UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the fiscal year ended September 30,
  2009.


OR


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





Commission
File Number 000-23357





BIOANALYTICAL
SYSTEMS, INC.





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





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





(765)
463-4527


(Registrant's
telephone number, including area code)





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





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





Name of
exchange on which registered:  NASDAQ Capital Market





Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined by
Rule 405 of the Securities Act.  YES oNO x





Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  YES oNO x





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





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





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


Large
accelerated filer oAccelerated
filer oNon-accelerated
filer oSmaller
Reporting Company x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).    YES oNO x





Based on
the closing price on the NASDAQ Global Market on March 31, 2009, the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was $4,432,000. As of January 12, 2010,
4,915,318 of registrant's common shares were outstanding. None of the
registrant's Preferred Shares were outstanding as of January 12,
2010.




Documents
Incorporated by Reference





Portions
of the registrant’s definitive proxy statement for its 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III
hereof.







TABLE OF
CONTENTS




PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              11Item
      1B.
              Unresolved
      Staff Comments
              17Item
      2.
              Properties
              17Item
      3.
              Legal
      Proceedings
              18Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              18PART
      IIItem
      5.
              Market
      for Registrant's Common Equity and Related Stockholder
    Matters
              18Item
      6.
              Selected
      Financial Data
              19Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      7A.
              Quantitative
      and Qualitative Disclosures about Market Risk
              30Item
      8.
              Financial
      Statements and Supplementary Data
              31Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              56Item
      9A.
              Controls
      and Procedures
              56Item
      9B.
              Other
      Information
              57PART
      IIIItem
      10.
              Directors
      and Executive Officers of the Registrant
              57Item
      11.
              Executive
      Compensation
              58Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management
              59Item
      13.
              Certain
      Relationships and Related Transactions
              59Item
      14.
              Principal
      Accounting Fees and Services
              59PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              60





PART
I





This
Report contains certain statements that are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Readers of this
Report are cautioned that reliance on any forward-looking statement involves
risks and uncertainties. Although Bioanalytical Systems, Inc. (the "Company",
“we”) believes that the assumptions on which the forward-looking statements
contained herein are based are reasonable, any of those assumptions could prove
to be inaccurate given the inherent uncertainties as to the occurrence or
nonoccurrence of future events. There can be no assurance that the
forward-looking statements contained in this Report will prove to be accurate.
Risks and uncertainties that may affect our future results include, but are not
limited to, those discussed under the heading “Risk Factors,” beginning on page
11.  The inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's objectives will
be achieved. (Dollar amounts in thousands, except per share data, unless noted
otherwise.)




ITEM
1 - BUSINESS




General




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




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




Changing
Nature of the Pharmaceutical Industry




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




Accelerated Drug
Development




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




Cost
Containment




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




1




Patent
Expiration




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




Alliances




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




Mergers and
Acquisitions




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




Biotechnology Industry and
Virtual Drug Company Growth




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




Unique Technical
Expertise




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




Data Management and Quality
Expertise




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




Globalization of the
Marketplace




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




The
Company's Role in the Drug Development Process




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




2




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




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




Many of
our products are designed for use in late discovery and preclinical development.
The Culex® family of robotic automated dose delivery and blood sampling systems
enable researchers to quickly and cost effectively determine PK/PD profiles of
drugs in large and small animal models.  These capabilities allow
experiments on freely moving conscious animals from early research for
therapeutic target validation to lead optimization of compounds being able to
automatically dose and sample in-vivo to develop pharmacokinetic profiles of
drugs during early screening in rodents quickly and cost effectively. Our
bioanalytical services group utilizes our depth of expertise in liquid
chromatography and electrochemistry to develop assays to support research and
clinical programs.  Liquid chromatography coupled to mass spectrometry
is now a mainstay of our bioanalytical laboratories in support of preclinical
projects. We have invested heavily in robotics and mass spectrometry systems in
previous years.  Application of this technology allows us to rapidly
develop and validate methods for new compounds and obtain information suitable
for regulatory submission.




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




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




Though we
no longer perform Phase I clinical studies following the sale of the Baltimore
Clinical Pharmacology Research Unit in fiscal 2008, our services include
evaluation of bioequivalence and bioavailability to monitor the rate and extent
to which a drug is available in the body and that the availability is consistent
between formulations.




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




We also
provide services in all areas during the post-approval phase, concentrating on
bioequivalence studies of new formulations, line extensions, new disease
indications and drug interaction studies.




The
increases in our services offerings as a result of both acquisition and internal
development have resulted in our ability to provide a broader range of services
to our clients, often using combined services of several disciplines to address
client needs.




3




Our
ability to solve client problems by combining our knowledge base, services and
products has been a factor in our selection by major pharmaceutical companies to
assist in several preclinical through the post-approval phases.




Company
Services and Products




Overview




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




Services




The
contract research services segment provides screening and pharmacological
testing, preclinical safety testing, formulation development, regulatory
compliance and quality control testing. Revenues from continuing operations from
the services segment were $24.2 million for fiscal 2009. The following is a
description of the services provided by our contract research services
segment:




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




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




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




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




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




In June
2008, we sold our Phase I / Bioequivalence business located in Baltimore,
Maryland, and exited that area of contract research services.  This
was a business we acquired in fiscal 2003 with the objective of broadening our
service offerings.  However, we never attained sustained profitability
with this business.




Research
Products




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




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




·
            Physiology
      monitoring tools




·
            Liquid
      chromatography and electrochemistry instruments
  platforms




4




Revenues
from continuing operations for our products segment were $7.6 million for fiscal
2009.  We offer three (3) principal product
lines:  Analytical Products, In vivo Sampling Products and Vetronics’
Products.  The following is a brief description of the products
offered:




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




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




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




Clients




Over the
past five years, we have regularly provided our services and/or products to most
of the top 25 pharmaceutical companies in the world, as ranked by the number of
research and development projects.  Approximately 10% of our revenues
are generated from customers outside of North America.




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




Pfizer,
Inc. is our largest client, accounting for approximately 7.0% and 7.4% of our
total revenues from continuing operations in fiscal 2009 and 2008, respectively.
Pfizer, Inc. accounted for 3.2% and 10.0% of total trade accounts receivable
from continuing operations at September 30, 2009 and 2008,
respectively.




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




Sales
and Marketing




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




Our
products and services are sold directly to the client. We currently have 18
employees on our sales and marketing staff.  Sales, marketing and
technical supports are based in the corporate headquarters located in West
Lafayette, Indiana.




We have a
network of 12 established distributors covering Japan, the Pacific Basin,
South America, the Middle East, India, South Africa and Eastern Europe. All of
our distributor relationships are managed from the corporate headquarters in
West Lafayette, Indiana.




5




Contractual
Arrangements




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




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




Backlog




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




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




Competition




Services




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




·
            Covance,
      Inc.;




·
            Pharmaceutical
      Product Development, Inc.;




·
            Charles
      River Laboratories, Inc.;




·
            Parexel;
      and




·
            MDS
      Health Group Ltd.




CROs
generally compete on:




·
            regulatory
      compliance record;




·
            quality
      system;




·
            previous
      experience;




·
            medical
      and scientific expertise in specific therapeutic
  areas;




·
            scientist-to-scientist
      relationships;




·
            quality
      of contract research;




·
            financial
      viability;




6




·
            database
      management;




·
            statistical
      and regulatory services;




·
            ability
      to recruit investigators;




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




·
            an
      international presence with strategically located facilities;
      and




·
            price.




Products




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




Government
Regulation




We are
subject to various regulatory requirements designed to ensure the quality and
integrity of our data and products. These regulations are promulgated primarily
under the Federal Food, Drug and Cosmetic Act, as well as by associated Good
Laboratory Practice ("GLP"), Good Manufacturing Practice ("GMP"), and Good
Clinical Practice ("GCP") guidelines administered by the FDA. The standards of
GLP, GMP, and GCP are required by the FDA and by similar regulatory authorities
around the world. These guidelines demand rigorous attention to employee
training; detailed documentation; equipment validation; careful tracking of
changes and routine auditing of compliance. Noncompliance with these standards
could result in disqualification of project data collected by the Company.
Material violation of GLP, GMP, or GCP guidelines could result in regulatory
sanctions and, in severe cases, could also result in a discontinuance of
selected operations.  Since October 2004, we have been audited, on a
routine basis, by the FDA and UK’s MHRA fifteen times. The FDA has visited five
times in West Lafayette, and twice each at the UK, Oregon, and Evansville
locations. MHRA has visited the UK facility four times. Of the eleven FDA
audits, five were without findings.  The UK facility was found to be
compliant with GLP and GCP.




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




Analytical
Services




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




·
            Resources
      – organization, personnel, facilities and
  equipment




·
            Rules
      – protocols and written procedures




·
            Characterization
      – test items and test systems




·
            Documentation
      – raw data, final report and
archives




·
            Quality
      assurance unit – formalized internal audit
  function




7




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




Preclinical
Services




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




Quality Assurance and
Information Technology




To assure
compliance with applicable regulations, we have established quality assurance
programs at our facilities that audit test data, train personnel and review
procedures and regularly inspect facilities. In addition, FDA regulations and
guidelines serve as a basis for our SOPs where applicable. On an ongoing basis,
we endeavor to standardize SOPs across all relevant operations. In addition, we
have both developed and purchased software to ensure compliant documentation,
handling and reporting of all laboratory-generated study data. In fiscal 2004,
we purchased similar 21 CFR Part 11 compliant software for our preclinical
research group.  At the end of fiscal 2009, the majority of our
laboratory operations in the US were fully in compliance with 21 CFR Part 11, in
our analytical, bioanalytical, toxicology, lab information management, and
document management systems. Systems compliant with 21 CFR Part 11 were formally
validated and released for use in regulated studies.




Also in
fiscal 2004, we initiated an implementation of a new Enterprise Resource
Planning ("ERP") system, which was launched at all of our locations in the third
quarter of fiscal 2005. The implementation of this system was completed in
fiscal 2008. The introduction of this new ERP system is part of our response to
the Sarbanes-Oxley Act of 2002 (the "Act"). We determined that it was not
practical to comply with the control, documentation and testing requirements of
Section 404 of the Act while operating on different, decentralized, obsolete
systems at our various locations. As part of the implementation of the new
system, documentation has been and will continue to be developed. Testing
procedures were initiated in fiscal 2008 at all locations in preparation of
management's assessment and report on internal controls over financial reporting
required by the Act. We worked diligently to ensure that the ERP system and
related procedures were adequately installed and successfully tested by the end
of fiscal year 2008.  Management’s assessment and report on internal
controls over financial reporting is included in Item 9A.




Controlled, Hazardous, and
Environmentally Threatening Substances




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




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




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




8




Safety




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




HIPAA




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




Product
Liability and Insurance




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




Research
and Development




In fiscal
2009 and 2008, we spent $762 and $781, respectively, on research and
development. Separate from our contract research services business, we maintain
applications research and development to enhance our products
business.




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




Intellectual
Property




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




We
currently hold nine federally registered trademarks, as well as one copyright
registration for software. We also maintain a small pool of issued and pending
patents. Most of these patents are related to our Culex® or in vivoproduct line. Of
these patents, most are either issued or pending in the United States, although
there are also patents issued and pending in the European Union and Japan.
Although we believe that at least two of these patents are important to the
Culex® product line, the success of the Culex® business is not dependent on the
intellectual property rights because we also generate client value through
continuing client support, hardware and software upgrades, system reliability
and accuracy. In addition to these formal intellectual property rights, we rely
on trade secrets, unpatented know-how and continuing applications research which
we seek to protect through means of reasonable business procedures, such as
confidentiality agreements. We believe that the greatest value that we generate
for our clients comes from these trade secrets, know-how and applications
research.




9




In fiscal
2008, the intangible assets amortization expense included an accelerated amount
of $143 for the impairment of certain patents, licenses and
trademarks.  This impairment reflected a management decision to no
longer support these assets as active patents, licenses and trademarks since
they had no related revenue-generating products.




Raw
Materials




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




Employees




At
September 30, 2009, we had 257 full-time employees and 17 part-time employees.
All employees enter into confidentiality agreements intended to protect our
proprietary information. We believe that our relations with our employees are
good. None of our employees are represented by a labor union. Our performance
depends on our ability to attract and retain qualified professional, scientific
and technical staff. The level of competition among employers for skilled
personnel is high. We believe that our employee benefit plans enhance employee
morale, professional commitment and work productivity and provide an incentive
for employees to remain with the Company.




Executive
Officers of the Registrant





The
following table illustrates information concerning the persons who served as our
executive officers as of September 30, 2009. Except as indicated in the
following paragraphs, the principal occupations of these persons have not
changed in the past three years. Officers are elected annually at the annual
meeting of the board of directors.




Name
                        
                        Age
                        
                        PositionRichard
      M. Shepperd
                        
                        69
                        
                        Director,
      President and Chief Executive OfficerMichael
      R. Cox
                        
                        62
                        
                        Vice
      President, Finance; Chief Financial and Administrative
      Officer;TreasurerAnthony
      S. Chilton, Ph.D.
                        
                        53
                        
                        Chief
      Operating Officer, Scientific ServicesJon
      Brewer
                        
                        48
                        
                        Vice
      President, Sales and MarketingCraig
      S. Bruntlett, Ph.D.
                        
                        60
                        
                        Senior
      Vice President, Instruments DivisionLina
      L. Reeves-Kerner
                        
                        58
                        
                        Senior
      Vice President, Human
Resources




Richard M. Shepperd was
elected President and Chief Executive Officer of the Company in September 2006.
Mr. Shepperd served for two years prior to joining the Company with Able
Laboratories, Inc., of Cranbury, New Jersey ("Able") as Chief Restructuring
Officer and Director of Restructuring. Able was formerly a generic
pharmaceutical manufacturing company which filed a voluntary petition for
bankruptcy on July 18, 2005 following the loss of FDA approval for its product
line. Mr. Shepperd's duties for Able included exercising executive authority
over all operational and restructuring activities of Able, which included
advising its Board, creditors committee and courts regarding strategies to
maintain and realize the most value from the company's assets. Able was not
affiliated with the Company. For the two years prior to serving with Able, Mr.
Shepperd served as an independent management consultant for various businesses.
In that capacity, he advised these businesses on developing strategies to
improve their financial health and maximize the assets of those
organizations.




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




10


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





Jon D. Brewerwas hired as the
Vice President of Sales and Marketing, effective October 1, 2008.  Mr.
Brewer has nearly 25 years of experience as a sales and marketing executive in
the pharmaceutical industry. Most recently, from 2006 to 2008, he consulted with
companies as an independent consultant to develop and implement new business
strategies. Prior to that, from 2000 to 2006, he served as Vice President of
Integrity Pharmaceuticals and continued in this role through the merger with
Xanodyne, a specialty pharmaceutical company headquartered in Cincinnati,
Ohio.He has a
strong history of developing and executing product launches and sales strategies
resulting in exceptional sales growth. Mr. Brewer resigned from the Company
effective January 4, 2010.





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




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




Investor
Information




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




Corporate Communications Director,
Corporate Center




2701 Kent Avenue, West Lafayette,
IN  47906   USA




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




BASi Investor Relations,
NASDAQ:  BASi




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




basi@BASInc.com,
www.BASInc.com




ITEM
1A - RISK FACTORS




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




11




We
have limited ability to raise additional cash.




Substantially
all of assets are encumbered as security for our existing
indebtedness.  It could be difficult to raise additional debt without
additional collateral for security.  There is also a limited market
for our common shares, which could make it difficult to issue additional
equity.  It could therefore be difficult to raise additional cash if
our revolving line of credit and operations are insufficient to generate
sufficient cash.




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




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




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





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




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





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




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




12




•
              the
      liquidity of our common
stock;




•
              the
      market price of our common
stock;





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





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





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





•
              the
      number of market makers in our common
stock;





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





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




Our
business is affected by macroeconomic conditions.




