  of the date of  issuance  at a
price of $16.00 per share.

 11 

Between June and September
2002,  BASi loaned PKLB a total of $408,000  for working  capital  purposes.  On
November 14, 2002,  PKLB executed a Secured  Convertible  Revolving  Note in the
principal amount of up to $925,000 payable to BASi to replace the existing notes
payable  to BASi  and to  allow  PKLB to  borrow  additional  amounts  to  cover
short-term  operating  requirements.  The note issued to BASi  carries an annual
interest rate of 8%, and all  principal and accrued  interest is due and payable
on May 1,  2003. The  outstanding  principal  amount of the note to BASi is
convertible by BASi at any time into PKLB common stock at a price of $0.1585 per
common  share,  which price  represents  the  average of the closing  prices for
PKLBs common shares as reported by NASDAQ for the twenty (20) trading days
ended  November 8,  2002.  All PKLB  common  shares  held by BASi as of the
effective time of the merger will be cancelled. The note to BASi is secured by a
security  interest  in favor of BASi in all of the assets of PKLB  pursuant to a
Security  Agreement  between PKLB, as debtor,  and BASi, as secured party.  PKLB
Limited Partnership,  a subsidiary of PKLB,  guaranteed repayment of the note to
BASi,  pursuant to the terms of an  Unconditional  Guaranty dated as of November
14, 2002, and pledged  certain real property  located in Baltimore,  Maryland to
BASi as security for its guaranty  pursuant to the terms of an Indemnity Deed of
Trust.

BASis  credit  agreement  (discussed  below) limits the amount that can be
loaned to PKLB prior to the  closing of the merger to the amount of the  Secured
Convertible Revolving Note. If the merger is consummated, BASi expects to expend
additional  amounts to pay trade  payables and other  obligations of PKLB and to
fund  PKLBs  continuing  operations.  BASi intends to fund these  expenses
using cash from operations and borrowings under the line of credit.  BASis
credit  agreement  also  requires  BASi to sell  the  Baltimore,  Maryland  real
property  within 180 days following its acquisition of PKLB. BASi intends to use
the net proceeds from the sale to pay down the line of credit.  BASi  management
believes that sale of the building will enable it to fund PKLB operations  until
such time as the cash flow generated from those  operations  becomes adequate to
support the operations.

On October 29, 2002,  BASi  obtained new credit  agreements  with two  different
banks  that  completely  refinanced  and  replaced  all  outstanding  bank  debt
arrangements  that  were in  place at  September  30,  2002.  These  new  credit
agreements provide for a $6.0 million revolving line of credit with a bank and a
mortgage  note  and two  construction  term  loans  payable  with  another  bank
aggregating  $10.0  million.  Borrowings  under these new credit  agreements are
collateralized  by substantially  all assets related to BASis  operations,
all common stock of BASis United States subsidiaries and 65% of the common
stock  of its  non-United  States  subsidiaries,  and the  assignment  of a life
insurance  policy  on  BASis  Chairman  and CEO.  Under the terms of these
credit agreements, BASi has agreed to restrict advances to foreign subsidiaries,
limit additional indebtedness and capital expenditures as well as to comply with
certain  financial  covenants  outlined  in  the  borrowing  agreements.   These
financial covenants include:  maintenance of a certain ratio of interest bearing
indebtedness (not including  subordinated debt) to earnings before income taxes,
depreciation,   amortization,   and   interest   expense   (EBITDA);
maintenance of a certain ratio of total  indebtedness  to tangible net worth and
subordinated  debt;  maintenance  of  a  certain  ratio  of  EBITDA  to  certain
identified  fixed  charges;  maintenance of a certain ratio of current assets to
current  liabilities;  limits on the amount of capital  expenditures that can be
made using funds other than long-term  indebtedness in a single fiscal year; and
maintenance of a certain ratio of net cash flow to debt servicing  requirements.
These new credit agreements contain  cross-default  provisions.  Details of each
debt issue are discussed below.

BASis  revolving  line of credit  expires  September 30, 2005. The maximum
amount  available  under  the  terms  of the  agreement  is  $6.0  million  with
outstanding  borrowings  limited  to  the  borrowing  base  as  defined  in  the
agreement.   Interest  accrues  monthly  on  the  outstanding   balance  at  the
banks prime rate to prime rate plus 125 basis points, or at the Eurodollar
rate plus 200 to 350 basis points, as elected by BASi,  depending upon the ratio
of BASis interest bearing indebtedness (less subordinated debt) to EBITDA.
BASi  pays a fee  equal  to 25 to 50  basis  points,  depending  upon  the same
financial ratios, on the unused portion of the line of credit.

BASi  has a  $5,410,000  commercial  mortgage  with a bank.  The  mortgage  note
requires 119 monthly principal payments of $22,542 plus interest,  followed by a
final  payment for the unpaid  principal  amount of  $2,727,502  due November 1,
2012. Interest is charged at the prime rate. On November 15, 2002, BASi obtained
a  $1,500,000  lease line for  equipment  with a bank.  At  November  30,  2002,
$1,090,000 was utilized,  including $859,020 under a sale-leaseback arrangement.
The lease requires 60 payments of $17,820.

BASi has a $2,250,000  construction  loan with a bank which expires  November 1,
2012. The loan requires  interest  payments only until completion of the project
in West Lafayette, Indiana. Interest is charged at the prime rate.

BASi has a $2,340,000  construction  loan with a bank which expires May 1, 2008.
The loan  requires  interest  payments  only until  completion of the project in
Evansville, Indiana. Interest is charged at the prime rate.

 12 

To obtain the  foregoing new credit  agreements,  BASi entered into an agreement
with Periculum Capital Company, LLC (Periculum).  Under the terms of
the  agreement,  BASi paid  $300,000 in fees to  Periculum  upon  closing of the
refinancing.

BASi is  required  to make  cash  payments  in the  future  on  debt  and  lease
obligations.  The following table  summarizes the BASis  contractual  term
debt and lease  obligations at December 31, 2002  (reflective of the refinancing
of debt that  occurred on October 29, 2002 and the issuance of notes  payable to
acquire  LCR)  and the  effect  such  obligations  are  expected  to have on its
liquidity and cash flows in future periods (amounts in thousands).

