**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, 2007.ORo
            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(Address
                  of principal executive offices)
              
              (Zip
                  code)




(765)
        463-4527
 (Registrant's
        telephone number, including area code)




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





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





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





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





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





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


Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer x




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




Based
        on
        the closing price on the NASDAQ stock market on March 30, 2007, the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates of the registrant is $22,425,000. As of December 21, 2007,
        4,909,127 shares of registrant's common shares were outstanding. No shares
        of
        registrant's Preferred Stock were outstanding as of December 21,
        2007.




**Documents
      Incorporated by Reference**





Portions
      of the registrant’s definitive proxy statement for its 2008 Annual Meeting of
      Shareholders are incorporated by reference into Part
      III
      hereof.









**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            17Item
                2.
            Properties
            17Item
                3.
            Legal
                Proceedings
            18Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            18**PART
                II**Item
                5.
            Market
                for Registrant's Common Equity and Related Stockholder
                Matters
            18Item
                6.
            Selected
                Financial Data
            21Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            30Item
                8.
            Financial
                Statements
            31Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            53Item
                9A.
            Controls
                and Procedures
            54Item
                9B.
            Other
                Information
            54**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            54Item
                11.
            Executive
                Compensation
            55Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
            55Item
                13.
            Certain
                Relationships and Related Transactions
            56Item
                14.
            Principal
                Accounting Fees and Services
            56**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            57








**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
        12. 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 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 research to understand the underlying causes of central nervous system
        disorders, diabetes, osteoporosis and other diseases since its formation
        in
        1974.


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


**Acquisitions**




*PharmaKinetics
      Laboratories, Inc* *.*




On
        May
        26, 2003, PharmaKinetics Laboratories, Inc., a Maryland corporation ("PKLB"),
        became a majority owned subsidiary of the Company. Following the acquisition,
        PKLB was renamed BASi Maryland, Inc. We acquired this site to broaden our
        service offering base through the addition of Phase I and bioequivalence
        testing
        in human subjects. In addition, we wanted to establish a meaningful operating
        presence physically near current and potential clients on the East Coast
        of the
        United States (“U.S.”). This site's operating performance prior to the
        acquisition had been poor. Since the acquisition, we have made significant
        organizational, managerial, staff, and physical plant changes to improve
        performance at the Baltimore clinic; however, the loss of a major client
        as a
        result of its acquisition during fiscal 2006 caused a significant downturn
        in
        BASi Maryland’s operating results. This resulted in an adjustment, in the
        third quarter of fiscal 2006, to the carrying value of the assets acquired.


*LC
      Resources, Inc.*




On
      December 13, 2002, we acquired LC Resources, Inc. ("LCR"), a privately held
      company with operations in McMinnville, Oregon. We believe LCR has a strong
      reputation in liquid chromatography and bioanalysis, and provides a location
      that is significantly closer to clients on the West Coast of the
      U.S.




1




**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 cradle-to-grave pharmaceutical development services. Our products
      are also marketed to academic and governmental institutions. Our services and
      products may have distinctly different customers (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 a
      larger pool of drug candidates. Clients demand 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.




*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.




*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 should lead to more outsourcing.
        Consolidation may result in short-term disruption in placement of, or progress
        on, drug development programs as merging companies rationalize their respective
        drug development pipelines. As an example, in fiscal 2006, an acquisition
        of a
        significant client of our Baltimore clinic resulted in the client cancelling
        scheduled work in our clinic, which directly contributed to losses in the
        clinic’s operations.


*Biotechnology
      Industry and Virtual Drug Company Growth*




The
      biotech industry continues to grow and has introduced many new developmental
      drugs. Many biotech 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.




2


*Data
      Management 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 client expectations.




*Globalization
      of the Marketplace*




Foreign
      firms are relying 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.