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




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




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




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




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




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




13




The
CRO services industry is highly competitive.




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





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




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




Certain
members of our senior management team (other than Mr. Shepperd and Dr. Chilton)
have employment agreements which include a clause for the continuation of the
executive’s salary for a period of one or two years following the termination of
their employment within one year of a Change of Control (as defined therein)
regardless of the reason for termination. A Change of Control under these
agreements includes the Company’s receipt of a report on a Schedule 13D by a
person who beneficially owns, directly or indirectly, 20% or more of our
outstanding Common Shares. On April 6, 2009, Dr. Peter T. Kissinger and Candice
Kissinger filed a Schedule 13D with the Securities and Exchange Commission,
which disclosed that they are the beneficial owners of more than 20% of our
outstanding Common Shares. The terms of the employment agreements combined with
the Kissinger’s Schedule 13D filing may make it more difficult to retain these
executives. If a significant number of these executives choose to resign prior
to April 6, 2010, the Company may be required to make payments to them that may
adversely affect our operating results and liquidity.




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





Any
failure on our part to comply with existing regulations could result in the
termination of ongoing research or the disqualification of data for submission
to regulatory authorities. This would harm our reputation, our prospects for
future work and our operating results. Furthermore, the issuance of a notice
from the FDA based on a finding of a material violation by us of good clinical
practice, good laboratory practice or good manufacturing practice requirements
could materially and adversely affect our business and financial
performance.




Proposed
and future legislation or regulations might increase the cost of our business or
limit our service or product offerings.




Federal
or state authorities might adopt healthcare legislation or regulations that are
more burdensome than existing regulations. Changes in regulation could increase
our expenses or limit our ability to offer some of our services or
products.




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




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




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




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




•
            products being tested fail to
      satisfy safety requirements;


•
            products have undesired clinical
      results;


•
            the client decides to forego a
      particular study;


•
            inability to enroll enough
      patients in the study;


•
            inability to recruit enough
      investigators;


•
            production problems cause
      shortages of the drug; and


•
            actions
      by regulatory authorities.




14




The termination of one or more
significant contracts could have a material adverse effect on our business and financial
performance.




Our
Products business depends on our intellectual property.





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




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




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




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


•
              competitive products with
      superior performance;


•
              patent conflicts or unenforceable
      intellectual property rights;


•
              demand for the particular
      product; and


•
            other factors that could make the
      product uneconomical.





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





Providing
CRO services creates a risk of liability.





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




We
may expand our business through acquisitions.





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





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


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


·
            diversion
      of management’s attention from current
  operations;


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


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


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




15




·
            loss
      of key employees of the acquired
companies.





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





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




Privacy
regulations could increase our costs or limit our services.





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




We
might lose business opportunities as a result of healthcare reform.




Numerous
governments have undertaken efforts to control growing healthcare costs through
legislation, regulation and voluntary agreements with healthcare providers and
drug companies. Healthcare reform could reduce demand for our services and
products, and, as a result, our revenue. In the last several years, the U.S.
Congress and some U.S. states have reviewed several comprehensive health care
reform proposals. The proposals are intended to expand healthcare coverage for
the uninsured and reduce the growth of total healthcare expenditures. The U.S.
Congress has also considered and may adopt legislation that could have the
effect of putting downward pressure on the prices that pharmaceutical and
biotechnology companies can charge for prescription drugs. Any such legislation
could cause our customers to spend less on research and development. If this
were to occur, we would have fewer opportunities for our business, which could
reduce our earnings. Similarly, pending or future healthcare reform proposals
outside the United States could negatively impact our revenues from our
international operations.





Reliance
on air transportation.





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




We
have experienced periods of losses on our operating activities.





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





The
outsourcing trend in the biotechnology and pharmaceutical industries may
decrease, which could adversely affect our operations.




Over the
past several years, some areas of our businesses have grown significantly as a
result of the increase in pharmaceutical and biotechnology companies outsourcing
their preclinical and clinical research support activities. We believe that due
to the significant investment in facilities and personnel required to support
drug development, pharmaceutical and biotechnology companies look to outsource
some or all of those services. By doing so, they can focus their resources on
their core competency of drug discovery, while obtaining the outsourced services
from a full-service provider like us. While industry analysts expect the
outsourcing trend to continue for the next several years, a decrease in
preclinical and/or clinical outsourcing activity could result in a diminished
growth rate in the sales of one or more of our expected higher-growth areas and
adversely affect our financial condition and results of operations. Furthermore,
our customer contracts are generally terminable on little or no notice.
Termination of a large contract or multiple contracts could adversely affect our
sales and profitability.




16





Current
economic and capital market trends may materially adversely affect our
business.




Our
revenues depend greatly on the expenditures made by the pharmaceutical and
biotechnology industries in research and development.  In some instances,
companies in these industries are reliant on their ability to raise capital in
order to fund their research and development projects.  Accordingly,
current economic factors and industry trends that affect our clients in these
industries also affect our business.  If companies in these industries were
to reduce the number of research and development projects they conduct or
outsource due to their inability to raise capital because of current economic
trends, our business could be materially adversely affected.




Moreover,
we rely on credit facilities to provide working capital to support our
operations.  We regularly evaluate alternative financing
sources.  Further changes in the commercial credit market or in the
financial stability of our creditors may impact the ability of our creditors to
provide additional financing. In addition, the financial condition of our credit
facility providers, which is beyond our control, may adversely change. Any
decrease in our access to borrowings under our credit facility, tightening of
lending standards and other changes to our sources of liquidity could adversely
impact our ability to obtain the financing we need to continue operating the
business in our current manner.




ITEM
1B- UNRESOLVED STAFF COMMENTS




Not
applicable.




ITEM
2-PROPERTIES




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




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




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




•             Bioanalytical Systems, Ltd. is
in Warwickshire, UK.  This facility contains our contract services and
instruments operations for laboratories, sales and technical support services in
the U.K.  During fiscal 2008, we moved into a newly constructed
laboratory space in the same office park as the previous leased
space.  Our new space of approximately 7,000 square feet is
specifically designed for laboratory use and will allow us to potentially double
capacity over the previous space.




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




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




17




ITEM
3-LEGAL PROCEEDINGS





We
currently do not have any material pending legal proceedings.




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





Not
applicable.




PART
II




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




Market
Information




As of
September 30, 2009, our common stock was traded on the NASDAQ Global Market
under the symbol “BASi.”  Effective November 20, 2009, our common
stock is traded on NASDAQ Capital Markets.  The following table sets
forth the quarterly high and low sales price per share of our common stock from
October 1, 2007 through September 30, 2009.




High
                  
                  
                  LowFiscal
      Year Ended September 30, 2008First
      Quarter
                  
                  $
                  9.39
                  
                  
                  $
                  6.76Second
      Quarter
                  
                  
                  8.85
                  
                  
                  
                  5.04Third
      Quarter
                  
                  
                  6.00
                  
                  
                  
                  4.25Fourth
      Quarter
                  
                  
                  5.70
                  
                  
                  
                  4.35Fiscal
      Year Ended September 30, 2009First
      Quarter
                  
                  $
                  5.13
                  
                  
                  $
                  1.00Second
      Quarter
                  
                  
                  1.82
                  
                  
                  
                  0.60Third
      Quarter
                  
                  
                  1.81
                  
                  
                  
                  0.70Fourth
      Quarter
                  
                  
                  1.15
                  
                  
                  
                  0.60




Holders




There
were approximately 2,700 holders of record of our common stock as of January 12,
2010.




Dividends




We have
not paid any cash dividends on our common shares and do not anticipate paying
cash dividends in the foreseeable future.




18


Equity
Compensation Plan Information




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




Plan Category
                              
                              Number of Securities to be
                                Issued upon Exercise of
                                Outstanding Options
                              
                              
                              Weighted Average
                                Exercise Price of
                                Outstanding Options
                              
                              
                              Number of Securities
                                Remaining Available for Future
                                Issuance under the Equity
                                Compensation Plan
                                (Excluding Securities Reflected
                                in First Column)Equity
      compensation plans approved by security holders
                              
                              
                              595
                              
                              
                              $
                              6.03
                              
                              
                              
                              336Equity
      compensation plans not approved by security holders (1)
                              
                              
                              25
                              
                              
                              $
                              4.58
                              
                              
                              
                              —Total
                              
                              
                              620
                              
                              
                              $
                              5.97
                              
                              
                              
                              336





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




For
additional information regarding our stock option plans approved by security
holders, please see Note 9 to the Notes to Consolidated Financial Statements
included in Item 8 of this report.




ITEM
6 – SELECTED FINANCIAL DATA




Not
applicable.




[Remainder
of page intentionally left blank.]




19


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




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




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




The
following amounts are in thousands unless otherwise indicated.




Business
Overview




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




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




The
number of significant drugs that have reached or are nearing the end of their
patent protection has also benefited the generic drug industry. That sector of
the drug industry has seen significant growth in the past decade, and, we
believe, will continue to experience strong growth in the foreseeable future.
Generic drug companies provide a significant source of new business for CRO's as
they develop, test and manufacture their generic compounds.




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




20


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




In
contrast to fiscal 2008, there were several announcements of large mergers in
the pharmaceutical industry in fiscal 2009. Pfizer Inc. and Eli Lilly and Co.
have both announced significant acquisitions.  Also, Merck and Roche
have recently announced mergers with Schering-Plough and Genentech,
respectively. We believe that such merger and consolidation activity reduced the
demand and increased competition for CRO services in fiscal 2009 and was a
distraction for the research and development arms of these companies as they
await finalization of new drug development portfolios.  The additional
competitive pressures could adversely affect our future operating
results.




Our
primary market, the contract research organization (“CRO”) market, is
experiencing serious economic pressures.  Since the end of our 2008
fiscal year, pharmaceutical development companies have delayed the initiation of
CRO studies and reduced their total spending for CRO services.  We
believe these actions are largely in response to the global economic recession
and related financial crisis.  The delays and reductions in spending
by our customers resulted in a significant negative impact on our revenues for
fiscal 2009 as compared to our prior fiscal year.  However, the number
of new studies initiated by our customers increased during our third fiscal
quarter ended June 30, 2009 and continued through the end of the current fiscal
year.




Executive
Overview




Our revenues are dependent on a
relatively small number of industries and clients. As a result, we closely
monitor the market for our services. In fiscal 2009, we experienced lower demand
for our products and services, high cancellation rates and significant project
delays. We believe this was primarily due to the current general economic
conditions and the global financial crisis, increased competition, and
consolidation of several large pharmaceutical and biotechnology companies, which
delayed decisions on research and development spending. Despite these conditions
and uncertainties about the level of and delays in R&D spending by
pharmaceutical and biotechnology companies, we continue to believe in the
fundamentals of the market and that it will rebound in future periods. For
fiscal 2010, we plan to focus on sales execution, operational performance and
building strategic partnerships with pharmaceutical and biotechnology
companies.




We review various metrics to evaluate
our financial performance, including period-to-period changes in new orders,
revenue, margins and earnings. In fiscal 2009, we had new authorizations of
$33.6 million, a decrease of 26.2% over the same period in 2008. Likewise in
fiscal 2009, our overall revenues declined approximately 24% versus the prior
fiscal year.  Gross margin and earnings declined as well from prior
year.  For a detailed discussion of our revenue, margins, earnings and
other financial results for the fiscal year ended September 30, 2009, see
“Results of Operations – 2009 Compared to 2008” below.




As of September 30, 2009, we had
$870 of cash and cash equivalents as compared to $335 of cash and cash
equivalents at the end of fiscal 2008. In fiscal 2009, we generated $1,999 in
cash from continuing operations.  Our accounts receivable and unbilled
revenues balances decreased $3,680 from the prior fiscal year primarily due to
the decline in sales, offset slightly by efforts to collect outstanding
receivables. We plan to continue to monitor accounts receivable and the various
factors that affect it, including contract terms, the mix of contracts performed
and our success in collecting receivables. We will also continue to limit
unnecessary spending, and freeze current wage rates for the foreseeable future
to control costs and maintain cash.


21




Results
of Operations




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




Year
      Ended September 30,2009
                                
                                
                                2008Service
      revenue
                                
                                
                                76.0
                                %
                                
                                
                                79.0
                                %Product
      revenue
                                
                                
                                24.0
                                
                                
                                
                                21.0Total
      revenue
                                
                                
                                100.0
                                %
                                
                                
                                100.0
                                %Cost
      of service revenue (a)
                                
                                
                                86.8
                                
                                
                                
                                69.7Cost
      of product revenue (a)
                                
                                
                                42.2
                                
                                
                                
                                39.0Total
      cost of revenue
                                
                                
                                76.1
                                
                                
                                
                                63.2Gross
      profit
                                
                                
                                23.9
                                
                                
                                
                                36.8Total
      operating expenses
                                
                                
                                38.4
                                
                                
                                
                                30.1Operating
      income (loss)
                                
                                
                                (14.5
                                )
                                
                                
                                6.7Other
      expense
                                
                                
                                (3.3
                                )
                                
                                
                                (2.3
                                )Income
      (loss) from continuing operations before income taxes
                                
                                
                                (17.8
                                )
                                
                                
                                4.4Income
      tax (benefit) expense
                                
                                
                                (0.6
                                )
                                
                                
                                3.2Net
      income (loss) from continuing operations
                                
                                
                                (17.2
                                )%
                                
                                
                                1.2
                                %





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





2009 Compared to
2008





Service
and Product Revenues




Overall,
our Services and Product revenues continue to be negatively impacted by the U.S.
and European economic recession.  Revenues for the year ended
September 30, 2009 declined 23.8% to $31,784 compared to $41,697 for the year
ended September 30, 2008.




Our
Services revenue declined 26.6% to $24,158 compared to $32,921 for the prior
year primarily as a result of lower bioanalytical analysis and toxicology
revenues.  Our bioanalytical analysis revenues decreased $4,255 (a
23.5% decline from fiscal 2008), mainly due to study delays by clients and
decreases in new bookings.  Our West Lafayette facility experienced
the majority of the decline in bioanalytical analysis revenues, or $2,647.
Likewise, our toxicology revenues declined from our prior fiscal year by $3,450,
or 30.1%.  Study delays and cancellations contributed to the decline
for the toxicology group as well.




Sales in
our Products segment decreased 13.1% from $8,776 to $7,626 when compared to the
same period in the prior year.  The majority of that decrease stems
from lower sales of our Culex automated in vivo sampling systems,
which declined 30.3% to $3,263 from $4,680.  This decline stems mainly
from the reduction in research and development and capital spending by our
customers as part of their overall cost savings initiatives.




22




Although
our revenues for the current fiscal year were less than our prior fiscal year,
our revenues increased 10% in the second half of the current fiscal year from
the first half.  This increase is the result of increased proposal
opportunities and acceptance rates since January 1, 2009 compared to the last
six months of calendar 2008 resulting from the efforts of our sales and
marketing department, which was reorganized in the first quarter of fiscal
2009.




Cost of Revenue




Cost of
revenue for the year ended September 30, 2009 was $24,180 or 76.1% of revenue
compared to $26,364, or 63.2% of revenue for the comparable prior
period.




Cost of
Service revenue as a percentage of Service revenue increased to 86.8% in the
current fiscal year from 69.7% in the prior year.  The principal cause
of this increase was the decline in sales.  A significant portion of
our costs of productive capacity in the Service segment are
fixed.   Thus, decreases in revenues lead to increases in costs
as a percentage of revenue.




Cost of
Product revenue as a percentage of Product revenue in the current fiscal year
increased from 39.0% to 42.2%.  The increase in the percentage was
mainly due to an increase in our periodic charges for inventory obsolescence of
$295.  This was the result of higher charges in the current fiscal
year for products that were discontinued.