`Payments due for fiscal years ending September 30:

                                   2003     2004-2005     2006-2007     After 2007       Total
                                   ----     ---------     ---------     ----------       -----
Mortgage note payable              $253      $  552          $552        $ 4,053        $ 5,410
Subordinated debt                   ---         ---           ---          2,375          2,375*
Capital lease obligations           302         127           ---            ---            429
Operating leases                    200         435           432             36          1,103
                                   ----      ------          ----        -------        -------
                                   $755      $1,114          $984        $ 6,464        $ 9,317

*    This amount reflects the subordinated notes issued to the shareholders of LCR in connection
     with the  acquisition of LCR by BASi in December 2002. The principal  amount of these notes
     will be reduced to reflect  certain changes in the net tangible asset value of LCR prior to
     the closing of the  acquisition.  The holders of these notes have the right to require BASi
     to prepay 20% of the principal amount of the notes each year prior to maturity.`

BASi's  borrowings under its revolving line of credit for working capital needs,
borrowings  to fund capital  expenditures  using  construction  loans and the 6%
subordinated notes payable that may be issued in connection with the merger with
PKLB will each affect BASi's  liquidity and cash flows in future periods.  These
obligations  are not  reflected in the above  schedule.  The covenants in BASi's
credit agreement requiring the maintenance of certain ratios of interest bearing
indebtedness  (not including  subordinated  debt) to EBITDA and net cash flow to
debt  servicing  requirements  may  restrict  the amount BASi can borrow to fund
future operations, acquisitions and capital expenditures.

After   September  30,  2002,  BASi  borrowed   additional   funds  to  continue
construction on its West Lafayette  expansion project. In order to better assure
compliance  with the  covenants in the credit  agreement,  construction  on this
project has been  delayed  and  management  does not expect to make  significant
borrowings in connection  with this project until cash flow  improves.  BASi has
formulated  and begun to  implement  a plan to reduce  debt and improve its cash
flow to better  enable it to  satisfy  the  credit  agreement  covenants  in the
future. The plan includes, but is not limited to, headcount reductions and other
cost-saving  measures at its West Lafayette and McMinville,  Oregon  facilities,
the sale of real estate assets in West Lafayette,  and the delay of construction
of its West Lafayette expansion project.  Further, BASi believes compliance with
loan  covenants  will be  achieved  and will take  necessary  action,  including
deferral of the PKLB acquisition, if deemed necessary, to remain compliant.

BASi intends to issue additional subordinated debt of approximately $4.0 million
in connection with the contemplated  acquisition of PKLB. This indebtedness will
not require any  payments of principal or interest by BASi during the first year
after it is issued,  and will not affect  BASi's  compliance  with the  leverage
covenant in its credit  agreement.  However,  as discussed above,  BASi will use
cash from  operations and amounts  available  under its credit  agreement to pay
trade  payables  and  other  obligations  of  PKLB  and to  fund  PKLB's  future
operations. To offset these requirements,  BASi intends to sell a building owned
by PKLB, located in  Baltimore,  Maryland and to apply the net proceeds  from
the sale to reduce amounts outstanding under the credit agreement.

Based on its current business activities,  BASi believes cash generated from its
operations,  amounts available under its existing bank line of credit and credit
facility, and the proposed action plan will be sufficient to fund BASi's working
capital and capital  expenditure  requirements  for the  foreseeable  future and
through September 30, 2003.

Inflation

BASi believes that
inflation has not had a material  adverse effect on its business,  operations or
financial condition.

New Accounting Pronouncements

Please refer to the Notes to Consolidated  Financial Statements for a discussion
of recently issued accounting standards.

[Page left blank intentionally]

 13 

CONSOLIDATED BALANCE SHEETS

`SEPTEMBER 30,
                                                             -----------------------------------------
                                                                  2002                         2001
                                                             -------------                ------------
ASSETS
Current assets:
  Cash and cash equivalents                                  $     825,964                $    373,738
  Accounts receivable
     Trade                                                       3,699,554                   3,634,143
     Grants                                                        115,592                     116,719
     Unbilled revenues and other                                   739,008                     514,997
  Inventories                                                    2,624,050                   2,391,081
  Deferred income taxes                                            455,033                     442,903
  Refundable income taxes                                           51,952                     325,001
  Prepaid expenses                                                 282,906                      71,062
                                                             -------------                ------------
Total current assets                                             8,794,059                   7,869,644
Property and equipment
  Land and improvements                                            495,624                     495,624
  Buildings and improvements                                    14,475,933                  13,507,731
  Machinery and equipment                                       13,363,055                  10,795,295
  Office furniture and fixtures                                  1,114,157                   1,092,452
  Construction in process                                        2,359,211                     112,790
                                                             -------------                ------------
                                                                31,807,980                  26,003,892
  Less accumulated depreciation and amortization                (8,983,937)                 (7,082,300)
                                                             -------------                ------------
                                                                22,824,043                  18,921,592
                                                             -------------                ------------
Goodwill, less accumulated amortization of
  $360,167 in 2002 and $280,871 in 2001                            883,628                     962,924
Other assets                                                       960,881                     222,494
                                                             -------------                ------------
Total assets                                                 $  33,462,611                $ 27,976,654
                                                             =============                ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                           $   2,459,325                $  2,618,788
  Income taxes payable                                              41,488                     176,000
  Accrued expenses                                                 752,934                     746,741
  Customer advances                                              1,285,311                   1,063,467
  Revolving line of credit                                       3,749,373                     235,687
  Current portion of capital lease obligations                   1,137,925                     261,123
  Current portion of long-term debt                                278,928                     233,328
                                                             -------------                ------------
Total current liabilities                                        9,705,284                   5,335,134
Capital lease obligations, less current portion                    123,371                     402,276
Long-term debt, less current portion                             3,123,756                   2,741,684
Deferred income taxes                                            1,611,836                   1,667,231
Shareholders' equity
  Preferred Shares
     Authorized shares- 1,000,000
     Issued and outstanding shares - none                              ---                         ---
  Common shares, no par value
     Authorized shares - 19,000,000
     Issued and outstanding shares -
        4,578,516 in 2002 and 4,569,416 in 2001                  1,014,206                   1,012,190
  Additional paid-in capital                                    10,520,839                  10,506,200
  Retained earnings                                              7,411,111                   6,344,666
  Accumulated other comprehensive loss                             (47,792)                    (32,727)
                                                             -------------                ------------
Total shareholders' equity                                      18,898,364                  17,830,329
                                                             -------------                ------------
Total liabilities and shareholders' equity                   $  33,462,611                $ 27,976,654
                                                             =============                ============`

See accompanying notes.