1)  The ***preclinical
      phase*** ** includes
      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,
      pharmacodynamics and safety testing of the new drug. These safety studies range
      from acute safety monitoring on drugs and medical devices to chronic, multi-year
      oncogenicity studies. Bioanalyses of blood sampled under these protocols by
      our
      bioanalytical services group provide kinetic, metabolism and dose-ranging data.
      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 preclinical development. The Culex® APS, a
      robotic automated pharmacology system, enables researchers to develop
      pharmacokinetic profiles of drugs during early screening in rodents quickly
      and
      cost effectively.  Clients and our bioanalytical services group sometimes
      use these electrochemistry and chromatography products to develop a single,
      quick, proprietary method to screen drugs in biological samples. Liquid
      chromatography coupled to mass spectrometry is now a mainstay of our
      bioanalytical laboratories. We have invested heavily in robotics and mass
      spectrometry systems over the last ten years.




2)  The ***clinical
      phase*** ** further
      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.




We
      perform Phase I studies at our clinic in Baltimore. Phase I services include
      bioavailability testing to monitor the rate and extent to which a drug becomes
      available in the blood. Bioavailability can also be used to compare the
      bioequivalence of similar generic and brand name drugs.




3




3)  ***Post-approval*** follows
      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.




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 and Phase I clinical trials, as well as in the
      post-approval phase.




**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, clinical trials,
      regulatory compliance and quality control testing. Revenues from the services
      segment were $36.1 million for fiscal 2007. 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 necessary
                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 preclinical*in
                vivo*sampling
                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.  ·
            ***Phase
                I****:*We
                perform Phase I human clinical trials in our 110-bed clinic in Baltimore.
                These are principally bioavailability, bioequivalence and first-in-human
                studies, both for generic drug and innovator pharmaceutical
                firms.




4


*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, and in some cases dominates,
      unique niches in life science research. We design, develop, manufacture and
      market state-of-the-art:




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




·
            *In
                vivo*microdialysis
                collection systems




·
            Physiology
                monitoring tools




·
            Liquid
                chromatography and electrochemistry instruments
                platforms




Revenues
      for our products segment were $9.2 million for fiscal 2007. The following is
      a
      description of the products we offer:




·
            The***Culex®
                APS***robotic automated pharmacology system is used by pharmaceutical
                researchers to monitor drug concentrations and response as a function
                of
                time. Compared to current manual methods, the Culex® offers greater than
                80% reduction in test model use and comparable reduction in labor.
                The
                Culex® also offers computer-controlled blood sampling protocol, behavioral
                monitoring, flexibility to collect other biological samples, exceptional
                cost savings, significant reduction in model stress and expeditious
                data
                delivery.




·
            ***Bioanalytical
                separation systems***(liquid chromatography) are used to detect and quantify low concentrations
                of substances by tracking complex chemical, physiological and behavioral
                effects in biological fluids and tissues from humans and laboratory
                animal
                models.




·
            ***Specialized
                chemical analyzers***monitor trace levels of organic chemicals, such as neurotransmitters,
                in
                biological samples using core electrochemistry, liquid chromatography
                and
                enzymology technologies to separate and quantify drugs, xenobiotics,
                metabolites and other chemicals in blood, cerebrospinal fluid and
                other
                biological media.




·
            ***epsilon*****TM**is
                a single liquid chromatography and electrochemistry instrument control
                platform for the separation systems and chemical analyzers noted
                above.




·
            A
                line of miniaturized*in
                vivo****sampling
                devices***sold to drug developers and medical research centers, assist in the
                study
                of a number of medical conditions including stroke, depression,
                Alzheimer's and Parkinson's diseases, diabetes and
                osteoporosis.




·
            ***Vetronics***small animal diagnostic electro-cardiogram and vital signs monitors
                are
                used primarily 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 in 2007 by Informa Healthcare. Approximately
        13% 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. We believe that smaller companies
        are
        more inclined to establish a consistent, long-term, strategic relationship,
        but
        realize that they may be poorly funded. We have adapted by increasing our
        focus
        on a larger number of specialist service buyers at large and small clients
        and
        by engaging in a more active and more diversified business development
        effort.