Operating
Expenses




Selling
expenses for the year ended September 30, 2009 decreased by 15.8% to $3,296 from
$3,912 for the year ended September 30, 2008.   This decrease was
primarily driven by a decrease in salary expense resulting from the reduction in
work force and other departures, lower commissions due to the decline in sales
and reduced spending on marketing expenditures. Also, accelerated amortization
of $143 in fiscal 2008, related to the abandonment of unused patents, resulted
in lower amortization expense in fiscal 2009.




Research
and development expenses for the year ended September 30, 2009 decreased 2.4% to
$762 from $781 for the year ended September 30, 2008. The decrease was partially
due to a decrease in salaries from the reduction in work force as well as
reduced spending on temporary labor and operating supplies.




General
and administrative expenses for the current year decreased 2.2% to $7,674 from
$7,846 for the prior year. A decline in salaries and hourly wages from the
January 2009 reduction in force contributed to the reduction in expenses in the
current fiscal year as well as strict controls on other variable
expenses.




Other
Income/Expense




Other
income (expense), net, was $(1,060) for the year ended September 30, 2009 as
compared to $(971) for the year ended September 30, 2008. This increase is due
to additional borrowings on our line of credit, causing higher interest expense
and lower interest income year over year.




Income
Taxes




Our effective tax rate for continuing
operations for the year ended September 30, 2009 was (3.5%) compared to 72.8%
for the prior year period.  In fiscal 2009, a valuation allowance was
set up against the entire US deferred income tax balance, adjusting the rate
from (36.4%) to (3.5%).  In fiscal 2008, we recorded an additional
expense of $233 for uncertain tax positions and incurred taxes on domestic
income from which we could not deduct the loss from our UK
facility.  We also did not provide income taxes on foreign earnings in
fiscal 2008 or 2009 due to the availability of net operating loss carry forwards
to offset our taxable income, which have not previously been recognized for
financial statement purposes due to the uncertainty of future
utilization.


23




Discontinued
Operations




On June
30, 2008, we sold the operating assets of our Baltimore Clinical Pharmacology
Research Unit (“CPRU”) to Algorithme Pharma USA Inc. ("AP USA") and Algorithme
Pharma Holdings Inc. ("Algorithme") for a cash payment of $850, and the
assumption of certain liabilities related to the CPRU.   As a
result, we exited the market for Phase I first-in-human clinical
studies.  We remain contingently liable for $800 annually through 2015
for future financial obligations under the CPRU facility lease.  For
further detail, see Note 5 to the consolidated financial statements included in
this report.




Accordingly,
in the consolidated statements of operations and cash flows, we segregated the
results of the CPRU as discontinued operations for our 2008 fiscal
year.  The loss from discontinued operations reflects the results of
operations of the CPRU until disposal in fiscal 2008. The remaining estimated
cash expenditures related to this unit were recorded as current liabilities of
discontinued operations, since they were paid within fiscal year
2009.  These expenditures relate mostly to normal operating
expenses.  The current assets of discontinued operations relate mostly
to outstanding customer receivables for completed clinical trials that were
collected in fiscal 2009.




Liquidity
and Capital Resources




Comparative
Cash Flow Analysis




Since
inception, our principal sources of cash have been cash flow generated from
operations and funds received from bank borrowings and other financings. At
September 30, 2009, we had cash and cash equivalents of $870 compared to $335 at
September 30, 2008.




Net cash
provided by continuing operating activities was $1,999 for the year ended
September 30, 2009, compared to $3,959 for the year ended September 30, 2008.
The decrease in cash provided by continuing operating activities in the current
fiscal year primarily results from a decrease in earnings from continuing
operations as well as a decrease in customer advances of
$1,169.  These items were partially offset by a decrease in accounts
receivable of $3,680 as a result of the decline in sales and a decrease in
refundable income taxes of $739 due to the receipt of federal and state income
tax refunds.  Included in operating activities for fiscal 2009 are
non-cash charges of $2,645 for depreciation and amortization, $103 recorded to
reflect the fair value of our interest rate swaps, $472 for impairment of
goodwill for our UK operations and $570 for employee stock option
expense.  The impact on operating cash flow of other changes in
working capital was not material.




The
decline in cash generated from operations, which is our primary source of cash,
relates to our current operating loss. We experienced an operating loss in
fiscal 2009 as compared to operating income in the prior year as a result of an
approximate 24% year-to-date decrease in sales, significantly reducing our cash
flow from operations.  The decline in sales was due to both a decrease
in new bookings and delays by sponsors on projects previously
booked.  This negative impact on our cash flow from operations began
to slow in our third quarter of fiscal 2009 as our revenues began to
increase.  Total revenues in the fourth quarter of fiscal 2009 of
$8,521 represent the highest revenues of any quarter in fiscal 2009. Likewise,
revenues in the second half of fiscal 2009 increased approximately $1,500 or 10%
over the first half of the current fiscal year.  Selling, general and
administrative costs in the first half of fiscal 2009 included one-time costs,
such as severance for employees, recruiting fees for replacing former officers
and marketing and advertising costs associated with our new marketing plan and
branding.  These increased costs did not continue into the second half
of fiscal 2009.  Compared to the first half of fiscal 2009, selling
and general and administrative costs decreased $1,580, or 25%, in the second
half of the current fiscal year. We expect the reduced spending levels to
continue and that our efforts to reduce costs will positively impact fiscal 2010
as well.
  With
respect to compliance with our bank loan covenants, EBITDA is computed as
earnings before interest, taxes, depreciation and amortization, removing other
non-cash charges such as stock option expenses and the impairment loss and
deducting unfunded capital expenditures.  For the third quarter ended
June 30, 2009, we generated positive EBITDA for the first time in fiscal
2009.  This continued into the fourth quarter of fiscal 2009 with
another positive EBITDA quarter.  We also covered our fixed charge
coverage ratio for interest, debt and lease amortization for the second half of
fiscal 2009, after a period of three fiscal quarters in which we did
not.  We believe these improvements helped to enable us to obtain
waivers from our banks for loan covenant violations and to amend the covenants
for future periods as discussed below.




24




In
January 2009, we completed a reduction in work force impacting all areas of
operations, through both attrition and terminations, which reduced our annual
compensation expense by approximately 12%.  Also, in an effort to
reduce operating costs and provide greater financial flexibility, we negotiated
a 43% reduction in the base salary of Richard M. Shepperd, our CEO.




Investing
activities used $834 in fiscal 2009 mainly due to capital
expenditures.  Our principal investments were for laboratory equipment
replacements and upgrades in all of our facilities as well as general building
and information technology infrastructure expenditures at all
sites.  The 51.3% reduction in capital spending from fiscal 2008 is a
result of our efforts to contain cash commitments throughout the organization,
funding only necessary expenditures.




Financing
activities used $1,476 in the current fiscal year as compared to $2,071 used for
fiscal 2008. The main use of cash in fiscal 2009 was for long term debt and
capital lease payments of $1,212, as well as net payments on our line of credit
of $264.  In fiscal 2008, we repaid the balance of our subordinated
debt, approximately $4,500, which was partially offset by $1,400 of new
borrowings, net borrowings on our line of credit of $2,023 and long term debt
and capital lease payments of $1,029.




Since the
acquisition of the Baltimore clinic in fiscal 2003, we had consistently
experienced negative cash flows from that operation.  With the sale of
that operation on June 30, 2008, we eliminated a significant drain on operating
cash flows, which should result in improved future
liquidity.   During fiscal 2009, cash provided by operating
activities for discontinued operations of $588 is mainly due to the collection
of outstanding receivables.




Capital
Resources




Property
and equipment spending totaled $0.8 million and $3.2 million in fiscal 2009 and
2008, respectively. The decrease in spending in fiscal 2009 is the result of
cash savings initiatives, funding only necessary expenditures. Capital spending
in fiscal 2008 was mainly for tenant improvements on our new lease in the UK
facility as well as laboratory equipment financed mainly through capital leases
in the West Lafayette and Evansville, Indiana facilities. Capital investments
for the purchase of additional laboratory equipment are driven by anticipated
increases in research services, and by the replacement or upgrading of our
equipment. Although we may consider strategic acquisition opportunities, we do
not intend to aggressively pursue additional acquisitions until we fully utilize
existing capacity.




We have
notes payable to Regions aggregating approximately $8,700 and a $3,000 line of
credit with Entrepreneur Growth Capital LLC (EGC), which is subject to
availability limitations that may substantially reduce or eliminate our
borrowing capacity at any time, as described in Note 7 to our consolidated
financial statements. Regions notes payable include three outstanding mortgages
on our facilities in West Lafayette and Evansville, Indiana, which total
$7,503.  Two of the mortgages mature in November 2012 with an interest
rate fixed at 7.1%, while the other matures in February 2011 with an interest
rate of 6.1%.  In addition to the mortgages, we also have a note
payable with Regions totaling $1,212, maturing December 18,
2010.  Interest on this term loan is equal to 6.1%. Monthly payments
are $9 plus interest. The loan is collateralized by real estate at our West
Lafayette and Evansville, Indiana locations. See Note 7 to the Consolidated
Financial Statements for additional information.




We have
interest rate swap agreements with respect to the note payable and a mortgage
loan to fix the interest rate at 6.1%.  We entered into the derivative
transactions to hedge interest rate risk of this debt obligation and not to
speculate on interest rates.  The fair value of the swaps was
determined with a level two analysis.  As a result of recent declines
in short term interest rates, the swaps had a negative fair value of $103 at
September 30, 2009 and $0 at September 30, 2008, which was recorded in our
consolidated financial statements as interest expense and a long term
liability.  The terms of the interest rate swaps match the scheduled
principal outstanding under the loans.  We do not intend to prepay the
loans, and expect the swaps to expire under their terms in two years without
payment by us.  Upon expiration of the swaps, the net fair value
recorded in the consolidated financial statements is expected to be
zero.




Borrowings
under our credit agreements are collateralized by substantially all assets
related to our operations and all common stock of our U.S. subsidiaries and 65%
of the common stock of our non-United States subsidiaries. Under the terms of
our credit agreements, we have agreed to restrict advances to subsidiaries,
limit additional indebtedness and capital expenditures as well as comply with
certain financial covenants outlined in the borrowing agreements. All of these
credit agreements contain cross-default provisions.


25




The
covenants in our loan agreements with Regions require us to maintain certain
ratios including a fixed charge coverage ratio and total liabilities to tangible
net worth ratio.  The Regions loans contain both cross-default
provisions with each other and with the revolving line of credit from EGC as
described below.  At December 31, 2008 and March 31, 2009, we were not
in compliance with our fixed charge coverage ratio.  On February 17,
2009, Regions waived our violation of our fixed charge coverage ratio covenant
through the end of our second fiscal quarter of the current year.  On
May 18, 2009, Regions amended the computations and requirements for the
fixed charge coverage ratios through December 31, 2009.  After that
date, the computations and requirements for the fixed charge coverage ratio will
revert to those in the original agreement.  The amended computations
are less restrictive to us.  At September 30, 2009, we were in
compliance with the amended fixed charge covenant ratio.  Based on
projections for fiscal 2010, we expect to be in breach of the Regions covenants
once the computations and requirements revert to the original agreement after
December 31, 2009.  On January 7, 2010, Regions waived our
expected violation of the fixed charge coverage ratio covenant through December
31, 2009.  On January 13, 2010, Regions amended the computations and
requirements for the fixed charge coverage ratios through fiscal year
2010.
  Revolving Line of
Credit
  On
January 13, 2010, we entered into a new $3,000 revolving line of credit
agreement (“Credit Agreement”), with Entrepreneur Growth Capital LLC (EGC),
which we intend to use for working capital and other purposes, to replace the
National City line of credit that expires on January 15, 2010. Borrowings under
the Credit Agreement are secured by a blanket lien on our personal property,
including certain eligible accounts receivable, inventory and intellectual
property assets, and a second mortgage on our West Lafayette and Evansville real
estate. Under the Credit Agreement, the Company has agreed to restrict
advances to subsidiaries, limit additional indebtedness and capital expenditures
and comply with certain financial covenants outlined in the Credit Agreement.
The initial term of the Credit Agreement terminates January 31, 2011 but is
renewable upon mutual agreement of the parties. If we prepay prior to the
expiration of the initial term (or any renewal term), then we are subject to an
early termination fee equal to the minimum interest charges for the number of
months remaining until expiration.
  The
covenants in the Credit Agreement require that we maintain a minimum tangible
net worth of $9,500, which may restrict the amount we can borrow to fund future
operations, acquisitions and capital expenditures.  The Credit
Agreement also contains cross-default provisions with the Regions loans and any
future EGC loans.
  Under the
Credit Agreement borrowings bear interest at an annual rate equal to
Citibank’s
Prime Rate plus five percent (5%) with minimum interest of $15 per
month.  Interest is paid monthly.  The line of credit also
carries an annual facilities fee of 2% and a 0.2% collateral monitoring
fee.
  Based
on our current business activities and cash on hand, we expect to borrow on our
revolving credit facility in fiscal 2010 to finance working
capital.  To conserve cash, we instituted a freeze on non-essential
capital expenditures.  As of September 30, 2009, we had $3,000 of
total borrowing capacity with the National City line of credit, of which $1,759
was outstanding, and $870 of cash on hand.
  We had a
decrease in our total borrowing capacity of $1,448, from $4,448 to $3,000, from
the fiscal year ended September 30, 2008 due to several factors, including the
reduction of our maximum available amount from $5,000 to
$3,000.  Declining sales in fiscal 2009 led to a lower accounts
receivable balance, which reduces the total borrowing capacity.  As
discussed above, the sales decline, which was due to lower new bookings and
sponsor delays, began to slow in the third quarter of the current fiscal
year.  Revenues in the second half of fiscal year 2009 increased 10%
over the first fiscal half and our accounts receivable balance increased
slightly as well.  Although the second half revenue and cash flow have
shown gains over the first half of fiscal 2009, failure to continue to improve
revenue and control expenses could impair our ability to continue
operations.
  With the
decrease in cash flow from operations discussed above, we may face additional
situations during fiscal 2010 where we are not in compliance with at least one
covenant in the Credit Agreement, requiring that we obtain a waiver at that
time.  If that situation arises, we will be required to negotiate with
our lending banks again to obtain loan modifications or waivers as described
above.  We cannot predict whether our lenders will provide those
waivers, if required, what the terms of any such waivers might be or what impact
any such waivers will have on our liquidity, financial condition or results of
operations.
  The
following table summarizes the cash payments under our contractual term debt and
other obligations at September 30, 2009 and the effect such obligations are
expected to have on our liquidity and cash flows in future fiscal periods
(amounts in thousands). The table does not include our revolving line of
credit.  Additional information on the debt is described in Note 7,
Debt Arrangements.




26


2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    After 2014
                    
                    
                    TotalNotes
      payable
                    
                    $
                    524
                    
                    
                    $
                    2,727
                    
                    
                    $
                    306
                    
                    
                    $
                    5,158
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    8,715Capital
      lease obligations
                    
                    
                    826
                    
                    
                    
                    479
                    
                    
                    
                    342
                    
                    
                    
                    159
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,806Operating
      leases
                    
                    
                    434
                    
                    
                    
                    424
                    
                    
                    
                    421
                    
                    
                    
                    405
                    
                    
                    
                    402
                    
                    
                    
                    2,918
                    
                    
                    
                    5,004Uncertain
      tax positions
                    
                    
                    473
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    473$
                    2,257
                    
                    
                    $
                    3,630
                    
                    
                    $
                    1,069
                    
                    
                    $
                    5,722
                    
                    
                    $
                    402
                    
                    
                    $
                    2,918
                    
                    
                    $
                    15,998




We
anticipate spending approximately $1.0 million in fiscal 2010 on capital assets,
primarily laboratory equipme nt which
will be financed using capital leases.