 14 

CONSOLIDATED STATEMENTS OF OPERATIONS

`YEAR ENDED SEPTEMBER 30,
                                                ------------------------------------------------
                                                    2002              2001              2000
                                                ------------      ------------      ------------
Service revenue                                 $ 16,139,602      $ 15,202,066      $ 10,999,609
Product revenue                                   10,373,444        10,072,582         8,223,692
                                                ------------      ------------      ------------
     Total revenue                                26,513,046        25,274,648        19,223,301
Cost of service revenue                           11,556,269         9,660,288         9,245,380
Cost of product revenue                            4,393,009         3,494,258         2,973,787
                                                ------------      ------------      ------------
     Total cost of revenue                        15,949,278        13,154,546        12,219,167
                                                ------------      ------------      ------------
Gross profit                                      10,563,768        12,120,102         7,004,134
Operating expenses:
  Selling                                          2,939,929         3,204,056         3,400,273
  Research and development                         1,521,001         1,611,045         1,805,933
  General and administrative                       4,476,105         3,814,601         2,990,234
                                                ------------      ------------      ------------
     Total operating expenses                      8,937,035         8,629,702         8,196,440
                                                ------------      ------------      ------------
Operating income (loss)                            1,626,733         3,490,400        (1,192,306)
Interest income                                        3,492             5,910            15,483
Interest expense                                    (205,002)         (417,211)         (553,715)
Other income (expense)                               135,099            46,479           (34,067)
Loss on sale of property and equipment               (12,883)          (18,671)          (48,708)
                                                ------------      ------------      ------------
Income (loss) before income taxes                  1,547,439         3,106,907        (1,813,313)
Income taxes (benefit)                               480,994         1,340,150          (431,303)
                                                ------------      ------------      ------------
Net income (loss)                               $  1,066,445      $  1,766,757      $ (1,382,010)
                                                ============      ============      ============
Net income (loss) per share:
  Basic                                         $       0.23      $       0.39      $      (0.30)
  Diluted                                       $       0.23      $       0.38      $      (0.30)
Weighted average common shares outstanding:
  Basic                                            4,575,995         4,564,620         4,550,336
  Diluted                                          4,625,381         4,600,498         4,550,336`

See accompanying notes.

 15 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

`ACCUMULATED
                                                                                             OTHER
                                                              ADDITIONAL                  COMPREHENSIVE       TOTAL
                                      PREFERRED   COMMON       PAID-IN       RETAINED        INCOME       SHAREHOLDERS'
                                        SHARES    SHARES       CAPITAL       EARNINGS        (LOSS)           EQUITY
                                      --------- -----------   -----------   -----------   ------------    -------------

BALANCE AT SEPTEMBER 30, 1999           $---    $   999,992   $10,481,978   $ 5,959,919   $    (20,595)   $17,421,294
 Comprehensive income (loss)
  Net loss                               ---            ---           ---    (1,382,010)           ---     (1,382,010)
  Other comprehensive loss:
    Foreign currency translation
     adjustments                         ---            ---           ---           ---         (2,851)        (2,851)
                                                                                                          -----------
 Total comprehensive loss                                                                                  (1,384,861)
 Exercise of stock options               ---         10,698        14,527           ---            ---         25,225
                                      --------- -----------   -----------   -----------   ------------    -----------
    BALANCE AT SEPTEMBER 30, 2000        ---    $ 1,010,690    10,496,505     4,577,909        (23,446)    16,061,658
 Comprehensive income (loss)
  Net income                             ---            ---           ---     1,766,757            ---      1,766,757
  Other comprehensive loss:
    Foreign currency translation
     adjustments                         ---            ---           ---           ---         (9,281)        (9,281)
                                                                                                          -----------
 Total comprehensive income                                                                                 1,757,476
 Exercise of stock options               ---          1,500         9,695           ---            ---         11,195
                                      --------- -----------   -----------   -----------   ------------    -----------
    BALANCE AT SEPTEMBER 30, 2001        ---      1,012,190    10,506,200     6,344,666        (32,727)    17,830,329
 Comprehensive income (loss)
  Net income                             ---            ---           ---     1,066,445            ---      1,066,445
  Other comprehensive loss:
    Foreign currency translation
     Adjustments                         ---            ---           ---           ---        (15,065)       (15,065)
                                                                                                          -----------
 Total comprehensive income                                                                                 1,051,380
 Exercise of stock options               ---          2,016        14,639           ---            ---         16,655
                                      --------- -----------   -----------   -----------   ------------    -----------
    BALANCE AT SEPTEMBER 30, 2002       $---    $ 1,014,206   $10,520,839   $ 7,411,111   $    (47,792)   $18,898,364`

See accompanying notes.

 16 

CONSOLIDATED STATEMENTS OF CASH FLOWS

`YEAR ENDED SEPTEMBER 30,
                                                            -------------------------------------------------
                                                                 2002              2001              2000
                                                            -------------      ------------      -------------
OPERATING ACTIVITIES
Net income (loss)                                           $   1,066,445      $   1,766,757     $ (1,382,010)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
  Depreciation and amortization                                 2,042,004          1,761,709        1,636,413
  Loss on sale of property and equipment                           12,883             18,671           48,708
  Deferred income taxes                                           (67,525)           362,313         (237,330)
  Changes in operating assets and liabilities:
     Accounts receivable                                         (288,295)          (903,212)         534,160
     Inventories                                                 (232,969)          (156,437)        (440,878)
     Prepaid expenses and other assets                           (438,227)          (232,425)         108,828
     Accounts payable                                            (428,391)         1,220,462         (787,123)
     Income taxes payable                                         138,537            162,086         (313,347)
     Accrued expenses                                               6,193            127,743         (337,834)
     Customer advances                                            221,844            (99,885)         631,253
                                                            -------------      -------------     ------------
Net cash provided (used) by operating activities                2,032,499          4,027,782         (539,160)

INVESTING ACTIVITIES
Capital expenditures                                           (4,684,278)        (1,673,411)      (1,572,627)
Proceeds from sale of property and equipment                       16,663             45,425           13,972
Loans to PharmaKinetics Laboratories, Inc.                       (407,858)               ---              ---
Payments for purchase of net assets from
  TPS., Inc. net of cash acquired                                     ---                ---         (446,469)
Deferred acquisition costs
  for PharmaKinetics Laboratories, Inc.                          (186,625)               ---              ---
                                                            -------------      -------------     ------------
Net cash used by investing activities                          (5,262,098)        (1,627,986)      (2,005,124)

FINANCING ACTIVITIES
Borrowings on line of credit                                    4,635,321          1,003,428        2,784,572
Payments on line of credit                                     (1,121,635)        (3,035,022)        (781,199)
Payments on capital lease obligations                            (261,123)          (239,916)        (220,432)
Borrowings of long-term debt                                      680,000                ---              ---
Payments of long-term debt                                       (252,328)          (234,097)        (707,841)
Net proceeds from the exercise of stock options                    16,655             11,195           25,225
                                                            -------------      -------------     ------------
Net cash provided (used) by financing activities                3,696,890         (2,494,412)       1,100,325
Effect of exchange rate changes                                   (15,065)            (9,281)          (2,815)
                                                            -------------      -------------     ------------
Net increase (decrease) in cash and cash equivalents              452,226           (103,897)      (1,446,774)
Cash and cash equivalents at beginning of year                    373,738            477,635        1,924,409
                                                            -------------      -------------     ------------
Cash and cash equivalents at end of year                    $     825,964      $     373,738     $    477,635
                                                            =============      =============     ============`

See accompanying notes.