Pfizer
      (including its predecessor companies) is our largest client. Pfizer accounted
      for approximately 5.3%, 7.3% and 10.1% of the Company's total revenues in fiscal
      2007, 2006 and 2005, respectively. Pfizer accounted for 5.1% and 12.8% of total
      trade accounts receivable at September 30, 2007 and 2006,
      respectively.




There
      can
      be no assurance that our business will not continue to be dependent on continued
      relationships with Pfizer 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.




5




**Sales
      and Marketing**




Capitalizing
      on our long history of innovation and technical excellence, our current sales
      and marketing plan targets 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 have 22 employees
      on
      our business development staff. In late fiscal 2005, this team was reorganized
      with more clearly defined sales objectives, territories and incentives. We
      also
      attend multiple trade shows in many disciplines and have created a collection
      of
      web sites, catalogs, training and technical support literature, media
      presentations, branding and workshops.




Sales,
      marketing and technical support are based in the corporate headquarters located
      in West Lafayette, Indiana. We also maintain offices in Baltimore, Maryland;
      Evansville, Indiana; McMinnville, Oregon; and Warwickshire, UK.




We
      have a
      network of 15  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.
      International growth is planned through stronger local promotion to support
      our
      distributor network.




**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. In the past year, we have increased the use
      of
      sales forecasts in manufacturing our products, with the result that we rarely
      have a significant backlog for products. Backlog may not be a good indicator
      of
      future sales trends. Management does not believe that backlog is material to
      an
      understanding of our business as a whole.




**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.;
                and




·
            MDS Health Group Ltd.




6




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;




·
            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 sciences research
      laboratories, we continue to serve that product niche today. We target
      underserved markets not addressed by larger capital equipment manufacturers.
      While we must sometimes compete on price with our products, we mainly compete
      on
      its overall value proposition, providing equipment that enables our customers
      to
      attain premium scientific laboratory information, on a reasonable operating
      investment. We continually invest in the refinement of our products, and in
      new
      product opportunities that meet our operating objectives.




·
            **Culex®
                APS**:
                Two small vendors have offered simple, semi-automated blood sampling
                systems. However, we do not believe that either vendor addresses
                the
                scientific need as well as Culex®. In addition, we have established strong
                relationships with the largest vendors of animal models who now provide
                catheterized "Culex® ready" models to our customers on a just-in-time
                basis, further increasing convenience and lowering cost to the
                customer.




·
            **Chemical
                Analysis**:
                We compete with several large equipment manufacturers, including
                Agilent,
                Waters Corporation and Perkin Elmer Corporation. Competitive factors
                include market presence, product quality, reliability and price.
                We
                believe that we compete well in niche markets because of our reputation
                and the quality of our products, together with the technical assistance
                and service we offer. Many of our competitors are much larger and
                have
                greater resources, making it difficult for us to capture business
                from
                clients other than those who need our unique
                capabilities.




7




·
            **Vetronics/*****in
                vivo*****sampling
                devices**:
                There are few competitors in this area of our business; however,
                a
                customer for our Vetronics products has undertaken development of
                a
                similar product for its own use, which will require that we seek
                additional customers for those
                products.




**Government
      Regulation**




We
      are
      subject to various regulatory requirements designed to ensure the quality and
      integrity of our data and products. These regulations are governed 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 six times: twice in West Lafayette, once each in
      the UK, Oregon, Evansville and Baltimore locations. Of the five FDA audits,
      three were without findings; the audit’s findings in Baltimore in 2005 were
      addressed. The audit report for the Oregon location has not yet been received.
      The UK facility was found to be compliant with GLP and GCP. There were no
      material adverse findings in any of these audits.




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




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.