Inflation




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




Critical
Accounting Policies




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




Revenue
Recognition




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




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




Long-Lived
Assets, Including Goodwill




Long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset.  During 2008, we recorded an impairment
charge of $143 related to certain patents, licenses and trademarks that have no
revenue generating products.




27




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




The
discount rate and sales growth rates are the two material assumptions utilized
in our calculations of the present value cash flows used to estimate the fair
value of the reporting units when performing the annual goodwill impairment
test. Our three reporting units are West Lafayette/Oregon, Evansville and the UK
based on the discrete financial information available which is reviewed by
management.  We utilize a cash flow approach in estimating the fair
value of the reporting units, where the discount rate reflects a weighted
average cost of capital rate. The cash flow model used to derive fair value is
most sensitive to the discount rate and sales growth assumptions used. Due to
fiscal year 2009 operating losses and lowered expectations for the near future,
we performed an impairment test for our UK reporting unit as of June 30, 2009
using the assumptions detailed in the table below.  As a result of
this test, we recorded a $472 impairment loss equal to the total value of the UK
goodwill.  We performed our annual impairment test for all other
reporting units at September 30, 2009.  Using the following
assumptions, which are more conservative than our internal forecasts and
operating plans, the fair value of our West Lafayette/Oregon reporting unit is
greater than the carrying value by approximately $1,600:


Reporting
      UnitWest
                                                          Lafayette/Oregon
                                                        
                                                        
                                                        UKDiscount
      rate
                                                        
                                                        22.0%
                                                        
                                                        
                                                        20.0%Revenue
      growth rate in fiscal 2010
                                                        
                                                        1.5%
                                                        
                                                        
                                                        27.0%Revenue
      growth rate each year after fiscal 2010
                                                        
                                                        3.0%
                                                        
                                                        
                                                        18.0%Operating
      expense reduction in fiscal 2010
                                                        
                                                        18.1%
                                                        
                                                        
                                                        17.0%Operating expense
      increase each year after fiscal 2010
                                                        
                                                        1.0%
                                                        
                                                        
                                                        9.0%




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


At
September 30, 2009, remaining recorded goodwill was $1,383, and the net balance
of other intangible assets was $114.




Stock-Based
Compensation




We recognize the cost resulting from
all share-based payment transactions in our financial statements using a
fair-value-based method.  We measure compensation cost for all
share-based awards based on estimated fair values and recognize compensation
over the vesting period for awards. We recognized stock-based compensation
related to stock options of $570 and $592 during the fiscal years ended
September 30, 2009 and 2008, respectively.





28




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




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


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


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


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





Employee
stock-based compensation expense recognized in fiscal 2009 and 2008 was
calculated based on awards ultimately expected to vest and has been reduced for
estimated forfeitures. Forfeitures are revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates and an adjustment will
be recognized at that time.





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





Income
Tax Accounting




As
described in Note 8 to the consolidated financial statements, we use the asset
and liability method of accounting for income taxes.




We
maintain a reserve for uncertain tax positions, according to ASC 740, Income
Taxes. Under ASC 740, we may recognize the tax benefit from an uncertain tax
position only if it is more likely than not to be sustained upon examination
based on the technical merits of the position. The amount of the accrual for
which an exposure exists is measured as the largest amount of benefit determined
on a cumulative probability basis that we believe is more likely than not to be
realized upon ultimate settlement of the position.




At the
end of fiscal 2008 a $473 liability for uncertain income tax positions existed
under ASC 740. This reserve is classified as a current liability in the
consolidated balance sheet based on when we expect each of the items to be
settled. Interest and penalties are included in this reserve. See Note 8 for
additional information.




Any
changes in the liability for uncertain tax positions would impact our effective
tax rate. Over the next twelve months, it is reasonably possible that the
uncertainty surrounding our reserve for uncertain income tax positions, which
relate to certain state income tax issues, will be resolved upon the conclusion
of state tax audits. Accordingly, if such resolutions are favorable, we would
reduce the carrying value of our reserve.




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




Inventories




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




29




New
Accounting Pronouncements




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




In April
2009, the FASB issued an accounting pronouncement under ASC 825-10-50 extending
the disclosure requirements regarding the fair value of financial
instruments.  ASC 825-10-50 requires disclosures in interim reporting
periods and in financial statements for annual reporting periods regarding the
fair value of all financial instruments for which it is practicable to estimate
that value, whether recognized or not on the company's balance
sheet.  ASC 825-10-50 requires entities to disclose the methods and
significant assumptions used to estimate the fair value of financial instruments
and describe changes in methods and significant assumptions, in both interim and
annual financial statements.  ASC 825-10-50 is effective for interim
reporting periods ending after June 15, 2009 (the quarter ended June 30, 2009
for the Company).  The adoption of ASC 825-10-50 has resulted in increased
disclosures in our consolidated financial statements.





In May
2009, the FASB issued a new accounting standard on the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued (“subsequent events”).
The standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that
occur for a potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This standard is effective for
interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on our consolidated financial
statements. We have evaluated subsequent events through January 13,
2010, the date of issuance of our consolidated financial
statements.




In June
2009, the FASB issued a new standard on the FASB Accounting Standards
Codification, or ASC. This standard was issued to establish the FASB ASC as
the source of authoritative accounting principles recognized by the FASB in the
preparation of financial statements in conformity with generally accepted
accounting principles, or GAAP. Essentially, the GAAP hierarchy will be
modified to only include 2 levels – authoritative and
non-authoritative. This standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
adoption of the FASB ASC has resulted in increased disclosures in our
consolidated financial statements.





In October 2009, the FASB issued
Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue
Recognition.  ASU 2009-13 revises the current accounting treatment to
specifically address how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting.  This guidance is
applicable to revenue arrangements entered into or materially modified during
our first fiscal year that begins after June 15, 2010.  The guidance
may be applied either prospectively from the beginning of the fiscal year for
new or materially modified arrangements or retrospectively.  We are
currently evaluating this authoritative guidance to determine any potential
impact that it may have on our consolidated financial statements.





ITEM
7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.


30


ITEM
8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Index to Consolidated
Financial Statements





PageConsolidated
      Financial Statements of Bioanalytical Systems, Inc.Consolidated
      Balance Sheets as of September 30, 2009 and 2008
                                                    32Consolidated
      Statements of Operations for the Years Ended September 30, 2009 and
      2008
                                                    33Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the
      Years Ended September 30, 2009 and 2008
                                                    34Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2009 and
      2008
                                                    35Notes
      to Consolidated Financial Statements
                                                    36Report
      of Independent Registered Public Accounting Firm
                                                    55Financial
      Statement Schedules:Schedules
      are not required, are not applicable or the information is shown in the
      Notes to the Consolidated Financial Statements.


31


BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED BALANCE
SHEETS


(In
thousands)





As
      of September 30,2009
                          
                          
                          2008AssetsCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          870
                          
                          
                          $
                          335Accounts
      receivableTrade
                          
                          
                          3,996
                          
                          
                          
                          6,705Unbilled
      revenues and other
                          
                          
                          1,684
                          
                          
                          
                          2,653Inventories
                          
                          
                          1,847
                          
                          
                          
                          2,184Deferred
      income taxes
                          
                          
                          —
                          
                          
                          
                          516Refundable
      income taxes
                          
                          
                          544
                          
                          
                          
                          1,283Prepaid
      expenses
                          
                          
                          622
                          
                          
                          
                          639Current
      assets of discontinued operations
                          
                          
                          —
                          
                          
                          
                          629Total
      current assets
                          
                          
                          9,563
                          
                          
                          
                          14,944Property
      and equipment, net
                          
                          
                          21,282
                          
                          
                          
                          23,135Deferred
      income taxes
                          
                          
                          12
                          
                          
                          
                          —Goodwill
                          
                          
                          1,383
                          
                          
                          
                          1,855Intangible
      assets, net
                          
                          
                          114
                          
                          
                          
                          144Debt
      issue costs
                          
                          
                          145
                          
                          
                          
                          177Other
      assets
                          
                          
                          86
                          
                          
                          
                          92Total
      assets
                          
                          $
                          32,585
                          
                          
                          $
                          40,347Liabilities
      and shareholders’ equityCurrent
      liabilities:Accounts
      payable
                          
                          $
                          1,997
                          
                          
                          $
                          2,209Accrued
      expenses
                          
                          
                          2,113
                          
                          
                          
                          2,061Customer
      advances
                          
                          
                          2,863
                          
                          
                          
                          4,032Income
      tax accruals
                          
                          
                          473
                          
                          
                          
                          473Revolving
      line of credit
                          
                          
                          1,759
                          
                          
                          
                          2,023Current
      portion of capital lease obligation
                          
                          
                          650
                          
                          
                          
                          720Current
      portion of long-term debt
                          
                          
                          524
                          
                          
                          
                          491Current
      liabilities of discontinued operations
                          
                          
                          —
                          
                          
                          
                          41Total
      current liabilities
                          
                          
                          10,379
                          
                          
                          
                          12,050Capital
      lease obligation, less current portion
                          
                          
                          792
                          
                          
                          
                          1,443Long-term
      debt, less current portion
                          
                          
                          8,191
                          
                          
                          
                          8,715Fair
      value of interest rate swaps
                          
                          
                          103
                          
                          
                          
                          —Deferred
      income taxes
                          
                          
                          —
                          
                          
                          
                          344Shareholders’
      equity:Preferred
      Shares:Authorized
      1,000 shares; none issued and outstanding
                          
                          
                          —
                          
                          
                          
                          —Common
      shares, no par value:Authorized
      19,000 shares; issued and outstanding 4,915 atSeptember
      30, 2009 and 2008December, 2007
                          
                          
                          1,191
                          
                          
                          
                          1,191Additional
      paid-in capital
                          
                          
                          13,131
                          
                          
                          
                          12,561Retained
      earnings
                          
                          
                          (1,290
                          )
                          
                          
                          4,173Accumulated
      other comprehensive income (loss)
                          
                          
                          88
                          
                          
                          
                          (130
                          )Total
      shareholders’ equity
                          
                          
                          13,120
                          
                          
                          
                          17,795Total
      liabilities and shareholders’ equity
                          
                          $
                          32,585
                          
                          
                          $
                          40,347




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


32




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





For the Years Ended
                                      September 30,2009
                                    
                                    
                                    2008Service
      revenue
                                    
                                    $
                                    24,158
                                    
                                    
                                    $
                                    32,921Product
      revenue
                                    
                                    
                                    7,626
                                    
                                    
                                    
                                    8,776Total
      revenue
                                    
                                    
                                    31,784
                                    
                                    
                                    
                                    41,697Cost
      of service revenue
                                    
                                    
                                    20,959
                                    
                                    
                                    
                                    22,941Cost
      of product revenue
                                    
                                    
                                    3,221
                                    
                                    
                                    
                                    3,423Total
      cost of revenue
                                    
                                    
                                    24,180
                                    
                                    
                                    
                                    26,364Gross
      profit
                                    
                                    
                                    7,604
                                    
                                    
                                    
                                    15,333Operating
      expenses:Selling
                                    
                                    
                                    3,296
                                    
                                    
                                    
                                    3,912Research
      and development
                                    
                                    
                                    762
                                    
                                    
                                    
                                    781General
      and administrative
                                    
                                    
                                    7,674
                                    
                                    
                                    
                                    7,846Impairment
      loss
                                    
                                    
                                    472
                                    
                                    
                                    
                                    —Total
      operating expenses
                                    
                                    
                                    12,204
                                    
                                    
                                    
                                    12,539Operating
      income (loss)
                                    
                                    
                                    (4,600
                                    )
                                    
                                    
                                    2,794Interest income
                                    
                                    
                                    2
                                    
                                    
                                    
                                    29Interest
      expense
                                    
                                    
                                    (1,063
                                    )
                                    
                                    
                                    (1,006
                                    )Other income
                                    
                                    
                                    1
                                    
                                    
                                    
                                    6Income
      (loss) from continuing operations before income taxes
                                    
                                    
                                    (5,660
                                    )
                                    
                                    
                                    1,823Income
      taxes (benefit)
                                    
                                    
                                    (197
                                    )
                                    
                                    
                                    1,328Net
      income (loss) from continuing operations
                                    
                                    $
                                    (5,463
                                    )
                                    
                                    $
                                    495Discontinued
      Operations (Note 5)Loss
      from discontinued operations before income taxes
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    (2,811
                                    )Loss
      on disposal
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (474
                                    )Tax
      benefit
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,301Net
      loss from discontinued operations after income taxes
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    (1,984
                                    )Net
      loss
                                    
                                    $
                                    (5,463
                                    )
                                    
                                    $
                                    (1,489
                                    )Basic
      net income (loss) per share:Net
      income (loss) per share from continuing operations
                                    
                                    $
                                    (1.11
                                    )
                                    
                                    $
                                    0.10Net
      loss per share from discontinued operations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (0.40
                                    )Basic
      net loss per share
                                    
                                    $
                                    (1.11
                                    )
                                    
                                    $
                                    (0.30
                                    )Diluted
      net income (loss) per share:Net
      income (loss) per share from continuing operations
                                    
                                    $
                                    (1.11
                                    )
                                    
                                    $
                                    0.10Net
      loss per share from discontinued operations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (0.40
                                    )Diluted
      net loss per share
                                    
                                    $
                                    (1.11
                                    )
                                    
                                    $
                                    (0.30
                                    )Weighted
      common shares outstanding:Basic
                                    
                                    
                                    4,915
                                    
                                    
                                    
                                    4,914Diluted
                                    
                                    
                                    4,915
                                    
                                    
                                    
                                    4,968




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




33




BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)


(In
thousands)





Common shares
                                    
                                    
                                    Additional
                                      paid-in-
                                    
                                    
                                    Retained
                                    
                                    
                                    Accumulated
                                      other
                                      comprehensive
                                    
                                    
                                    Total
                                      shareholders'Number
                                    
                                    
                                    Amount
                                    
                                    
                                    capital
                                    
                                    
                                    earnings
                                    
                                    
                                    Income (loss)
                                    
                                    
                                    equityBalance
      at October 1, 2007
                                    
                                    
                                    4,909
                                    
                                    
                                    
                                    1,189
                                    
                                    
                                    
                                    11,957
                                    
                                    
                                    
                                    5,560
                                    
                                    
                                    
                                    (152
                                    )
                                    
                                    
                                    18,554Comprehensive
      loss:Net
      income from continuing operations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    495
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    495Net
      loss on discontinued operations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,984
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (1,984
                                    )Other
      comprehensive income (loss):Foreign
      currency translationadjustments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    22
                                    
                                    
                                    
                                    22Total
      comprehensive loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (1,467
                                    )Stock
      compensation
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    592
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    592Exercise
      of stock options
                                    
                                    
                                    6
                                    
                                    
                                    
                                    2
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    14Adoption
      of ASC 740 cumulative adjustment
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    102
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    102Balance
      at September 30, 2008
                                    
                                    
                                    4,915
                                    
                                    
                                    $
                                    1,191
                                    
                                    
                                    $
                                    12,561
                                    
                                    
                                    $
                                    4,173
                                    
                                    
                                    $
                                    (130
                                    )
                                    
                                    $
                                    17,795Comprehensive
      loss:Net
      loss from continuing operations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (5,463
                                    )
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (5,463
                                    )Other
      comprehensive income (loss):Foreign
      currency translationadjustments
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    218
                                    
                                    
                                    
                                    218Total
      comprehensive loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (5,245
                                    )Stock
      compensation
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    570
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    570Balance
      at September 30, 2009
                                    
                                    
                                    4,915
                                    
                                    
                                    $
                                    1,191
                                    
                                    
                                    $
                                    13,131
                                    
                                    
                                    $
                                    (1,290
                                    )
                                    