 17 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.        Significant Accounting Policies

Nature of Business

Bioanalytical  Systems, Inc. and its subsidiaries  (BASi)  engage in
laboratory services, consulting and research related to analytical chemistry and
chemical instrumentation.  BASi also manufactures scientific instruments for use
in the  determination  of trace  amounts of  organic  compounds  in  biological,
environmental  and  industrial  materials.  BASi also  sells its  equipment  and
software  for  use  in  industrial,   government   and  academic   laboratories.
BASis customers are located throughout the world.

Principles of Consolidation

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

Cash Equivalents

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

Financial Instruments

Financial  instruments  that subject BASi to credit risk consist  principally of
trade accounts  receivable.  BASi performs  periodic  credit  evaluations of its
customers  financial  conditions and generally does not require collateral
on trade accounts receivable.

BASis cash and cash equivalents, accounts receivable, accounts payable and
certain  other  accrued  liabilities  are all  short-term  in  nature  and their
carrying  amounts  approximate  fair value.  BASis bank debt has primarily
variable interest rates, thus their carrying amounts approximate fair value.

Inventories

Inventories are stated at the lower of cost or market.  Cost is determined using
the last-in, first-out (LIFO) method.

Long-Lived Assets, Including Goodwill

The carrying value of long-lived  assets,  including  goodwill,  is periodically
reviewed by  management  in accordance  with  Statement of Financial  Accounting
Standards  (SFAS)  No. 121,  Accounting  for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed  Of.  Under the
provisions of the statement,  BASi  evaluates its long-lived  assets in light of
events and circumstances  that may indicate that the remaining  estimated useful
life may warrant  revision or that the remaining  value may not be  recoverable.
When factors  indicate that  long-lived  assets should be evaluated for possible
impairment,  BASi uses an estimate of the related cash flows over the  remaining
life of the asset in measuring whether that asset is recoverable.  To the extent
an impairment  has occurred,  the excess of the carrying value of the long-lived
assets  over their  estimated  fair value  will be charged to  operations.  BASi
evaluates  long-lived assets and goodwill for impairment under this methodology.
As of September  30, 2002,  an  impairment  of the carrying  value of long-lived
assets, including goodwill, has not occurred.

Property And Equipment

Property and equipment are recorded at cost,  including interest  capitalized in
connection with the construction of major  facilities.  Depreciation,  including
amortization on capital leases, is computed using the straight-line  method over
the estimated  useful lives of 3 through 40 years.  Expenditures for maintenance
and repairs are charged to expense as incurred.

 18 

Revenue Recognition

The  majority  of  BASis  service  contracts  involve  the  processing  of
bioanalytical  samples for pharmaceutical  companies.  These contracts generally
provide for a fixed fee for each  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. BASis other service contracts generally consist of
pre-clinical  trial 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.

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.

BASi product revenue is derived  primarily from sales of equipment  utilized for
analytical testing.  Revenue from equipment not requiring installation,  testing
or training is recognized upon shipment to customers.  One BASi product includes
internally developed software and requires  installation,  testing and training,
which  occur  concurrently.   Revenue  is  recognized  upon  completion  of  the
installation, testing and training.

Advertising Expense

BASi expenses  advertising costs as incurred.  Advertising expense was $266,225,
$195,833 and $306,737 for 2002, 2001 and 2000, respectively.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations  and No. 142, Goodwill and
Other   Intangible   Assets.   Under   the   new   rules,   goodwill   and
indefinite-lived  intangible  assets are no longer  amortized,  but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite  life will continue to be amortized  over their useful lives.  The
amortization  provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired  after June 30, 2001.  With respect to goodwill and  intangible  assets
acquired  prior to July 1,  2001,  BASi  will  apply  the new  accounting  rules
beginning October 1, 2002. Application of the nonamortization  provisions of the
Statement  is expected  to result in an increase in net income of $77,000  ($.02
per share) per year.  BASi will  perform  the first of the  required  impairment
tests of goodwill and indefinite-lived  intangible assets as of October 1, 2002,
and has not yet  determined  what  the  effect  of  these  tests  will be on the
earnings and financial position of BASi.

In  October  2001,  the FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 supercedes FASB
Statement No. 121,  Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of and also supercedes the accounting
and  reporting  provisions  of  Accounting  Principals  Board  (APB)
Opinion No. 30, Reporting the Results of Operations-Reporting  the Effects
of  Disposal  of a  Segment  of  a  Business,  and  Extraordinary,  Unusual  and
Infrequently Occurring Events and Transactions, for segments of a business
to be  disposed  of.  Among  its many  provisions,  SFAS  No.  144  retains  the
fundamental  requirements  of both  previous  standards;  however,  it  resolves
significant implementation issues related to FASB Statement No. 121 and broadens
the separate  presentation  of discontinued  operations in the income  statement
required by APB Opinion No. 30 to include a component of an entity  (rather than
a segment of a  business).  The  provisions  of SFAS No. 144 are  effective  for
financial  statements issued for fiscal years beginning after December 15, 2001,
with  early  application  encouraged.  BASi does not  believe,  based on current
circumstances, the effect of adoption of SFAS No. 144 will be material.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44 and 64,  Amendment of FASB  Statement No. 13 and  Technical  Corrections."
SFAS No.  145  rescinds  both  SFAS No. 4,  "Reporting  Gains  and  Losses  from
Extinguishment  of  Debt,"  and an  amendment  to that  Statement,  SFAS  No.64,
"Extinguishments  of Debt Made to Satisfy Sinking Fund Requirements." SFAS No. 4
required that all gains and losses from the extinguishment of debt be aggregated
and, if material,  be classified as an  extraordinary  item,  net of the related
income tax effect.  Upon the  adoption of SFAS No. 145,  all gains and losses on
the  extinguishment  of debt for periods  presented in the financial  statements
will be classified as extraordinary  items only if they meet the criteria in APB
No. 30. The  provisions of SFAS No. 145 related to the  rescission of SFAS No. 4
and SFAS No. 64 shall be applied for fiscal years  beginning after May 15, 2002.
BASi does not believe, based on current circumstances, the effect of adoption of
SFAS No. 145 will be material.

 19 

In June  2002,  the  FASB  issued  SFAS  No.  146,  Accounting  for  Costs
Associated  with  Exit or  Disposal  Activities.  SFAS No.  146  nullifies
Emerging Issues Task Force  (EITF)  Issue No. 94-3,  Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a  Restructuring).  SFAS No.
146  generally  requires  companies  to  recognize  costs  associated  with exit
activities  when they are incurred rather than at the date of a commitment to an
exit or  disposal  plan and is to be applied  prospectively  to exit or disposal
activities  initiated after December 31, 2002. BASi is currently  evaluating the
effects,  if any, that this standard will have on its results of operations  and
financial position.