8




*Clinical
      Services*




Our
      Clinical Research Unit in Baltimore is principally subject to GCP guidelines
      that cover activities such as obtaining informed consent, verifying
      qualifications of investigators, complying with Standard Operating Procedures
      ("SOP"), reporting adverse reactions to drugs and maintaining thorough and
      accurate records. We must maintain source documents for each study for specified
      periods. Such documents are frequently reviewed by the study sponsor during
      visits to our facility and may be reviewed by the FDA during audits. In the
      fall
      of 2005, the facility was audited by the FDA. The FDA cited areas for needed
      improvement. We have addressed and responded to the FDA concerns.




We
      are
      subject to regulation and inspection by local, state, federal and foreign
      agencies where our facilities are located. 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.




*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 2007, our laboratory operations were fully
      in compliance with 21 CFR Part 11, in our analytical, bioanalytical, toxicology,
      lab information management, and document management systems. All of these
      systems were also 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 is ongoing, with
      various additional phases planned for fiscal 2008. The introduction of a 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, and testing procedures initiated, in preparing for
      management's assessment and report on internal controls over financial reporting
      required by the Act for fiscal 2008. Although we are working diligently to
      ensure that the ERP system and related procedures will be adequately installed
      and successfully tested by September 30, 2008, there can be no assurance that
      all necessary procedures required by the Act will be completed by that
      date.




*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.




9




*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
      2007, 2006 and 2005, we spent $881, $1,444, and $1,326, 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
      vivo* product
      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.




10




**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, 2007, we had 306 full-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, 2007. Except as indicated in the
      following paragraphs, the principal occupations of these persons has not changed
      in the past five years. Officers are elected annually at the annual meeting
      of
      the board of directors.




Name
            Age
            PositionRichard
                M. Shepperd
            67
            President
                and Chief Executive OfficerRonald
                E. Shoup, Ph.D.
            55
            Chief
                Operating Officer, BASi Contract Research ServicesMichael
                R. Cox
            60
            Vice
                President, Finance; Chief Financial Officer; TreasurerEdward
                M. Chait, Ph.D.
            65
            Executive
                Vice President; Chief Scientific OfficerCraig
                S. Bruntlett, Ph.D.
            58
            Senior
                Vice President, Sales DevelopmentLina
                L. Reeves-Kerner
            56
            Vice
                President, Human Resources


**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.
  **Ronald
        E. Shoup, Ph.D.** served
        as
        Chief Operating Officer of the Company's Contract Research Services and was
        Managing Director of Bioanalytical Systems, Ltd. in the UK. His responsibilities
        included directing operations at the Company's Contract Research Services
        sites.
        In October 2007, Dr. Shoup was appointed Chief Scientific Officer, assuming
        responsibility for the scientific direction of the Company and ceasing his
        operational duties. He joined the Company in 1980 as an applications chemist,
        became Research Director in 1983 and launched the Contract Research Services
        group within the Company in 1988. Dr. Shoup has a Bachelor of Science degree
        in
        Mathematics and Chemistry from Purdue University and then attended Michigan
        State and Purdue University for his Ph.D. in Analytical Chemistry.
  Dr.
        Shoup
        has served on the editorial board of the Journal of Chromatography, participated
        in NIH Special study sections, and is a member of the external advisory board
        to
        the Purdue University Department of Chemistry. He has published over 40
        scientific papers.
  **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.