                                    $
                                    88
                                    
                                    
                                    $
                                    13,120




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





34


BIOANALYTICAL
SYSTEMS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





YearsEndedSeptember30,2009
                            
                            
                            2008Operating
      activities:Net
      loss
                            
                            $
                            (5,463
                            )
                            
                            $
                            (1,489
                            )Adjustments
      to reconcile net loss to net cash provided by continuing operating
      activities:Net
      loss from discontinued operations, including loss on
    disposal
                            
                            
                            —
                            
                            
                            
                            1,984Depreciation
      and amortization
                            
                            
                            2,645
                            
                            
                            
                            3,013Goodwill
      impairment charge
                            
                            
                            472
                            
                            
                            
                            —Employee
      stock compensation expense
                            
                            
                            570
                            
                            
                            
                            592Bad
      debt expense
                            
                            
                            (2
                            )
                            
                            
                            58Loss
      on interest rate swap
                            
                            
                            103
                            
                            
                            
                            —Loss
      on sale of property and equipment
                            
                            
                            37
                            
                            
                            
                            24Deferred
      income taxes
                            
                            
                            160
                            
                            
                            
                            388Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            3,680
                            
                            
                            
                            (1,510
                            )Inventories
                            
                            
                            338
                            
                            
                            
                            (207
                            )Refundable
      income taxes
                            
                            
                            739
                            
                            
                            
                            (509
                            )Prepaid
      expenses and other assets
                            
                            
                            49
                            
                            
                            
                            151Accounts
      payable
                            
                            
                            (212
                            )
                            
                            
                            969Accrued
      expenses
                            
                            
                            52
                            
                            
                            
                            433Customer
      advances
                            
                            
                            (1,169
                            )
                            
                            
                            62Net
      cash provided by continuing operating activities
                            
                            
                            1,999
                            
                            
                            
                            3,959Investing
      activities:Capital
      expenditures
                            
                            
                            (834
                            )
                            
                            
                            (1,713
                            )Proceeds
      from sale of property and equipment
                            
                            
                            —
                            
                            
                            
                            2Net
      cash used by continuing investing activities
                            
                            
                            (834
                            )
                            
                            
                            (1,711
                            )Financing
      activities:Payments
      of long-term debt
                            
                            
                            (491
                            )
                            
                            
                            (4,876
                            )Borrowings
      on long-term debt
                            
                            
                            —
                            
                            
                            
                            1,400Payments
      on revolving line of credit
                            
                            
                            (19,052
                            )
                            
                            
                            (14,285
                            )Borrowings
      on revolving line of credit
                            
                            
                            18,788
                            
                            
                            
                            16,308Payments
      on capital lease obligations
                            
                            
                            (721
                            )
                            
                            
                            (632
                            )Net
      proceeds from the exercise of stock options
                            
                            
                            —
                            
                            
                            
                            14Net
      cash used by continuing financing activities
                            
                            
                            (1,476
                            )
                            
                            
                            (2,071
                            )Cash
      flow of discontinued operations:Cash
      provided (used) by operating activities
                            
                            
                            588
                            
                            
                            
                            (3,361
                            )Net
      cash provided by investing activities
                            
                            
                            —
                            
                            
                            
                            669Net
      cash provided (used) by discontinued operations
                            
                            
                            588
                            
                            
                            
                            (2,692
                            )Effect
      of exchange rate changes
                            
                            
                            258
                            
                            
                            
                            13Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            535
                            
                            
                            
                            (2,502
                            )Cash
      and cash equivalents at beginning of year
                            
                            
                            335
                            
                            
                            
                            2,837Cash
      and cash equivalents at end of year
                            
                            $
                            870
                            
                            
                            $
                            335




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




35




BIOANALYTICAL SYSTEMS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Amounts
in thousands unless otherwise listed)




1.   DESCRIPTION OF THE
BUSINESS




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




2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES




(a)
            Principles
      of Consolidation




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




(b)
            Revenue
      Recognition




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




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




(c)
            Cash
      Equivalents




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




(d)
            Financial
      Instruments




Our
credit risk consists principally of trade accounts receivable. We perform
periodic credit evaluations of our customers’ financial conditions and generally
do not require collateral on trade accounts receivable. We account for trade
receivables based on the amounts billed to customers. Past due receivables are
determined based on contractual terms. We do not accrue interest on any of our
trade receivables.  The allowance for doubtful accounts is determined
by management based on our historical losses, specific customer circumstances,
and general economic conditions.  Periodically, management reviews
accounts receivable and adjusts the allowance based on current circumstances and
charges off uncollectible receivables when all attempts to collect have
failed. Our allowance for doubtful accounts for continuing operations was
$110 and $83 at September 30, 2009 and 2008, respectively.


36




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




2009
                          
                          
                          2008Opening
      balance
                          
                          $
                          83
                          
                          
                          $
                          27Charged
      to expense, net
                          
                          
                          39
                          
                          
                          
                          58Accounts
      written off
                          
                          
                          (12
                          )
                          
                          
                          (2
                          )Ending
      balance
                          
                          $
                          110
                          
                          
                          $
                          83




(e)
            Inventories




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




(f)
            Property
      and Equipment




We record
property and equipment at cost, including interest capitalized during the period
of construction of major facilities. We compute depreciation, including
amortization on capital leases, using the straight-line method over the
estimated useful lives of the assets, which we estimate to be: buildings and
improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office
furniture and fixtures, 10 years. Depreciation expense for continuing operations
was $2,609 in fiscal 2009 and $2,752 in fiscal 2008. Expenditures for
maintenance and repairs are expensed as incurred.





Property
and equipment, net, as of September 30, 2009 and 2008 consisted of the
following:




2009
                            
                            
                            2008Land
      and improvements
                            
                            $
                            490
                            
                            
                            $
                            497Buildings
      and improvements
                            
                            
                            21,298
                            
                            
                            
                            21,318Machinery
      and equipment
                            
                            
                            20,462
                            
                            
                            
                            20,456Office
      furniture and fixtures
                            
                            
                            972
                            
                            
                            
                            992Construction
      in progress
                            
                            
                            40
                            
                            
                            
                            14943,262
                            
                            
                            
                            43,412Less:  accumulated
      depreciation
                            
                            
                            (21,980
                            )
                            
                            
                            (20,277
                            )Net
      property and equipment
                            
                            $
                            21,282
                            
                            
                            $
                            23,135




(g)
            Long-Lived
      Assets including Goodwill




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




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




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




37


The discount rate and sales growth rate
are the two material assumptions utilized in our calculations of the present
value cash flows used to estimate the fair value of the reporting units when
performing the annual goodwill impairment test. Our three reporting units are
West Lafayette/Oregon, Evansville and the UK based on the discrete financial
information available which is reviewed by management.  We utilize a
cash flow approach in estimating the fair value of the reporting units, where
the discount rate reflects a weighted average cost of capital rate. The cash
flow model used to derive fair value is most sensitive to the discount rate and
sales growth assumptions used.  Due to fiscal year 2009 operating
losses and lowered expectations for the near future, we performed an impairment
test for our UK reporting unit as of June 30, 2009 using the assumptions
detailed in the table below.  As a result of this test, we recorded a
$472 impairment loss equal to the total value of the UK goodwill.  We
performed our annual impairment test for all other reporting units at September
30, 2009.  Using the following assumptions, which are slightly below
our internal forecasts and operating plans, the fair value of our West
Lafayette/Oregon reporting unit is greater than the carrying value.




Reporting
      UnitWest
                                        Lafayette/Oregon
                                      
                                      
                                      UKDiscount
      rate
                                      
                                      22.0%
                                      
                                      
                                      20.0%Revenue
      growth rate in fiscal 2010
                                      
                                      1.5%
                                      
                                      
                                      27.0%Revenue
      growth rate each year after fiscal 2010
                                      
                                      3.0%
                                      
                                      
                                      18.0%Operating
      expense reduction in fiscal 2010
                                      
                                      18.1%
                                      
                                      
                                      17.0%Operating
      expense increase each year after fiscal 2010
                                      
                                      1.0%
                                      
                                      
                                      9.0%




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




At
September 30, 2009, remaining recorded goodwill was $1,383, and the net balance
of other intangible assets was $114.




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




2009
                      
                      
                      2008Opening
      balance
                      
                      $
                      1,855
                      
                      
                      $
                      1,855UK
      impairment charge
                      
                      
                      (472
                      )
                      
                      
                      —Ending
      balance
                      
                      $
                      1,383
                      
                      
                      $
                      1,855




On June
30, 2008, we sold the operating assets of our Clinical Pharmacology Research
Unit located in Baltimore, Maryland.  As a result of this sale (more
fully described in Note 5), we expensed the remaining $47 unamortized balance of
the intangible assets of this unit in fiscal 2008.




38




Also, in
fiscal 2008, the intangible assets amortization expense includes an accelerated
amount of $143 for the write off of certain patents, licenses and
trademarks.  This acceleration reflects a management decision to no
longer support certain assets as active patents, licenses and trademarks since
they had no related revenue-generating products.




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




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





September 30, 2008Weighted
                              average life
                              (years)
                            
                            Gross Carrying
                              Amount
                            
                            
                            Accumulated
                              AmortizationFDA
      compliant facility
                            
                            10
                            
                            $
                            302
                            
                            
                            $
                            158





Amortization
expense for intangible assets for fiscal years ended September 30, 2009 and
2008 was $30 and $215 respectively.  As mentioned above, the large
decline in amortization expense from fiscal 2008 to fiscal 2009 is the result of
fiscal 2008 accelerated amortization of $143 for the write off of certain
patents, licenses and trademarks as well as the $47 amortization related to the
intangible assets of the CPRU unit in Baltimore. The following table provides
information regarding estimated amortization expense for the next five fiscal
years:





2010
                  
                  $
                  302011
                  
                  
                  302012
                  
                  
                  302013
                  
                  
                  242014
                  
                  
                  —




(h)
            Advertising
      Expense




We
expense advertising costs as incurred. Advertising expense was $219 and $201 for
the years ended September 30, 2009 and 2008, respectively.




(i)
            Stock-Based
      Compensation




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




We use a
binomial option-pricing model as our method of valuation for share-based awards,
requiring us to make certain assumptions about the future, which are more fully
described in Note 9.  Stock-based compensation expense for employee
stock options for the years ended September 30, 2009 and 2008 was $570 and $592
with related tax benefits of $0 and $154, respectively.




39




(j)
            Income
      Taxes




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




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




We record interest and penalties
accrued in relation to uncertain income tax positions as a component of income
tax expense.  Any changes in the liability for
uncertain tax positions would impact our effective tax rate. Over the next
twelve months, it is reasonably possible that the uncertainty surrounding our
reserve for uncertain income tax positions, which relate to certain state income
tax issues, will be resolved upon the conclusion of state tax litigation.
Accordingly, if such resolutions are favorable, we would reduce the carrying
value of our reserve.




(k)
            New
      Accounting Pronouncements




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





In April
2009, the FASB (Financial Accounting Standards Board) issued an accounting
pronouncement under ASC 825-10-50 extending the disclosure requirements
regarding the fair value of financial instruments.  ASC 825-10-50
requires disclosures in interim reporting periods and in financial statements
for annual reporting periods regarding the fair value of all financial
instruments for which it is practicable to estimate that value, whether
recognized or not on the company's balance sheet.  ASC 825-10-50
requires entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments and describe changes in methods
and significant assumptions, in both interim and annual financial
statements.  ASC 825-10-50 is effective for interim reporting periods
ending after June 15, 2009 (the quarter ended June 30, 2009 for the
Company).  While the adoption of ASC 825-10-50 impacts our
disclosures, it did not have an impact on our consolidated financial position or
results of operations.





In May
2009, the FASB issued a new accounting standard on the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued (“subsequent events”).
The standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that
occur for a potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This standard is effective for
interim and annual periods ending after June 15, 2009. The adoption of
this standard did not have a material impact on our consolidated financial
statements.





In June
2009, the FASB issued a new standard on the FASB Accounting Standards
Codification, or ASC. This standard was issued to establish the FASB ASC as
the source of authoritative accounting principles recognized by the FASB in the
preparation of financial statements in conformity with generally accepted
accounting principles, or GAAP. Essentially, the GAAP hierarchy was
modified to only include 2 levels – authoritative and
non-authoritative. This standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009.
While the adoption of the FASB ASC impacted our disclosures, it did not have an
impact on our consolidated financial position or results of
operations.





In October 2009, the FASB issued
Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue
Recognition.  ASU 2009-13 revises the current accounting treatment to
specifically address how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting.  This guidance is
applicable to revenue arrangements entered into or materially modified during
our first fiscal year that begins after June 15, 2010.  The guidance
may be applied either prospectively from the beginning of the fiscal year for
new or materially modified arrangements or retrospectively.  We are
currently evaluating this authoritative guidance to determine any potential
impact that it may have on our consolidated financial statements.




40





(l)
            Fair
      Value




The
Company adopted the provisions of the Fair Value Measurements and Disclosure
Topic effective for interim reporting periods ending after June 15, 2009 as
required by the FASB ASC. This Topic defines fair value, establishes a
consistent framework for measuring fair value and expands the disclosure
requirements about fair value measurements.




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




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




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




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





The
carrying amounts for cash and cash equivalents, accounts receivable,
inventories, prepaid expenses and other assets, accounts payable and other
accruals approximate their fair values because of their nature and respective
duration.  The fair value of the revolving credit facility and
long-term debt is equal to their carrying values due to the variable nature of
their interest rates.  See Note 7 for further discussion of the fair
value of our interest rate swap.




(m)
            Use
      of Estimates




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




3.  INCOME
(LOSS) PER SHARE




We
compute basic income (loss) per share using the weighted average number of
common shares outstanding.  We compute diluted income (loss) per share
using the weighted average number of common and potential common shares
outstanding. Potential common shares include the dilutive effect of shares
issuable upon exercise of options to purchase common shares.  Shares
issuable upon exercise of options were excluded from the computation of loss per
share for the fiscal year ended September 30, 2009 as they are
anti-dilutive.




[Remainder of page intentionally left blank.]


41





The
following table reconciles our computation of basic income (loss) per share from
continuing operations to diluted income (loss) per share from continuing
operations:





Years Ended
                    September 30,2009
                  
                  
                  2008Basic
      net income (loss) per share from continuing operations:Net
      income (loss) applicable to common shareholders
                  
                  $
                  (5,463
                  )
                  
                  $
                  495Weighted
      average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,914Basic
      net income (loss) per share from continuing operations
                  
                  $
                  (1.11
                  )
                  
                  $
                  0.10Diluted
      net income (loss) per share from continuing operations:Diluted
      net income (loss) applicable to common shareholders
                  
                  $
                  (5,463
                  )
                  
                  $
                  495Weighted
      average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,914Dilutive
      stock options/shares
                  
                  
                  —
                  
                  
                  
                  54Diluted
      weighted average common shares outstanding
                  
                  
                  4,915
                  
                  
                  
                  4,968Diluted
      net income (loss) per share from continuing operations
                  
                  $
                  (1.11
                  )
                  
                  $
                  0.10





At
September 30, 2009 and 2008, we had 620 and 700 shares, respectively, issuable
upon exercise of stock options that are not included in our outstanding share
calculation as they are anti-dilutive.





4.  INVENTORIES





Inventories
at September 30 consisted of the following:





2009
                      
                      
                      2008Raw materials
                      
                      $
                      1,732
                      
                      
                      $
                      1,897Work in progress
                      
                      
                      131
                      
                      
                      
                      268Finished goods
                      
                      
                      271
                      
                      
                      
                      202$
                      2,134
                      
                      
                      $
                      2,367Obsolescence
      reserve
                      
                      
                      (287
                      )
                      
                      
                      (183
                      )$
                      1,847
                      
                      
                      $
                      2,184





42





5.  DISCONTINUED OPERATIONS





On June
30, 2008, we completed a transaction with Algorithme Pharma USA Inc. ("AP USA")
and Algorithme Pharma Holdings Inc. ("Algorithme") whereby we sold the operating
assets of our Baltimore Clinical Pharmacology Research Unit
(“CPRU”).   In exchange, we received cash of $850, and they
assumed certain liabilities related to the CPRU, including our obligations under
the lease for the facility in which the CPRU operated.  As a result of
this sale, we have exited the Phase I first-in-human clinical study
market.  We remain contingently liable for $800 annually through 2015
for future financial obligations under the lease should AP USA and Algorithme
fail to meet their lease commitment.