On  December  31,  2002,  the FASB issued  SFAS No.  148,  Accounting  for
Stock-Based  Compensation   Transition and Disclosure.  SFAS No. 148
amends SFAS No. 123,  Accounting  for Stock-Based  Compensation,  to
provide  alternative  methods of  transition to SFAS No.  123s  fair value
method of accounting for stock-based  employee  compensation.  SFAS No. 148 also
amends  the  disclosure  provisions  of SFAS No.  123 and APB  Opinion  No.  28,
Interim Financial Reporting, to require disclosure in the summary of
significant  accounting  policies of the effects of an entitys  accounting
policy with respect to stock-based employee  compensation on reported net income
and earnings per share in annual and interim  financial  statements.  While SFAS
No. 148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS No.
148 are  applicable to all companies  with  stock-based  employee  compensation,
regardless  of whether they account for that  compensation  using the fair value
method of SFAS No. 123 or the  intrinsic  value  method of APB  Opinion  No. 25,
Accounting  for  Stock  Issued  to  Employees.  SFAS No.  148s
amendment of the transition and annual  disclosure  requirements of SFAS No. 123
are  effective  for fiscal  years  ending  after  December  15,  2002.  SFAS No.
148s  amendment of the  disclosure  requirements  of APB Opinion No. 28 is
effective for financial reports containing consolidated financial statements for
interim periods beginning after December 15, 2002.

Use Of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock Options

In   accordance   with   SFAS  No.   123,   Accounting   for   Stock-Based
Compensation,  BASi uses the  intrinsic  value method to account for stock
options,  consistent  with the existing rules  established by APB Opinion No. 25,
Accounting for Stock Issued to Employees.

2.        Earnings per Share

Basic earnings per share is computed on the basis of the weighted average number
of common  shares  outstanding.  Diluted  earnings  per share is computed on the
basis of the  weighted  average  number of common and common  equivalent  shares
outstanding.  Common  equivalent  shares include the dilutive effect of employee
and director options to purchase common shares and convertible preferred shares,
which are assumed to be converted.  The dilutive effect of employee and director
options to purchase common shares was to increase the weighted average number of
common  shares  outstanding  by  49,386  and  35,878  shares  in 2002 and  2001,
respectively.  There was no dilutive effect of employee and director  options to
purchase common shares for 2000.

3.        Commitments

On June 20,  2002,  BASi  and  PharmaKinetics  Laboratories,  Inc.,  a  Maryland
corporation (PKLB) entered into an Agreement and Plan of Merger (the
Merger  Agreement)  which  provides  for,  subject  to the terms and
conditions set forth therein,  the merger of PKLB and a wholly-owned  subsidiary
of BASi (the Merger). As of the effective date of the Merger, shares
of PKLB common stock  outstanding  will be converted  into shares of BASi common
stock at a rate of one BASi share for each 12 PKLB shares; shares of PKLB Series
A convertible preferred stock will be converted into 6% subordinated convertible
promissory notes issued by BASi in an aggregate  principal amount of $4,000,000;
and shares of PKLB Series B convertible  preferred  stock will be converted into
shares of BASi common  stock at the same ratios as shares of PKLB common  stock.
The  promissory  notes issued in the merger mature on January 1, 2008,  will not
bear interest for the first year following the effective date of the merger, and
will be  convertible  at the option of the holder  into BASi  common  stock at a
conversion  price of $16.00 per share. The transaction is subject to approval by
the  BASi  board  of  directors  and  customary  closing  conditions,  including
registration  of the BASi securities to be issued in the merger and the approval
of PKLBs shareholders.  The merger is currently expected to close prior to
March 31,  2003.  Holders of more than 85% of  PKLBs  Class A  convertible
preferred stock have agreed to vote those shares in favor of the merger.  During
the year ended September 30, 2002, BASi made unsecured loans to PKLB aggregating
$408,000. The terms of these loans were modified in November 2002 (see Note 11).
The outstanding balances on these loans is included in other assets at September
30, 2002.

 20 

4.        Inventories

Inventories at September 30 consisted of the following:

`2002            2001
                                                  ----------      ----------
                        Raw materials             $1,347,184      $1,322,182
                        Work in progress             338,996         302,706
                        Finished goods             1,090,914         876,646
                                                  ----------      ----------
                                                   2,777,094       2,501,534
                        LIFO reserve                (153,044)       (110,453)
                                                  ----------      ----------
                                                  $2,624,050      $2,391,081
                                                  ==========      ==========`

5.        Debt Arrangements

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

`2002              2001
                                                            ----------        ----------
     Mortgage  note  payable  to bank,  payable in
     monthly  principal  installments  of  $19,444
     plus  interest  at the  one-month  LIBOR rate
     plus 200 basis points (3.28% at September 30,
     2002).  Repaid  with  new  borrowings  from a
     different bank on October 29, 2002.                    $2,741,684        $2,975,012

     Mortgage  note  payable  to bank,  payable in
     monthly principal installments of $3,800 plus
     interest at the one-month LIBOR rate plus 200
     basis points  (3.28% at September  30, 2002).
     Repaid with new  borrowings  from a different
     bank on October 29, 2002.                                 661,000               ---
                                                            ----------        ----------
                                                             3,402,684         2,975,012
     Less current portion                                      278,928           233,328
                                                            ----------        ----------
                                                            $3,123,756        $2,741,684
                                                            ==========        ==========`

BASi had a  revolving  line of  credit  that  allowed  for  borrowings  of up to
$3,500,000.   Interest  accrued  monthly  on  the  outstanding  balance  at  the
banks  prime  rate  minus  25 to plus 75  basis  points  or at the  London
Interbank Offered Rate (LIBOR) plus 200 to 300 basis points, as elected by BASi,
depending  upon certain  financial  ratios.  As of September  30, 2002 and 2001,
interest on the entire outstanding  balance was based on the prime rate minus 25
basis points (4.50% and 5.25%,  respectively).  The balance  outstanding on this
line of credit at September 30, 2002 was $3,749,373,  including $249,373 of cash
overdrafts.  This line of credit was repaid with new borrowings from a different
bank on October 29, 2002.

Cash  interest  payments of $250,615,  $329,544 and $498,513  were made in 2002,
2001 and 2000,  respectively.  Cash interest payments for 2002 included interest
of $39,644, which was capitalized. These amounts included interest required to be
paid on a portion of the undistributed earnings of a subsidiary, which qualifies
as a domestic international sales corporation.

Subsequent Event-Debt Arrangements

On October 29, 2002,  BASi  obtained new credit  agreements  with two  different
banks  that  completely  refinanced  and  replaced  all  outstanding  bank  debt
arrangements  that  were in  place at  September  30,  2002.  These  new  credit
agreements  provide for a $6 million  revolving line of credit with a bank and a
mortgage note payable and two construction  term loans payable with another bank
aggregating  $10  million.  Borrowings  under  these new credit  agreements  are
collateralized by substantially all assets related to BASis operations and
all common stock of BASis United States subsidiaries and 65% of the common
stock  of its  non-United  States  subsidiaries,  and the  assignment  of a life
insurance  policy  on  BASis  Chairman  and CEO.  Under the terms of these
credit agreements,  BASi has agreed to restrict advances to subsidiaries,  limit
additional  indebtedness  and  capital  expenditures  as well as to comply  with
certain  financial  covenants  outlined in the borrowing  agreements.  These new
credit agreements contain cross-default  provisions.  Details of each debt issue
are discussed below.