11




**Edward
        M. Chait, Ph.D.** had
        been
        Executive Vice President, Chief Scientific Officer since August, 2005. In
        October 2007, he relinquished that position and became Chief Business Officer,
        responsible for operations across the Company’s products and services. Prior to
        joining the Company, from August 2003, Dr. Chait served as the Chief Executive
        Officer of Spectral Genomics, Inc., a developer of products and services
        related
        to molecular genetics and diagnostics enabling the identification of the
        causal
        factors of disease at the genetic level. From 2001 to 2003, Dr. Chait served
        as
        the Chief Executive Officer of PharmaCore, Inc., a small-molecule drug discovery
        company providing molecular building blocks, custom organic synthesis and
        GMP
        services to biotechnology and pharmaceutical companies. From 1991 to 2001,
        Dr.
        Chait was Senior Vice President in charge of Business Development for Intergen
        Company, a private biotech manufacturing and research products company. Since
        2002, Dr. Chait has also served as an advisor to the Purdue Cancer Center,
        a
        National Cancer Center designated basic-research cancer center. From 1968
        to
        1991, Dr. Chait held positions of increasing responsibility in marketing
        and
        business development at DuPont in instrument and life science products. Dr.
        Chait has a Ph.D. in chemistry from Purdue.


**Craig
      S. Bruntlett, Ph.D.** has been
      Senior Vice President of Sales development 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.bioanalytical.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@bioanalytical.com , www.bioanalytical.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.




12




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




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




**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 (“CRO”) 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.




**The
      CRO services industry is highly competitive.**




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





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




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





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





Any
      failure on our part to comply with existing regulations could result in the
      termination of ongoing research or the disqualification of data for submission
      to regulatory authorities. 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.




13




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




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




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




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




•
            products
                being tested fail to satisfy safety requirements;•
            products
                have undesired clinical results;•
            the
                client decides to forego a particular study;•
            inability
                to enroll enough patients in the study;•
            inability
                to recruit enough investigators;•
            production
                problems cause shortages of the drug; and•
            actions
                by regulatory authorities.





The
      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.





**We
      dose human volunteers with new drug candidates in our clinical
      operations.**





Our
      clinical research services involve the introduction of experimental
      pharmaceutical compounds into consenting human volunteers during the studies
      of
      such compounds. This activity may expose us to liability as a result of adverse
      reactions of these volunteers to the compounds being tested. We seek to limit
      our risk through “hold harmless” provisions with the volunteers, obtaining
      indemnity from the sponsors, and by maintaining insurance. We bear the risk
      that
      these agreements may not protect us from liabilities, that our insurance may
      not
      be sufficient to cover our losses, and that such insurance may no longer be
      available on terms acceptable to us.




14





**Providing
      CRO services create 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.





**If
      we are unable to attract suitable willing volunteers for our clinical trials,
      our clinical research business might suffer.**





The
      clinical research studies we run in our Baltimore laboratory rely upon the
      ready
      accessibility and willing participation of volunteer subjects. Volunteer
      subjects generally include people from the communities in which the studies
      are
      conducted, including our Phase I clinic in Baltimore, Maryland, which to date
      has provided a substantial pool of potential subjects for research studies.
      Our
      clinical research development business could be adversely affected if we were
      unable to attract suitable and willing volunteers on a consistent
      basis.





**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. Factors
      which
      may affect our ability to grow successfully through acquisitions
      include:





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


·
            diversion
                of management’s attention from current
                operations;


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


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


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


·
            loss
                of key employees of the acquired
                companies.





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





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




**Privacy
      regulations could increase our costs or limit our
      services.**





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




15




**We
      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 increased profitability for any meaningful period of
      time.





**We
      continue to experience operating losses in our Baltimore Phase I
      clinic.**





Since
      our
      acquisition of the clinic in 2003, it has experienced significant
      operating losses. In fiscal 2006, we recognized an impairment loss on the
      clinic's assets as a result of losing a major client. In the current fiscal
      year, we have recruited a new management team for the clinic and continue to
      invest to develop that business; however, there can be no assurance that we
      will
      be successful in our efforts.





**The
      outsourcing trend in the biotechnology and pharmaceutical industries may
      decrease, which could slow our growth.**




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.