Accordingly,
in the accompanying consolidated statements of operations and cash flows we have
segregated the results of the CPRU as discontinued operations for fiscal
2008.  The loss from discontinued operations reflects the operating
loss of the CPRU.  The CPRU was previously included in our Services
segment.





Condensed
Statements of Operations from Discontinued Operations





(in thousands)
                  
                  Year Ended
                    September 30,2009
                  
                  
                  2008Net
      Sales
                  
                  $
                  —
                  
                  
                  $
                  2,192Loss
      before income taxes and disposal
                  
                  
                  —
                  
                  
                  
                  (2,811
                  )Loss
      on disposal
                  
                  
                  —
                  
                  
                  
                  (474
                  )Loss
      from operations before tax benefit
                  
                  
                  —
                  
                  
                  
                  (3,285
                  )Income
      tax benefit
                  
                  
                  —
                  
                  
                  
                  1,301Net
      loss
                  
                  $
                  —
                  
                  
                  $
                  (1,984
                  )





Summary
Balance Sheet of Discontinued Operations





(in
      thousands)
                  
                  September 30,
                    2009
                  
                  
                  September 30,
                    2008Receivables,
      net of allowance for doubtful accounts
                  
                  $
                  —
                  
                  
                  $
                  346Other
      current assets
                  
                  
                  —
                  
                  
                  
                  283Total
      assets
                  
                  $
                  —
                  
                  
                  $
                  629Accounts
      payable, accrued liabilities and other liabilities
                  
                  
                  —
                  
                  
                  
                  41Equity
                  
                  
                  —
                  
                  
                  
                  588Total
      liabilities and equity
                  
                  $
                  —
                  
                  
                  $
                  629





43





6.  LEASE
ARRANGEMENTS





The total
amount of equipment capitalized under capital lease obligations as of September
30, 2009 and 2008 was $3,884. Accumulated amortization on capital leases at
September 30, 2009 and 2008 was $1,981 and $1,338, respectively. Amortization of
assets acquired through capital leases is included in depreciation
expense.





During
fiscal 2009, we did not acquire any new equipment through capital lease
arrangements.  We acquired equipment totaling $1,145 through capital
lease arrangements during the year ended September 30, 2008. Future minimum
lease payments on capital leases at September 30, 2009 are as
follows:





Principal
                                    
                                    
                                    Interest
                                    
                                    
                                    Total2010
                                    
                                    $
                                    650
                                    
                                    
                                    $
                                    176
                                    
                                    
                                    $
                                    8262011
                                    
                                    
                                    366
                                    
                                    
                                    
                                    113
                                    
                                    
                                    
                                    4792012
                                    
                                    
                                    279
                                    
                                    
                                    
                                    63
                                    
                                    
                                    
                                    3422013
                                    
                                    
                                    147
                                    
                                    
                                    
                                    12
                                    
                                    
                                    
                                    1592014
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —$
                                    1,442
                                    
                                    
                                    $
                                    364
                                    
                                    
                                    $
                                    1,806





We lease
office space and equipment under noncancelable operating leases that terminate
at various dates through 2013, with the UK building lease expiring in 2023.
Certain of these leases contain renewal options. Total rental expense under
these leases was $485 and $1,609 in fiscal 2009 and 2008,
respectively.  The decrease in rental expense in the current year is
primarily due to the sale of our CPRU unit on June 30, 2008 as described in Note
5.  Beginning in the fourth quarter of fiscal 2008, we did not have
the building lease payments for the CPRU unit.





Future
minimum lease payments for the following fiscal years under operating leases at
September 30, 2009 are as follows:




2010
                    
                    $
                    4342011
                    
                    
                    4242012
                    
                    
                    4212013
                    
                    
                    4052014
                    
                    
                    402After
      2014
                    
                    
                    2,918$
                    5,004





[Remainder
of page intentionally left blank.]





44





7.  DEBT
ARRANGEMENTS





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




2009
                    
                    
                    2008Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $40 until June 1, 2010 when it adjusts under the terms of
      the note. Interest is fixed at 7.1% for three years beginning June 1,
      2007.  Collateralized by underlying property.  Due
      November, 2012.
                    
                    $
                    4,117
                    
                    
                    $
                    4,294Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $19. The interest rate is 6.1%. Collateralized by
      underlying property. Due February, 2011.
                    
                    
                    1,489
                    
                    
                    
                    1,623Mortgage
      note payable to a bank, payable in monthly principal and interest
      installments of $17 until June 1, 2010, when it adjusts under the terms of
      the note. Interest is fixed at 7.1% for three years beginning June 1,
      2007.  Collateralized by underlying property.  Due
      November, 2012.
                    
                    
                    1,897
                    
                    
                    
                    1,967Note
      payable to a bank, payable in monthly principal installments of $9 plus
      interest.  The interest rate is 6.1%. Collateralized by West
      Lafayette and Evansville properties. Due December, 2010.
                    
                    
                    1,212
                    
                    
                    
                    1,322$
                    8,715
                    
                    
                    $
                    9,206Less
      current portion
                    
                    
                    524
                    
                    
                    
                    491$
                    8,191
                    
                    
                    $
                    8,715





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





2010
                            
                            $
                            5242011
                            
                            
                            2,7272012
                            
                            
                            3062013
                            
                            
                            5,158$
                            8,715





Cash
interest payments of $917 and $872 were made in 2009 and 2008,
respectively.





Mortgages
and note payable





On
December 18, 2007, we entered into a loan agreement with Regions Bank
(“Regions”) under which Regions loaned us $1,400 under a term loan maturing
December 18, 2010. The outstanding balance on this loan at September 30, 2009
was $1,212.Interest
on the loan is equal to LIBOR plus 215 basis points. Monthly payments are $9
plus interest. The loan is collateralized by real estate at our West Lafayette
and Evansville, Indiana locations. Regions also holds approximately $7,500 of
additional mortgage debt on these facilities.  We entered into
interest rate swap agreements with respect to two of these loans to fix the
interest rate at 6.1%.  We entered into these derivative transactions
to hedge interest rate risk of this debt obligation and not to speculate on
interest rates. The fair value of the swaps was determined with a level two
analysis.  As a result of recent declines in short term interest
rates, the swaps had a negative fair value of $103 at September 30, 2009 and $0
at September 30, 2008, which was recorded in our condensed consolidated
financial statements as interest expense and a long term
liability.  The terms of the interest rate swaps match the scheduled
principal outstanding under the loans.  We do not intend to prepay the
loans, and expect the swaps to expire under their terms in two years without
payment by us.  Upon expiration of the swaps, the net fair value
recorded in the consolidated financial statements is expected to be
zero.





45





The
covenants in our loan agreements with Regions require us to maintain certain
ratios including a fixed charge coverage ratio and total liabilities to tangible
net worth ratio.  The Regions loans contain both cross-default
provisions with each other and with the revolving line of credit with
Entrepreneur Growth Capital described below.  At December 31, 2008 and
March 31, 2009, we were not in compliance with our fixed charge coverage
ratio.  On February 17, 2009, Regions waived our violation of our
fixed charge coverage ratio covenant through March 31, 2009.  On May
18, 2009, Regions amended the computations and requirements for the fixed
charge coverage ratios through December 31, 2009.  After that date,
the computations and requirements for the fixed charge coverage ratio will
revert to those in the original agreement.  The amended computations
are less restrictive to us.  At September 30, 2009, we were in
compliance with the amended fixed charge covenant ratio.  Based on
projections for fiscal 2010, we expect to be in breach of the Regions covenants
once the computations and requirements revert to the original agreement after
December 31, 2009.  On January 7, 2010, Regions waived our
expected violation of the fixed charge coverage ratio covenant through December
31, 2009.  On January 13, 2010, Regions amended the computations and
requirements for the fixed charge coverage ratios through fiscal year
2010.





Revolving Line of Credit





Through
December 31, 2009, we had a revolving line of credit (“Agreement”), with
National City, which we used for working capital and other purposes. Borrowings
under the Agreement were collateralized by substantially all assets related to
our operations, other than the real estate securing the Regions loans, all
common stock of our United States subsidiaries and 65% of the common stock of
our non-United States subsidiaries. Under the Agreement, the Company agreed to
restrict advances to subsidiaries, limit additional indebtedness and capital
expenditures and comply with certain financial covenants outlined in the
Agreement.





The
covenants in the Agreement required that we maintain certain ratios of
interest-bearing indebtedness to EBITDA and net cash flow to debt servicing
requirements.  The Agreement also contained cross-default provisions
with the Regions loans.





On July
17, 2009, we executed a Fourth Amendment to the Amended and Restated Credit
Agreement with National City.  In fiscal 2009, prior to the Fourth
Amendment, we had been operating in breach of the fixed charge coverage ratio
and tangible net worth covenants.  Under the amended Agreement,
National City reduced the maximum available amount from $5,000 to $3,000 and
agreed to waive our violations of the fixed charge coverage ratio covenant and
the tangible net worth covenant through June 30, 2009.  National City
also agreed to amend the computations and requirements for the fixed charge
coverage ratios and the tangible net worth ratio through December 31, 2009. As
of September 30, 2009, we were in compliance with the amended
computations.  On December 31, 2009, we executed a Fifth Amendment to
the Amended and Restated Credit Agreement with PNC Bank, as successor by
merger to National City, extending the maturity date of the line of
credit until January 15, 2010.





At
September 30, 2009, we had $3,000 of total borrowing capacity from the National
City line of credit, of which $1,759 was outstanding.





On
January 13, 2010, we entered into a new $3,000 revolving line of credit
agreement (“Credit Agreement”) with Entrepreneur Growth Capital LLC (EGC)
to replace the National City line of credit that expires on January 15,
2010.  The initial term of the Credit Agreement expires on January 31,
2011.  Borrowings bear interest at an annual rate equal to
Citibank’s Prime Rate
plus five percent (5%), or 8.25% as of January 13, 2010 with minimum monthly
interest of $15.  Interest is paid monthly.  The line of
credit also carries an annual facilities fee of 2% and a 0.2% collateral
monitoring fee.  The covenants in the Credit Agreement require that we
maintain a minimum tangible net worth of $9,500, which may restrict the amount
we can borrow to fund future operations, acquisitions and capital
expenditures.  The Credit Agreement also contains cross-default
provisions with the Regions loans and any future EGC loans.





46





8.  INCOME TAXES





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





2009
                    
                    
                    2008Long-term
      deferred tax assets:Tax
      over book depreciation
                    
                    $
                    (842
                    )
                    
                    $
                    (770
                    )Lower
      tax basis on assets of acquired company
                    
                    
                    (418
                    )
                    
                    
                    (428
                    )Domestic
      net operating loss carryforward
                    
                    
                    1,440
                    
                    
                    
                    641Stock
      compensation expense
                    
                    
                    363
                    
                    
                    
                    213Foreign
      net operating loss
                    
                    
                    1,293
                    
                    
                    
                    —Foreign
      tax credit carryover
                    
                    
                    119
                    
                    
                    
                    —AMT
      credit carryover
                    
                    
                    13
                    
                    
                    
                    —Total
      long-term deferred tax assets
                    
                    $
                    1,968
                    
                    
                    $
                    (344
                    )Current
      deferred tax assets:Inventory
      pricing
                    
                    $
                    186
                    
                    
                    $
                    128Accrued
      compensation and vacation
                    
                    
                    240
                    
                    
                    
                    244Accrued
      expenses and other – net
                    
                    
                    —
                    
                    
                    
                    73Foreign
      tax credit carryover
                    
                    
                    —
                    
                    
                    
                    71Foreign
      net operating loss
                    
                    
                    (1
                    )
                    
                    
                    540Total
      current deferred tax assets
                    
                    $
                    425
                    
                    
                    $
                    1,056Valuation
      allowance for deferred tax assets
                    
                    
                    (2,381
                    )
                    
                    
                    (540
                    )Net
      deferred tax assets
                    
                    $
                    12
                    
                    
                    $
                    172





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





2009
                
                
                2008Current:Federal
                
                $
                (345
                )
                
                $
                (505
                )State
                
                
                (11
                )
                
                
                144Foreign
                
                
                (1
                )
                
                
                —Total
      Current
                
                $
                (357
                )
                
                $
                (361
                )Deferred:Federal
                
                $
                118
                
                
                $
                341State
                
                
                41
                
                
                
                45Foreign
                
                
                1
                
                
                
                2Total
      deferred
                
                $
                160
                
                
                $
                388$
                (197
                )
                
                $
                27





47





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





2009
                            
                            
                            2008Statutory
      federal income tax rate
                            
                            
                            (34
      .0
                            )%
                            
                            
                            34
      .0
                            %Increases
      (decreases):Nondeductible
      expenses
                            
                            
                            2
      .6
                            
                            
                            
                            5
      .0State
      income taxes, net of federal tax benefit
                            
                            
                            (5
      .4
                            )
                            
                            
                            10
      .0Nontaxable
      foreign (gains) losses
                            
                            
                            2
      .5
                            
                            
                            
                            12
      .4Uncertain
      tax positions
                            
                            
                            —
                            
                            
                            
                            12
      .8Valuation
      allowance
                            
                            
                            32
      .9
                            
                            
                            
                            —Other
                            
                            
                            (2
      .1
                            )
                            
                            
                            (1
      .4
                            )(3 .5
                            )%
                            
                            
                            72 .8
                            %





We have
not provided any U.S. income taxes benefit on the accumulated losses of our UK
subsidiary. In fiscal 2009 and 2008, our foreign operations generated losses
before income taxes of $2,293 and $669, respectively.  We have foreign
net operating loss carryforwards of $4,040 that have an indefinite life
under current UK tax law.  Payments made in 2009 and 2008 for income
taxes amounted to $1 and $186, respectively.





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





At September 30, 2009, we had domestic
net operating loss carryforwards of approximately $3,242 for federal and $3,968
for state, which expire from September 30, 2028 through 2029.  Also,
we have a foreign tax credit carryforward of approximately $119, which expires
on September 30, 2016.  Further, we have an alternative minimum tax
credit carryforward of approximately $13 available to offset future federal
income taxes.  This credit has an unlimited expiration.





We may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not to be sustained upon regulatory examination based on the
technical merits of the position. The amount of the benefit for which an
exposure exists is measured as the largest amount of benefit determined on a
cumulative probability basis that we believe is more likely than not to be
realized upon ultimate settlement of the position. At the end of fiscal 2008, a
$473 liability for uncertain income tax positions existed under ASC
740.





A
reconciliation of the total amounts of unrecognized tax liability at September
30, 2008 and 2009 is as follows:




Beginning
      of year balance, October 1, 2007
                
                $
                240Increases
      to tax positions in current year
                
                259Increases
      to tax positions in prior years
                
                —Decreases
      to tax positions in prior years
                
                (26)Decreases
      due to lapse of statute of limitations
                
                —End
      of year balance, September 30, 2008
                
                $
                473Increases
      to tax positions in current year
                
                —Increases
      to tax positions in prior years
                
                —Decreases
      to tax positions in prior years
                
                —Decreases
      due to lapse of statute of limitations
                
                —End
      of year balance, September 30, 2009
                
                $
                473





Over the
next twelve months, it is reasonably possible that the uncertainty surrounding
our reserve for uncertain income tax positions will be resolved upon the
conclusion of state tax litigation. Accordingly, if such resolutions are
favorable, we would reduce the carrying value of our reserve.  Interest and
penalties are included in this reserve.  We file income tax returns in
the U.S., several U.S. States, and the foreign jurisdiction of the United
Kingdom.  We remain subject to examination by taxing authorities in
the jurisdictions in which we have filed returns for years after
2005.