 21 

On October  29,  2002 BASi  obtained a revolving  line of credit  which  expires
September  30,  2005.  The  maximum  amount  available  under  the  terms of the
agreement is $6 million with  outstanding  borrowings  limited to the  borrowing
base as defined in the agreement.  Interest  accrues  monthly on the outstanding
balance at the banks  prime rate to prime rate plus 125 basis points or at
the Eurodollar rate plus 200 to 350 basis points, as elected by BASi,  depending
upon certain financial  ratios.  BASi pays a fee equal to 25 to 50 basis points,
depending  on certain  financial  ratios,  on the unused  portion of the line of
credit.

On October 29, 2002 BASi obtained a $5,410,000  commercial mortgage with a bank.
The  mortgage  note  requires  119 monthly  principal  payments of $22,542  plus
interest,  followed  by a final  payment  for the  unpaid  principal  amount  of
$2,727,502   due   November   1,  2012.   Interest   is  charged  at  the  prime
rate.

On October 29, 2002 BASi  obtained a  $2,250,000  construction  loan with a bank
which expires November 1, 2012. Proceeds from this loan will be used to fund the
expansion  of  BASis  facilities  in West  Lafayette,  Indiana.  The  loan
requires  interest  payments  only  until  completion  of the  project  in  West
Lafayette, Indiana. Interest is charged at the prime rate.

On October 29, 2002 BASi  obtained a  $2,340,000  construction  loan with a bank
which  expires  May 1,  2008.  Proceeds  from this loan will be used to fund the
expansion of BASis  facilities in Evansville,  Indiana.  The loan requires
interest  payments only until completion of the project in Evansville,  Indiana.
Interest  is  charged at the prime  rate.

To obtain the  foregoing new credit  agreements,  BASi entered into an agreement
with Periculum Capital Company, LLC (Periculum).  Under the terms of
the  agreement,  BASi paid  $300,000 in fees to  Periculum  upon  closing of the
refinancing.

6.        Lease Arrangements

BASi has capital lease  arrangements  to finance the  acquisition  of equipment.
Future minimum lease  payments,  based upon  scheduled  payments under the lease
arrangements as of September 30, 2002 are as follows:

`2003                                           1,161,235
             2004                                             126,932
                                                          -----------
             Total minimum lease payments                   1,288,167
             Amounts representing interest                    (26,870)
                                                          -----------
             Present value of minimum lease payments        1,261,297
             Less current portion                          (1,137,925)
                                                          -----------
                                                          $   123,372
                                                          ===========`

The total amount of property  and  equipment  capitalized  under  capital  lease
obligations  as of September 30, 2002 and 2001 was  $2,776,645  and  $1,917,625,
respectively,   including  $859,020  capitalized  under  a  capital  lease  line
(discussed below).  Accumulated  amortization on capital leases at September 30,
2002 and 2001 was $1,041,348 and $855,100, respectively.

BASi had a $1,500,000 lease line for equipment with a bank. On November 15, 2002
BASi sold the  equipment  to a bank and is leasing the  equipment  back under an
operating lease (see Note 11).

BASi leases office space under a  noncancelable  operating lease that terminates
in 2004.  This lease contains  renewal  options  ranging from one to five years.
Total rental  expense was $20,080,  $22,903 and $32,499 in 2002,  2001 and 2000,
respectively.

Future minimum lease payments at September 30, 2002 are as follows:

`2003              $ 19,890
             2004                 3,315
                               --------
                               $ 23,205
                               ========`

 22 

7.        Income Taxes

Significant  components  of BASi's  deferred  tax  liabilities  and assets as of
September 30 are as follows:

`2002           2001
                                                          ----           ----
        Deferred tax liabilities:
           Tax over book depreciation                  $1,498,289     $1,383,003
           Deferred DISC income                           113,547        170,321
                                                       ----------     ----------
        Total deferred liabilities                      1,611,836      1,553,324
        Deferred tax assets:
           Inventory pricing                              129,745        123,008
           Accrued vacation                               169,985        155,935
           Tax credit carry forward                           ---         32,587
           Accrued expense and other--net                 155,303         17,466
           Foreign net operating loss                     289,861        484,314
                                                       ----------     ----------
        Total deferred tax assets                         744,894        813,310
        Valuation allowance for
           Deferred tax assets                           (289,861)      (484,314)
                                                       ----------     ----------
        Net deferred tax assets                           455,033        328,996
                                                       ----------     ----------
        Net deferred tax liabilities                   $1,156,803     $1,224,328
                                                       ==========     ==========`

Significant  components  of the  provision  (benefit)  for  income  taxes are as
follows:

`2002            2001          2000
                                    ----            ----          ----
        Current:
            Federal               $223,761      $  680,469     $(245,378)
            State                  310,724         297,368        51,405
            Foreign                 14,034             ---           ---
                                  --------      ----------     ---------
        Total current              548,519         977,837      (193,973)
        Deferred:
            Federal                (60,603)        337,601      (230,925)
            State                   (6,922)         24,712        (6,405)
                                  --------      ----------     ---------
        Total deferred             (67,525)        362,313      (237,330)
                                  --------      ----------     ---------
                                  $480,994      $1,340,150     $(431,303)
                                  ========      ==========     =========`

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

`2002      2001      2000
                                                               ----      ----      ----
      Statutory federal income tax rate                        34.0%     34.0%     34.0%
      Increases (decreases):
          Amortization of goodwill and
             other nondeductible expenses                       2.2       0.9      (0.6)
          Benefit of foreign sales corporation, net            (2.4)     (0.9)      1.5
          State income taxes, net of federal tax benefit        9.3       5.8      (1.6)
          Research and development credit                      (0.8)     (1.0)      ---
          Nondeductible (deductible) foreign losses           (12.5)      3.4     (11.5)
          Other                                                 1.1       0.9       2.0
                                                              -----      ----      ----
                                                               30.9%     43.1%     23.8%
                                                              =====      ====      ====`

In fiscal 2002,  2001 and 2000,  BASi's foreign  operations  generated an income
(loss) before income taxes of $621,699, $(359,297) and $(612,496), respectively.

Payments  made in 2002,  2001 and 2000 for income  taxes  amounted to  $270,300,
$1,095,000 and $67,000, respectively.

BASi has foreign net  operating  loss  carryforwards  aggregating  $906,000 that
begin to expire in fiscal 2021.