**Our
      previous independent registered public accounting firm advised management and
      our audit committee that they identified material weaknesses in our internal
      controls as of June 30, 2006. The material weaknesses noted consisted of a
      failure to set an appropriate "tone at the top" to instill a company-wide
      attitude of control consciousness; failure to maintain adequate procedures
      for
      anticipating and identifying financial reporting risks and for reacting to
      changes in its operating environment that could have a material effect on
      financial reporting; failure to maintain adequately trained personnel to perform
      effective review of accounting procedures critical to financial reporting;
      and a
      lack of adequately trained finance and accounting personnel with the ability
      to
      apply U.S. generally accepted accounting principles associated with the
      impairment of certain long-lived assets in accordance with Statement of
      Financial Accounting Standards No. 144,** ***Accounting
      for the Impairment or Disposal of Long-Lived Assets*** **.
      Management concurred with the assessment at that time. Our business and stock
      price may be adversely affected by these identified material weaknesses if
      such
      material weaknesses recur or if we have other material weaknesses in our
      internal controls.**




16


As
        we
        disclose in Part II, Item 9A, "Controls and Procedures" of this Form 10-K,
        our
        management and previous independent accountants concluded that a material
        weakness existed in our internal controls as of June 30, 2006. We have
        instituted measures to address these risks. We believe these actions have
        addressed the weaknesses cited by our previous independent accountants. However,
        any failure to maintain the improvements in the controls over our financial
        reporting, could cause us to fail to meet our reporting obligations. Any
        failure
        to improve our internal controls to address the identified material weaknesses
        could also cause investors to lose confidence in our reported financial
        information, which could harm our operations or results or cause us to fail
        to
        meet our reporting obligations, and could have a negative impact on the trading
        price of our stock. We cannot be certain that any steps we may have taken
        to
        improve our internal controls to address the identified material weaknesses
        will
        ensure that we implement and maintain adequate controls over our financial
        processes and reporting in the future.


***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:




•  **West
        Lafayette, IN** :
        principal executive offices are located at 2701 Kent Avenue, West Lafayette,
        Indiana 47906, and constitutes multiple buildings with approximately 135,000
        square feet of operations, manufacturing, and administrative space. Both
        the
        services segment and the products segment conduct operations at this facility.
        A
        new 20,000 square foot Absorption, Distribution, Metabolism and Excretion
        (ADME)
        preclinical research facility became fully functional in April, 2005. It
        is
        custom-designed to provide contract pharmacokinetic and ADME research services
        based on its Culex® Automated Pharmacology system. Both the new facility and the
        prior portion of the building have been financed by mortgages.


•  **BAS
      Evansville** occupies
      10 buildings with roughly 100,000 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.




•  **BASi
        Clinical Research Unit** (BASi
        Maryland) in Baltimore, Maryland occupies a seven story, 126,000 square foot
        historic building in downtown Baltimore. On January 5, 2005, this building
        was
        sold to a developer. We, then, entered into a three-year lease back with
        the
        developer for approximately 85% of the space in the building. On January
        5, 2008
        we will begin a new seven year lease, with two possible five-year extensions,
        on
        46,000 square feet of the existing premises, reducing our occupancy to 37%
        of
        the building, in line with our space needs in the facility. Included in our
        new
        lease are significant landlord improvements to both our space and the common
        areas of the building. This site contains a 110-bed, three ward, Phase I
        Clinical Trials facility along with administrative offices committed to
        recruitment and enrollment of study participants, medical and clinical trials
        staff, and data management.


•  **Bioanalytical
      Systems, Ltd.,** Warwickshire, UK contains our contract services and instruments operations
      in
      roughly 12,000 square feet of leased space for laboratories, sales and technical
      support services in the U.K. In April 2008 we anticipate moving into newly
      constructed laboratory space in the same office park. Our new space of
      approximately 7,000 square feet is specifically designed for laboratory use
      and
      will allow us to potentially double capacity over our present
      space.




•  **BASi
      Northwest Laboratory** is
      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 4, 6 and 7 to the Notes to Consolidated Financial
        Statements.