48





9.  STOCK-BASED
COMPENSATION





Summary
of Stock Option Plans and Activity





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





The
maximum number of common shares that may be granted under the Plan is 500
shares.  At September 30, 2009, 336 shares remain available for grants
under the Plan.





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





2009
                              
                              
                              2008Risk-free
      interest rate
                              
                              
                              2.89
                              %
                              
                              
                              3.74
                              %Dividend
      yield
                              
                              
                              0.00
                              %
                              
                              
                              0.00
                              %Volatility
      of the expected market price of the Company's common stock
                              
                              
                              55.00
                                77.00
                              %-
                                %
                              
                              
                              44.00
                                59.00
                              %-
                                %Expected
      life of the options (years)
                              
                              
                              8.0
                              
                              
                              
                              7.0





A summary
of our stock option activity and related information for the years ended
September 30, 2009 and 2008, respectively, is as follows (in thousands except
for share prices):





Options
                  (shares)
                
                
                Weighted-
                  Average Exercise
                  Price
                
                
                Weighted-
                  Average Grant
                  Date Fair Value
                
                
                Weighted-Average
                  Remaining
                  Contractual Life
                  (Years)
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      - October 1, 2007
                
                
                615
                
                
                $
                6.00Exercised
                
                
                (6
                )
                
                $
                4.94Granted
                
                
                189
                
                
                $
                6.40
                
                
                $
                3.67Terminated
                
                
                (44
                )
                
                $
                6.74Outstanding
      - September 30, 2008
                
                
                754
                
                
                $
                6.06
                
                
                $
                3.50
                
                
                
                7.7
                
                
                $
                39Outstanding
      - October 1, 2008
                
                
                754
                
                
                $
                6.00Exercised
                
                
                -
                
                
                $
                -Granted
                
                
                60
                
                
                $
                4.07
                
                
                $
                2.73Terminated
                
                
                (194
                )
                
                $
                6.74Outstanding
      - September 30, 2009
                
                
                620
                
                
                $
                5.97
                
                
                $
                3.36
                
                
                
                7.4
                
                
                $
                -Exercisable
      at September 30, 2009
                
                
                321
                
                
                $
                6.13
                
                
                $
                3.41
                
                
                
                6.4
                
                
                $
                -





49





A summary
of non-vested options for the year ended September 30, 2009 is as
follows:





Number of
                        Shares
                      
                      
                      Weighted-
                        Average Grant
                        Date Fair ValueNon-vested
      options at October 1, 2008
                      
                      
                      449
                      
                      
                      $
                      3.62Granted
                      
                      
                      60
                      
                      
                      $
                      2.73Vested
                      
                      
                      (16
                      )
                      
                      $
                      5.35Forfeited
                      
                      
                      (194
                      )
                      
                      $
                      3.69Non-vested
      options at September 30, 2009
                      
                      
                      299
                      
                      
                      $
                      3.30





We
received$14 from the
exercise of qualified employee stock options in fiscal 2008, for which no tax
benefit was recognized.  The aggregate intrinsic value of those shares
exercised was $12.  No options were exercised in fiscal
2009.   As of September 30, 2009, our total unrecognized
compensation cost related to non-vested stock options was $453 and is expected
to be recognized over a weighted-average service period of
1.22 years.





The
following table summarizes outstanding and exercisable options as of
September 30, 2009 (in thousands except per share amounts):





Range of Exercise Prices
                    
                    Shares
                      Outstanding
                    
                    
                    Weighted-
                      Average
                      Remaining
                      Contractual
                      Life (Years)
                    
                    
                    Weighted-
                      Average
                      Exercise Price
                    
                    
                    Shares
                      Exercisable
                    
                    
                    Weighted-
                      Average
                      Exercise Price$
          2.80 - 4.58
                    
                    
                    123
                    
                    
                    
                    5
      .56
                    
                    
                    $
                    4
      .17
                    
                    
                    
                    93
                    
                    
                    $
                    4
      .38$
          4.59 - 5.74
                    
                    
                    192
                    
                    
                    
                    7
      .96
                    
                    
                    $
                    5
      .09
                    
                    
                    
                    42
                    
                    
                    $
                    5
      .34$
          5.75 - 8.79
                    
                    
                    305
                    
                    
                    
                    7
      .68
                    
                    
                    $
                    7
      .25
                    
                    
                    
                    186
                    
                    
                    $
                    7
      .18





10.  RETIREMENT
PLAN





We have
a 401(k) Retirement Plan (the “Plan”) covering all employees over
twenty-one years of age with at least one year of service. Under the terms of
the Plan, we contribute 1% of each participant’s total wages to the Plan and
match 22% of the first 10% of the employee contribution. The Plan also includes
provisions for various contributions which may be instituted at the discretion
of the Board of Directors. The contribution made by the participant may not
exceed 30% of the participant’s annual wages. We made no discretionary
contributions under the plan in 2009 and 2008. Contribution expense was $296 and
$293 in fiscal 2009 and 2008, respectively.





11.  SEGMENT
INFORMATION





We
operate in two principal segments – research services and research products. Our
Services segment provides research and development support on a contract basis
directly to pharmaceutical companies. Our Products segment provides liquid
chromatography, electrochemical and physiological monitoring products to
pharmaceutical companies, universities, government research centers, and medical
research institutions. We evaluate performance and allocate resources based on
these segments. Certain of our assets are not directly attributable to the
Services or Products segments. These assets are grouped into the Corporate
segment and include cash and cash equivalents, deferred income taxes, refundable
income taxes, debt issue costs and certain other assets. We do not allocate such
items to the principal segments because they are not used to evaluate their
financial position. The accounting policies of these segments are the same as
those described in the summary of significant accounting policies.  As
a result of the sale of our CPRU described in Note 5, the segment information
reflects only the operating results by segment for continuing
operations.





50




(a)
            Operating
      Segments





Years Ended
                        September 30,2009
                      
                      
                      2008Revenue:Service
                      
                      $
                      24,158
                      
                      
                      $
                      32,921Product
                      
                      
                      7,626
                      
                      
                      
                      8,776$
                      31,784
                      
                      
                      $
                      41,697Operating
      (loss) income from continuing operations:Service
                      
                      $
                      (3,884
                      )
                      
                      $
                      2,139Product
                      
                      
                      (716
                      )
                      
                      
                      655$
                      (4,600
                      )
                      
                      $
                      2,794Corporate
      Expenses
                      
                      
                      1,060
                      
                      
                      
                      971Income
      (loss) from continuing operations before income taxes
                      
                      $
                      (5,660
                      )
                      
                      $
                      1,823





Years Ended
                    September 30,2009
                  
                  
                  2008Identifiable
      assets:Service
                  
                  $
                  19,102
                  
                  
                  $
                  23,594Product
                  
                  
                  8,046
                  
                  
                  
                  9,771Corporate
                  
                  
                  5,437
                  
                  
                  
                  6,982$
                  32,585
                  
                  
                  $
                  40,347Goodwill,
      net:Service
                  
                  $
                  1,009
                  
                  
                  $
                  1,481Product
                  
                  
                  374
                  
                  
                  
                  374$
                  1,383
                  
                  
                  $
                  1,855Intangible
      assets, net:Service
                  
                  $
                  114
                  
                  
                  $
                  144Product
                  
                  
                  —
                  
                  
                  
                  —$
                  114
                  
                  
                  $
                  144Depreciation
      and amortization:Service
                  
                  $
                  2,377
                  
                  
                  $
                  2,653Product
                  
                  
                  268
                  
                  
                  
                  360$
                  2,645
                  
                  
                  $
                  3,013Capital
      Expenditures:Service
                  
                  $
                  698
                  
                  
                  $
                  1,505Product
                  
                  
                  136
                  
                  
                  
                  208$
                  834
                  
                  
                  $
                  1,713





51





(b)
            Geographic
      Information




Years Ended
                    September 30,2009
                  
                  
                  2008Sales
      to External Customers:North
      America
                  
                  $
                  28,656
                  
                  
                  $
                  35,866Pacific
      Rim
                  
                  
                  661
                  
                  
                  
                  650Europe
                  
                  
                  2,215
                  
                  
                  
                  4,671Other
                  
                  
                  252
                  
                  
                  
                  510$
                  31,784
                  
                  
                  $
                  41,697Long-lived
      Assets:North
      America
                  
                  $
                  22,472
                  
                  
                  $
                  24,170Europe
                  
                  
                  550
                  
                  
                  
                  1,233$
                  23,022
                  
                  
                  $
                  25,403





(c)
            Major
      Customers





In 2009
and 2008, Pfizer accounted for approximately 7.0% and 7.4%, respectively, of our
total revenues from continuing operations and 3.2% and 10.0% of total trade
accounts receivable from continuing operations, respectively.





12.  RELATED
PARTY TRANSACTIONS





On
January 1, 2008, we paid the remaining principal balance of $500 in cash of the
6% subordinated convertible note payable to one of our directors.





[Remainder
of page intentionally left blank.]





52





13.  CONSOLIDATED
QUARTERLY FINANCIAL DATA (UNAUDITED)





The
following is a summary of the unaudited quarterly results of operations for
fiscal years 2009 and 2008 (in thousands except per share amounts). As a result
of the sale of our CPRU described in Note 5, the quarterly financial data only
reflects the operating results for continuing operations.





First
                            Quarter
                          
                          
                          Second
                            Quarter
                          
                          
                          Third
                            Quarter
                          
                          
                          Fourth
                            Quarter2009Total
      Revenue
                          
                          $
                          8,076
                          
                          
                          $
                          7,066
                          
                          
                          $
                          8,121
                          
                          
                          $
                          8,521Gross
      Profit
                          
                          
                          2,047
                          
                          
                          
                          872
                          
                          
                          
                          2,135
                          
                          
                          
                          2,550Net
      loss from continuing operations
                          
                          
                          (1,584
                          )
                          
                          
                          (1,831
                          )
                          
                          
                          (632
                          )
                          
                          
                          (1,416
                          )Basic
      net loss per share from continuing operations
                          
                          
                          (0.32
                          )
                          
                          
                          (0.37
                          )
                          
                          
                          (0.13
                          )
                          
                          
                          (0.29
                          )Diluted
      net loss per share from continuing operations
                          
                          
                          (0.32
                          )
                          
                          
                          (0.37
                          )
                          
                          
                          (0.13
                          )
                          
                          
                          (0.29
                          )2008Total
      Revenue
                          
                          $
                          10,565
                          
                          
                          $
                          10,301
                          
                          
                          $
                          11,447
                          
                          
                          $
                          9,384Gross
      Profit
                          
                          
                          4,086
                          
                          
                          
                          3,959
                          
                          
                          
                          4,316
                          
                          
                          
                          2,972Net
      income (loss) from continuing operations
                          
                          
                          587
                          
                          
                          
                          432
                          
                          
                          
                          407
                          
                          
                          
                          (931
                          )Basic
      net income (loss) per share from continuing operations
                          
                          
                          0.12
                          
                          
                          
                          0.09
                          
                          
                          
                          0.08
                          
                          
                          
                          (0.19
                          )Diluted
      net income (loss) per share from continuing operations
                          
                          
                          0.12
                          
                          
                          
                          0.09
                          
                          
                          
                          0.08
                          
                          
                          
                          (0.19
                          )





14.   SUBSEQUENT
EVENTS





We
evaluated subsequent events through January 13, 2010, the date our consolidated
financial statements were issued. On
December 31, 2009, we executed a Fifth Amendment to the Amended and Restated
Credit Agreement with PNC Bank, as successor by merger to National City Bank,
extending the maturity date of the line of credit to January 15, 2010.On
January 13, 2010, we entered into a new revolving line of credit
agreement with Entrepreneur Growth Capital (EGC), which we use for working
capital and other purposes, to replace the National City line of credit that
expires on January 15, 2010.  See Note 7 for additional
information.  On January 7, 2010, Regions waived our expected
violation of the fixed charge coverage ratio at December 31, 2009.  On
January 13, 2010 Regions amended the computations and requirements of the fixed
charge coverage ratios through our fiscal year 2010.





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





15.  RISKS
AND UNCERTAINTIES





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





53





The
overall economic downturn first began to negatively affect our operating results
in fiscal 2009.  Revenues for fiscal 2009 declined approximately 24%
or $10 million from our prior fiscal year due to a lower volume of new bookings,
and the delaying and canceling by sponsors of projects previously booked. 
The lower sales volume and a decrease in our operating expenses of approximately
3% created a net loss of $5.5 million and a decline in cash flow from operations
from approximately $4 million in fiscal 2008 to $2 million in fiscal
2009.  We experienced a 10% increase in revenue in the second half
versus the first half of fiscal 2009 as the volume of bookings slowly improved
late in the year.   To improve cash flow and reduce our
break-even level, we implemented cost controls starting in the second quarter of
fiscal 2009.  One such control was a reduction in work force, through
both attrition and terminations, impacting all areas of
operations.  This reduced our annual compensation expense and is
expected to save us approximately $2.4 million annually. These cost control
measures resulted in the reduction of operating expenses, excluding goodwill
impairment, by approximately 25% ($1.6 million) in the second half of fiscal
2009 compared to the first half of the year. In addition, we reduced our capital
expenditures by 51% ($900) in fiscal 2009.





In fiscal
2010, we will continue to monitor and address the impact that the challenging
economy is having on our company and industry.   In fiscal 2010,
we expect to see slow but continued improvement in the volume of new
bookings.  We also expect improved gross profit margins due to the
cost controls implemented.  If current economic factors and industry
trends for the CRO industry continue or deteriorate in fiscal 2010, our results
of operations could be adversely affected.  We have replaced our
revolving line of credit, which was set to expire in January 2010, with a new
line of credit with similar borrowing capacity from Entrepreneur Growth Capital
(EGC).  We have also amended the financial covenants of our Regions
debt to be more favorable to the Company.  We will continue to assess
the need for additional cost controls such as freezing non-essential capital
expenditures and current wage rates, reducing employee costs through personnel
reductions either by attrition or reduction in workforce, reducing non-essential
expenses, and monitoring our operations for efficiencies to further reduce our
break-even point.  We have debt, lease and tax obligations of
approximately $2.3 million in fiscal 2010.  We anticipate receiving a
tax refund of approximately $375 in the third quarter of fiscal
2010.  Based on our expectation of a small increase in revenue, the
availability on our line of credit, and the impact of the cost reductions
implemented, we project that we will have the liquidity required to meet our
fiscal 2010 operations and debt obligations.





54




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Bioanalytical
Systems Inc.





We have
audited the consolidated balance sheets of Bioanalytical Systems, Inc. as of
September 30, 2009 and 2008, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss) and cash flows
for the years then ended.  These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bioanalytical Systems, Inc
as of September 30, 2009 and 2008, and the results of its operations and its
cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.





/s/ Crowe
Horwath LLP


Indianapolis,
Indiana


January
13, 2010


55


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


None.





ITEM
9A-CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures


We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance to our management and board of directors that information
required to be disclosed in the reports we file or submit to the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Based on an evaluation conducted under the supervision and with the
participation of the Company’s management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of September 30, 2009,
including those procedures described below, we, including our Chief Executive
Officer and our Chief Financial Officer, determined that those controls and
procedures were effective.





Changes
in Internal Controls





In fiscal
2009, we initiated an improved process of tracking our tax liabilities, have
added layers of review and are investigating commercially available software
that will accurately maintain and track the differences between financial
reporting and tax return reporting.





Except as
noted above, there were no changes in our internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act, during fiscal 2009 that have materially affected or are reasonably likely
to materially affect our internal control over financial
reporting.