 23 

8.        Stock Option Plans

During fiscal 1990,  BASi  established an Employee  Incentive  Stock Option Plan
whereby  options to purchase shares of BASi's common shares at fair market value
can be granted to employees of BASi.  Options granted become exercisable in four
equal  installments  beginning  two years after the date of the grant.  The plan
terminated in 2000.

BASi adopted new stock option plans,  discussed  below,  in connection  with its
initial public offering and accordingly  does not plan to grant any more options
pursuant to the plans discussed above.

During  fiscal  1998,  BASi  established  an Employee  Stock Option Plan whereby
options to purchase  shares of BASi's  common shares at fair market value can be
granted to employees of BASi.  Options granted become  exercisable in four equal
installments beginning two years after the date of grant. The plan terminates in
fiscal 2008.

During  fiscal 1998,  BASi  established  an Outside  Director  Stock Option Plan
whereby  options to purchase shares of BASi's common shares at fair market value
can be granted to outside directors.  Options granted become exercisable in four
equal  installments  beginning  two  years  after  the date of  grant.  The plan
terminates in fiscal 2008.

A summary of BASi's stock option activity and related  information for the years
ended September 30 is as follows:

`2002                    2001                      2000
                            --------------------      -------------------       -------------------
                                        Weighted                 Weighted                  Weighted
                                         Average                  Average                   Average
                                        Exercise                 Exercise                  Exercise
                             Options      Price       Options      Price        Options     Price
                            --------------------      -------------------       -------------------
Outstanding--
  beginning of year          124,964      $ 4.39      134,235      $ 4.27       206,299     $ 3.35
Exercised                     (9,100)       1.83       (6,771)       1.65       (48,296)      0.52
Granted                          ---         ---          ---         ---         5,000       2.88
Terminated                    (2,750)       4.93       (2,500)       5.00       (28,768)      3.75
                            --------                  -------                   -------
Outstanding--
  end of year                113,114      $ 4.59      124,964      $ 4.39       134,235     $ 4.27
                            ========                  =======                   =======



                                   Weighted
                    Number          Average      Weighted       Number         Weighted
  Range of       Outstanding       Remaining      Average    Exercisable        Average
  Exercise       September 30,    Contractual    Exercise    September 30,     Exercise
   Prices            2002            Life          Price         2002            Price
------------     -------------    -----------    --------    -------------    -----------

$1.51 - 2.10        31,114            .50          $1.72        31,114           $1.72
$2.11 - 8.00        82,000           5.84          $5.68        51,250           $5.93
                   -------                                      ------
                   113,114                                      82,364
                   =======                                      ======`

 24 

Disclosure of pro forma information  regarding net income and earnings per share
is  required by SFAS No. 123 as if BASi has  accounted  for its  employee  stock
options granted  subsequent to December 31, 1994, under the fair value method as
defined  by that  Statement.  The fair  value for  options  granted  by BASi was
estimated at the date of grant using a  Black-Scholes  option pricing model with
the following weighted-average assumptions:

`Risk-free interest rate                           5.50%
     Dividend yield                                    0.00%
     Volatility factor of the expected market
       Price of BASi's common stock                    0.53 (0.53 in 2001 and 2000)
     Expected life of the options (years)              7.0`

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including  expected  stock  price  volatility.  Because
BASis employee stock options have characteristics  significantly different
from  those of traded  options,  and  because  changes in the  subjective  input
assumptions can materially affect the fair value estimate,  in managements
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its employee stock options.

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the related vesting  period.  BASis pro forma
information giving effect to the estimated compensation expense related to stock
options is as follows:

`2002          2001           2000
                                                ----------    ----------   -----------
    Pro forma net income (loss)                 $1,046,189    $1,746,501   $(1,415,284)
    Pro forma net income (loss) per share            $0.23          0.38        $(0.31)`

The weighted average fair value of options granted was $1.64 in 2000. No options
were granted in 2002 or 2001.

9.        Retirement Plan

Effective July 1, 1984,  BASi  established an Internal  Revenue Code Section 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,  BASi
contributes  2% of each  participant's  total  wages to the Plan.  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 20% of the participant's annual wages. BASi made no discretionary
contributions  under the plan in 2002, 2001 and 2000.  Contribution  expense was
$369,023, $324,674 and $256,107 in 2002, 2001 and 2000, respectively.

10.        Segment Information

BASi operates in two  principal  segments - analytical  services and  analytical
products.  BASi's analytical services unit provides analytical chemistry support
on a contract  basis directly to  pharmaceutical  companies.  BASi's  analytical
products unit provides liquid chromatography,  electrochemical and physiological
monitoring  products  to  pharmaceutical  companies,  universities,   government
research centers and medical research  institutions.  BASi evaluates performance
and allocates  resources  based on these  segments.  The accounting  policies of
these  segments are the same as those  described  in the summary of  significant
accounting policies.

 25 

`Year Ended September 30,
                                         -----------------------------------------------
                                            2002                 2001               2000
                                         -----------------------------------------------
OPERATING SEGMENTS                                         (in thousands)
REVENUE
Service                                  $ 16,140             $ 15,202          $ 10,999
Product                                    10,373               10,073             8,224
                                         --------             --------          --------
Total revenue                            $ 26,513             $ 25,275          $ 19,223

OPERATING INCOME (LOSS)
Service                                  $  1,142             $  2,629          $   (409)
Product                                       485                  861              (783)
                                         --------             --------          --------
Total operating income (loss)               1,627                3,490            (1,192)
Corporate expenses                            (80)                (383)             (621)
                                         --------             --------          --------
Income (loss) before income taxes        $  1,547             $  3,107          $ (1,813)
                                         ========             ========          ========

IDENTIFIABLE ASSETS
Service                                  $ 22,255             $ 18,396          $ 17,772
Product                                    11,208                9,581             9,125
                                         --------             --------          --------
Total assets                             $ 33,463             $ 27,977          $ 26,897
                                         ========             ========          ========`

`Year Ended September 30,
                                         -----------------------------------------------
                                            2002                 2001               2000
                                         -----------------------------------------------
DEPRECIATION AND AMORTIZATION                              (in thousands)
Service                                  $  1,518             $  1,242          $  1,218
Product                                       524                  520               418
                                         --------             --------          --------
Total depreciation
  and amortization                       $  2,042             $  1,762          $  1,636
                                         ========             ========          ========

CAPITAL EXPENDITURES
Service                                  $  3,843             $  1,584          $  1,269
Product                                       841                   89               304
                                         --------             --------          --------
Total capital expenditures               $  4,684             $  1,673          $  1,573
                                         ========             ========          ========`

`Year Ended September 30,
                                         -----------------------------------------------
                                            2002                 2001               2000
                                         -----------------------------------------------
GEOGRAPHIC INFORMATION                                     (in thousands)
Sales to external customers:
North America                            $ 20,238             $ 20,536          $ 13,891
Pacific Rim:
     Japan                                    273                  242               580
     Other                                    640                  660               232
Europe                                      4,401                2,337             2,317
Other                                         961                1,500             2,203
                                         --------             --------          --------
                                         $ 26,513             $ 25,275          $ 19,223
                                         ========             ========          ========
Long-lived assets:
North America                            $ 22,700             $ 18,691          $ 18,467
Europe                                      1,969                1,416             1,575
                                         --------             --------          --------
                                         $ 24,669             $ 20,107          $ 20,042
                                         ========             ========          ========`

 26 

Major Customers

During 2002, 2001 and 2000, a major United States-based  pharmaceutical  company
accounted for approximately 19.0%, 18.9% and 21.0%, respectively, of BASis
total  revenues  and 15.7%  and  23.6% of total  trade  accounts  receivable  at
September 30, 2002 and 2001, respectively.

During 2002,  2001 and 2000,  another major United  States-based  pharmaceutical
company  accounted for  approximately  9.3%, 11.7% and 12.2%,  respectively,  of
BASis total revenues and 6.3% and 10.7% of total trade accounts receivable
at September 30, 2002 and 2001, respectively.

11.        Subsequent EventsUnaudited

On November 15, 2002 BASi obtained a $1,500,000  lease line for equipment with a
bank. At November 30, 2002, $1,090,000 was utilized,  including $859,020 under a
sale-leaseback  arrangement  (see Note 6). The lease  requires  60  payments  of
$17,820.

Between  June and  September  2002,  BASi loaned  PKLB a total of  $408,000  for
working  capital  purposes  (see Note 3). On November 14, 2002,  PKLB executed a
Secured  Convertible  Revolving  Note in the principal  amount of up to $925,000
payable to BASi to replace the existing  notes payable to BASi and to allow PKLB
to borrow additional  amounts to cover short-term  operating  requirements.  The
note,  secured by real estate,  carries an annual  interest  rate of 8%, and all
principal  and  accrued  interest  is  due  and  payable  on May  1,  2003.  The
outstanding  principal  amount of the note to BASi is convertible by BASi at any
time into PKLB common stock at a price of $0.1585 per common share,  which price
represents  the average of the closing prices for  PKLBs  common shares as
reported by NASDAQ for the twenty (20) trading days ended November 8, 2002.

On December 13, 2002 BASi acquired LC Resources,  Inc., a privately-held company
based in Walnut Creek,  California.  Under the agreement,  BASi purchased all of
the outstanding shares of LC Resources, Inc. (LCR) for $2.5 million,
subject to adjustment  for certain  changes in net tangible  assets of LCR. BASi
paid cash of $125,000 at closing with the remainder of the purchase  price to be
paid through  promissory  notes bearing  interest at 10% per annum,  maturing on
October 1, 2007. The notes are subordinate to BASis  senior bank debt (see
Note 5). The holders of the notes will have the option to require  BASi to repay
up to 20% of the  outstanding  principal  balance of the notes on each October 1
prior to maturity, commencing October 1, 2003.

 27 

REPORT OF INDEPENDENT AUDITORS

Board Of Directors And Shareholders
Bioanalytical Systems, Inc.

We have audited the  accompanying  consolidated  balance sheets of Bioanalytical
Systems,  Inc. as of September 30, 2002 and 2001,  and the related  consolidated
statements of operations,  shareholders  equity and cash flows for each of
the  three  years in the  period  ended  September  30,  2002.  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 auditing standards generally accepted
in the 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. 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 financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of Bioanalytical
Systems,  Inc. at September 30, 2002 and 2001, and the  consolidated  results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  September 30, 2002 in conformity  with  accounting  principles  generally
accepted in the United States.

/s/ Ernst & Young LLP

Indianapolis, Indiana
November 1, 2002

 28 

Board Of Directors
Peter T. Kissinger, Ph.D.
Chairman, President and Chief Executive Officer
Ronald E. Shoup, Ph.D.
Chief Operating Officer, BASi Contract Research Services
Candice B. Kissinger
Senior Vice President, Marketing
William E. Baitinger
Special Assistant to the Vice President For Research,
Purdue University
John A. Kraeutler
President and Chief Operating Officer,
Meridian Bioscience, Inc.
W Leigh Thompson, Ph.D., M.D.
Chief Executive Officer
Profound Quality Resources, Inc.Executive Management
Peter T Kissinger, Ph.D.
Chairman, President and Chief Executive Officer
Ronald E. Shoup, Ph.D.
Chief Operating Officer, BASi Contract Research Services
Douglas P Wieten
Chief Financial Officer and Treasurer
Vice President, Finance
Candice B. Kissinger
Senior Vice President, Marketing
Craig S. Bruntlett, Ph.D.
Senior Vice President, International Sales
Donnie A. Evans
Vice President, Engineering
Stephen Geary, Ph.D.
Vice President, U.S. Sales and Marketing
Lina L. Reeves-Kerner
Vice President, Human Resources
Michael P. Silvon, Ph.D.
Vice President, Planning; and Development
Michelle L. Troyer
Corporate ControllerScientific Advisory Board
Daniel Armstrong, Ph.D.
R. Graham Cooks, Ph.D.
William R. Heineman, Ph.D.
Jean-Michel Kauffman, Ph.D.
Susan Lunte, Ph.D.
Mark Meyerhoff, Ph.D.
W. Leigh Thompson, Ph.D., M.D.
Patrick Murphy, Ph. D.

 29 

CORPORATE INFORMATION

Annual Meeting Of Shareholders
February 20, 2003
West Lafayette, IndianaAuditors
Ernst & Young LLP
Indianapolis, IndianaTransfer Agent
Corporate Trust Department
National City Bank
1900 East 9th Street
Cleveland, Ohio 44114Common Shares

Bioanalytical  Systems,  Inc.  common  shares are traded on the NASDAQ  National
Market under the symbol BASI.

The following table sets forth by calendar quarter the high and low sales prices
of the common  shares on the NASDAQ  National  Market  System.  The  approximate
number of holders of common shares is 1,700.

`Fiscal         1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
      ------         -----------      -----------      -----------      -----------

      2002
      High             9.400             7.710             6.970           4.850
      Low              5.170             6.500             5.100           3.000

      2001
      High             2.781             3.875             9.040          13.900
      Low              2.125             2.313             3.000           5.000`

The Company  has not paid any cash  dividends  on its common  shares for the two
most recent fiscal years.  The Company has no intention to pay cash dividends in
the foreseeable future.

Inquiries

A copy of the  Companys  2002  Form  10-K  Annual  Report  filed  with the
Securities  and Exchange  Commission  is available  without  charge upon written
request,   and  by  visiting   www.bioanalytical.com/investlannual.html.   Media
inquiries and requests for the 10-K and investors  kits should be directed
to:

Corporate Communications Director
Bioanalytical Systems, Inc.
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
765-463-4527
www.bioanalytical.com

 30 