Management’s Report on Internal
Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Under the supervision and with the
participation of our management, including our Principal Executive Officer and
Principal Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.





A
material weakness is a control deficiency, or combination of control
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis.
Management’s assessment identified transaction-level material weakness in the
design and operating effectiveness of controls related to income
taxes.  Based on this evaluation, we concluded that we did not
maintain effective internal control over financial reporting as of September 30,
2009.  We determined that our company’s accounting staff does not have
sufficient technical accounting knowledge relating to accounting for income
taxes which could result in a misstatement of account balances that would result
in a reasonable possibility that a material misstatement to our financial
statements may not be prevented or detected on a timely
basis.





We intend
to take appropriate and reasonable steps to make the necessary improvements to
remediate the material weakness. We will develop an enhanced tax provision model
to capture, summarize and consolidate tax provision data to facilitate the
preparation of our income tax provision and provide additional training of
accounting staff related directly to accounting for income taxes. We intend to
consider the results of our remediation efforts and related testing as part of
our fiscal 2010 assessment of the effectiveness of our internal control over
financial reporting.





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


56


ITEM
9B-OTHER INFORMATION




None.





PART
III





ITEM 10-DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT





The
following information concerns the persons who served as the directors of the
Company as of September 30, 2009, with the additions of David L. Omachinski and
John B. Landis, Ph.D., who were elected to the Board on October 8, 2009 and
November 12, 2009, respectively. Except as indicated in the following
paragraphs, the principal occupations of these persons have not changed in the
past five years. Information concerning the executive officers of the Company
may be found in “Executive Officers of the Registrant” under Item 1 of this
report, which is incorporated herein by reference.  Information
required by Part III, Item 10 is incorporated herein by this reference from the
Company’s Proxy Statement for 2010 Annual Meeting.





Name
              
              Age
              
              PositionWilliam
      E. Baitinger
              
              76
              
              ChairmanLarry
      S. Boulet
              
              63
              
              DirectorDavid
      W. Crabb
              
              56
              
              DirectorLeslie
      B. Daniels
              
              62
              
              DirectorJohn
      B. Landis, Ph.D.
              
              56
              
              DirectorDavid
      L. Omachinski
              
              57
              
              DirectorRichard
      M. Shepperd
              
              69
              
              Director,
      President and Chief Executive
Officer





William E. Baitinger has
served as a director of the Company since 1979. Mr. Baitinger was Director of
Technology Transfer for the Purdue Research Foundation from 1988 until 2000. In
this capacity he was responsible for all licensing and commercialization
activities from Purdue University. He currently serves as Special Assistant to
the Vice President for Research at Purdue University. Mr. Baitinger has a
Bachelor of Science degree in Chemistry and Physics from Marietta College and a
Master of Science degree in Chemistry from Purdue University.




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




David W. Crabb, M.D. has
served as a director of the Company since February, 2004. He has been Chairman
of the Indiana University Department of Medicine since 2001. Previously he had
served as Chief Resident of Internal Medicine and on the Medicine and
Biochemistry faculty of Indiana University. He was appointed Vice Chairman for
Research for the department and later Assistant Dean for Research. Dr. Crabb
serves on several editorial boards and on the Board of Indiana Alcohol Research
Center. He was a recipient of a NIH Merit award and numerous other research and
teaching awards.




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


57


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





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





Richard M. Shepperd was
elected President and Chief Executive Officer of the Company in September 2006,
and in May 2007, agreed to extend his term until December 2009.  Mr.
Shepperd served for two years prior to joining the Company with Able
Laboratories, Inc., of Cranbury, New Jersey ("Able") as its Chief Restructuring
Officer and Director of Restructuring. Able was formerly a generic
pharmaceutical manufacturing company which filed a voluntary petition for
bankruptcy on July 18, 2005 following the loss of FDA approval for its product
line. Mr. Shepperd's duties for Able included exercising executive authority
over all operational and restructuring activities of Able, which included
advising its Board, creditors committee and courts regarding strategies to
maintain and realize the most value from the company's assets. Able was not
affiliated with the Company. For the two years prior to serving with Able, Mr.
Shepperd served as an independent management consultant for various businesses.
In that capacity, he advised these businesses on developing strategies to
improve their financial health and maximize the assets of those
organizations.




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




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




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





ITEM
11-EXECUTIVE COMPENSATION




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


58


ITEM
12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




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




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





ITEM
13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS




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




ITEM
14-PRINCIPAL ACCOUNTING FEES AND SERVICES




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





[Remainder
of page intentionally left blank.]


59


PART
IV




ITEM
15-EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




(a)
Documents filed as part of this Report.




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


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


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





Number
            
            Description of Exhibits(2)
            2.1
            Asset
      Purchase Agreement, dated June 30, 2008, by and among Bioanalytical
      Systems, Inc., BASi Maryland, Inc., Algorithme Pharma USA Inc. and
      Algorithme Pharma Holdings Inc (incorporated by reference to Exhibit 2.1
      of Form 8-K filed July 7, 2008).(3)
            3.1
            Second
      Amended and Restated Articles of Incorporation of Bioanalytical Systems,
      Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the
      quarter ended December 31, 1997).3.2
            Second
      Amended and Restated Bylaws of Bioanalytical Systems, Inc., as
      subsequently amended (filed herewith).(4)
            4.1
            Specimen
      Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to
      Registration Statement on form S-1, Registration No.
      333-36429).4.2
            See
      Exhibits 3.1 and 3.2 to this Form 10-K.(10)
            10.1
            Bioanalytical
      Systems, Inc. 1997 Employee Incentive Stock Option Plan, as amended
      January 24, 2004 (*) (incorporated by reference to Appendix A to
      definitive Proxy Statement filed January 28, 2003 SEC File No.
      000-23357).10.2
            Form
      of Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option
      Agreement (*) (incorporated by reference to Exhibit 10.27 to Registration
      Statement on From S-1, Registration No. 333-36429).10.3
            1997
      Bioanalytical Systems, Inc. Outside Director Stock Option Plan, as amended
      January 24, 2004 (*) (incorporated by reference to Appendix B to
      definitive Proxy Statement filed January 28, 2003 SEC File No.
      000-23357).10.4
            Form
      of Bioanalytical Systems, Inc. 1997 Outside Director Stock Option
      Agreement (*) (incorporated by reference to Exhibit 10.29 to Registration
      Statement on Form S-1, Registration No. 333-36429).10.5
            Loan
      Agreement between Bioanalytical Systems, Inc. and Regions Bank dated
      December 18, 2007 (incorporated by reference to Exhibit 10.7 of Form 10-K
      for the fiscal year ended September 30, 2007).10.6
            Amended
      and Restated Credit Agreement by and between Bioanalytical Systems, Inc.,
      and National City Bank, executed January 4, 2005 (incorporated by
      reference to Exhibit 10.5 of Form 8-K filed January 10,
    2005).


60





Number
            
            Description
      of Exhibits10.7
            Amended
      and Restated General Security Agreement by and between Bioanalytical
      Systems, Inc. and National City Bank executed January 4, 2005
      (incorporated by reference to Exhibit 10.7 of Form 8-K filed January 10,
      2005).10.8
            Second
      Amendment to Amended and Restated Credit Agreement by and between
      Bioanalytical Systems, Inc. and National City Bank executed October 24,
      2007 (incorporated by reference to Exhibit 10.3 of Form 10-Q for the first
      fiscal quarter ended December 31, 2007).10.9
            Waiver
      letter, dated December 19, 2008, from National City Bank regarding the
      Second Amendment to Amended and Restated Credit Agreement by and between
      Bioanalytical Systems, Inc. and National City Bank (incorporated by
      reference to Exhibit 10.9 to Form 10-K for the fiscal year ended September
      30, 2008).10.10
            Fourth
      Amendment to Amended and Restated Credit Agreement between Bioanalytical
      Systems,
              Inc.
      and National City Bank, executed July 17, 2009 (incorporated by reference
      to Exhibit 10.1 to Form 8-K filed July 17, 2009).10.11
            Replacement
      Promissory Note by and between Bioanalytical Systems, Inc. and National
      City Bank, executed July 17, 2009 (incorporated by reference to Exhibit
      10.2 to Form 10-Q for the fiscal quarter ended June 30,
    2009).10.12
            Replacement
      Subsidiary Guaranty by and between Bioanalytical Systems Inc. and National
      City Bank, executed July 17, 2009 (incorporated by reference to Exhibit
      10.3 to Form 10-Q for the fiscal quarter ended June 30,
    2009).10.13
            Replacement
      Promissory Note by and between Bioanalytical Systems, Inc. and National
      City Bank, executed January 4, 2005 (incorporated by reference to Exhibit
      10.6 of Form 8-K filed January 10, 2005).10.14
            Form
      of Grant of non-qualified stock options dated April 1, 2004 to Michael R.
      Cox (*) (incorporated by reference to Exhibit 10.3 to Form 10-Q for the
      fiscal quarter ended March 31, 2004).10.15
            Employment
      Agreement by and among Bioanalytical Systems, Inc. and Richard M.
      Shepperd, entered into on May 18, 2007 (*) (incorporated by reference to
      Exhibit 10.1 to Form 10-Q for the fiscal quarter ended June 30,
      2007).10.16
            Option
      Agreement by and among Bioanalytical Systems, Inc. and Richard M.
      Shepperd, entered into on May 18, 2007 (*) (incorporated by reference to
      Exhibit 10.2 to Form 10-Q for the fiscal quarter ended June 30,
      2007).10.17
            Agreement
      for Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems
      Limited and Pettifer Estates Limited, dated October 11, 2007 (incorporated
      by reference to Exhibit 10.1 to Form 8-K filed October 17,
      2007).10.18
            Form
      of Lease, by and among Bioanalytical Systems, Inc., Bioanalytical Systems
      Limited and Pettifer Estates Limited (incorporated by reference to Exhibit
      10.2 to Form 8-K filed October 17, 2007).10.19
            Employment
      Agreement between Michael R. Cox and Bioanalytical Systems, Inc., dated
      November 6, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K
      filed November 13, 2007).10.20
            Employee
      Incentive Stock Option Agreement between Michael R. Cox and Bioanalytical
      Systems, Inc., dated November 6, 2007 (incorporated by reference to
      Exhibit 10.2 to Form 8-K filed November 13,
  2007).


61





Number
            
            Description of Exhibits10.21
            Severance
      Agreement and Release of All Claims between Edward M. Chait and
      Bioanalytical Systems, Inc., dated November 7, 2008 (incorporated by
      reference to Exhibit 10.29 to Form 10-K for the fiscal year ended
      September 30, 2008).10.22
            Bioanalytical
      Systems, Inc. 2008 Director and Employee Stock Option Plan (incorporated
      by reference to Appendix A to the Revised Definitive Proxy Statement filed
      February 5, 2008, SEC File No. 000-23357).10.23
            Form
      of Bioanalytical Systems, Inc. 2008 Director and Employee Stock Option
      Plan (*) (incorporated by reference to Exhibit 10.31 to Form 10-K for the
      fiscal year ended September 30, 2008).10.24
            Assignment
      and Assumption of Office Lease, dated June 30, 2008, between Bioanalytical
      Systems, Inc. and AP USA Algorithme Pharma USA Inc (incorporated by
      reference to Exhibit 10.1 of Form 8-K filed July 7,
  2008).10.25
            Employment
      Agreement between Jon Brewer and Bioanalytical Systems, Inc., dated
      October 1, 2008 (incorporated by reference to Exhibit 10.1 to Form 8-K
      filed September 26, 2008).10.26
            Employment
      Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc.,
      dated December 1, 2008 (incorporated by reference to Exhibit 10.1 to Form
      8-K filed November 14, 2008).10.27
            Employee
      Incentive Stock Option Agreement between Jon Brewer and Bioanalytical
      Systems, Inc., dated October 1, 2008 (incorporated by reference to Exhibit
      10.35 to Form 10-K for the fiscal year ended September 30,
      2008).10.28
            Employee
      Incentive Stock Option Agreement between Anthony S. Chilton and
      Bioanalytical Systems, Inc., dated December 1, 2008 (incorporated by
      reference to Exhibit 10.36 to Form 10-K for the fiscal year ended
      September 30, 2008).10.29
            Waiver
      letter, dated February 17, 2009, from Regions Bank (incorporated by
      reference to Exhibit 10.7 to Form 10-Q for the fiscal quarter ended
      December 31, 2008).10.30
            Amendment
      to Employment Agreement, dated January 12, 2009, by and among
      Bioanalytical Systems, Inc. and Richard M. Shepperd (incorporated by
      reference to Exhibit 10.1 to Form 8-K filed January 14,
    2009).10.31
            Second
      amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, dated May 18, 2009 (incorporated by reference to Exhibit
      10.3 to Form 10-Q for the fiscal quarter ended March 31,
      2009).10.32
            Fifth
      Amendment to Amended and Restated Credit Agreement between Bioanalytical
      Systems,
              Inc.
      and PNC Bank, as successor by merger to National City Bank, executed
      December 31, 2009 (incorporated by reference to Exhibit 10.1 to Form 8-K
      filed January 7, 2010).10.33
            Waiver
      letter, dated January 7, 2010, from Regions Bank (filed
      herewith).10.34
            Third
      amendment to Loan Agreement between Bioanalytical Systems, Inc. and
      Regions Bank, dated January 13, 2010 (filed herewith).10.35
            Loan
      and Security Agreement by and between Bioanalytical Systems, Inc., and
      Entrepreneur Growth Capital LLC, executed January 13, 2010 (filed
      herewith).(14)
            14
            Code
      of Ethics (incorporated by reference to Exhibit 14 to Form 10-K for the
      fiscal year ended September 30,
2006).


62





(21)
            21.1
            Subsidiaries
      of the Registrant (filed herewith).(23)
            23.1
            Consent
      of Independent Registered Public Accounting Firm Crowe Horwath LLP (filed
      herewith).(31)
            31.1
            Certification
      of Chief Executive Officer (filed herewith).31.2
            Certification
      of Chief Financial Officer (filed herewith).(32)
            32.1
            Written
      Statement of Chief Executive Officer and Chief Financial Officer Pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
      Section 1350) (filed herewith)..




*    Management
contract or compensatory plan or arrangement.


63


SIGNATURES





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





BIOANALYTICAL
      SYSTEMS, INC.(Registrant)By:  /s/  Richard M.
      ShepperdDate:  
      January 13, 2010
              Richard
      M. ShepperdPresident
      and Chief Executive OfficerBy:  /s/  Michael R.
      CoxMichael
      R. CoxDate:  January
      13, 2010
              Vice
      President, Finance and Administration,
                Chief
      Financial Officer and
Treasurer





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





Signature
                
                Capacity
                
                Date/s/  Richard M.
      Shepperd
                
                Director,
      President and Chief Executive
                  Officer
      (Principal Executive Officer)
                
                January
      13, 2010Richard
      M. Shepperd/s/  Michael R.
    Cox
                
                Vice
      President, Finance and
                  Administration,
      Chief Financial Officer
                
                January
      13, 2010Michael
      R. Cox
                
                and
      Treasurer (Principal Financial and
                  Accounting
      Officer)/s/  William E.
      Baitinger
                
                Chairman
                
                January
      13, 2010William
      E. Baitinger/s/  Larry S.
    Boulet
                
                Director
                
                January
      13, 2010Larry
      S. Boulet/s/  David W.
    Crabb
                
                Director
                
                January
      13, 2010David
      W. Crabb/s/  Leslie B.
      Daniels
                
                Director
                
                January
      13, 2010Leslie
      B. Daniels/s/  John B. Landis,
      Ph.D.
                
                Director
                
                January
      13, 2010John
      B. Landis, Ph.D./s/  David L.
      Omachinski
                
                Director
                
                January
      13, 2010David
      L. Omachinski


64