17





***ITEM
      3-LEGAL PROCEEDINGS***





We
      currently do not have any 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*




Our
      common stock is traded on the NASDAQ National Market System under the symbol
      “BASi.” The following table sets forth the quarterly high and low sales price
      per share of our common stock from October 1, 2005 through September 30,
      2007.




**High**
            
            **Low**Fiscal
                Year Ended September 30, 2006First
                Quarter
            
            $
            6.40
            
            $
            4.75Second
                Quarter
            
            
            7.21
            
            
            5.68Third
                Quarter
            
            
            7.80
            
            
            5.86Fourth
                Quarter
            
            
            7.64
            
            
            4.75Fiscal
                Year Ended September 30, 2007First
                Quarter
            
            $
            5.74
            
            $
            4.98Second
                Quarter
            
            
            7.36
            
            
            5.25Third
                Quarter
            
            
            7.80
            
            
            6.60Fourth
                Quarter
            
            
            7.82
            
            
            6.54




*Holders*




There
      were approximately 2,700 holders of record of our common stock as of December
      5,
      2007.




*Dividends*




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




18


*Stock
      Performance Graph*




The
      following graph shows a comparison of cumulative total returns for an investment
      in our Common Stock, the NASDAQ Composite Index and a Peer Group. It covers
      the
      period commencing September 30, 2002 and ending September 30, 2007. The graph
      assumes that the value for the investment in our common stock and in each index
      was $100 on September 30, 2002 and that all dividends were reinvested. This
      graph is not deemed to be “soliciting material” or to be “filed” with the SEC or
      subject to the SEC’s proxy rules or to the liabilities of Section 18 of the
      1934 Act, and the graph shall not be deemed to be incorporated by reference
      into any prior or subsequent filing by us under the Securities Act of 1933,
      as
      amended, or the 1934 Act.  The
      Peer
      Group consists of Bio-RAD Laboratories Inc., Covance Inc., Encorium Group Inc.,
      Gene Logic Inc., Kendle International Inc., OI Corp. and Pharmaceutical Product
      Development Inc.












*[Remainder
      of page intentionally left blank.]*




19




*Equity
      Compensation Plan Information*




We
      maintain stock option plans that allow 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
            
            
            240
            
            
            $5.08
            
            
            347Equity
                compensation plans not approved by security
                holders(1)
            
            
            50
            
            
            $
                5.14
            
            
            —Options
                issuable to officer upon approval by shareholders
                (2)
            
            
            275
            
            
            $
                7.10
            
            
            —Total
            
            
            615
            
            
            $
                6.00
            
            
            347





(1)
      Includes option to purchase 25 shares at $4.57 granted April 1, 2004, and
      25 shares at $5.69 granted August 1, 2005. Each of these grants is fully
      vested and expire after 10 years.




(2)
        Options granted to Richard M. Shepperd, President and CEO, to purchase shares
        at
        $7.10 per share. These options are contingent upon shareholder approval at
        the
        next shareholders' meeting. In the event such approval is not attained, the
        Company will make cash payments on each vesting date equal to the value that
        would have been realized on the options vesting on that date. In addition,
        45,000 nonqualified options were granted to each of Edward M. Chait and Michael
        R. Cox on November 6, 2007. These options are also contingent upon shareholder
        approval that the next shareholders’ meeting. These options are not included in
        the table above. The exercise price of these options is $8.60 per
        share.


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.






*[Remainder
      of page intentionally left blank.]*


20


***ITEM
      6-SELECTED FINANCIAL DATA***




**BASi
      SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA**




**Year Ended September 30,**STATEMENT
                  OF OPERATIONS DATA:
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003**(in
                  thousands, except per share data)Service
                  revenue
              
              $
              36,051
              
              $
              34,318
              
              $
              32,951
              
              $
              24,928
              
              $
              19,987Product
                  revenue
              
              
              9,194
              
              
              8,730
              
              
              9,444
              
              
              12,224
              
              
              9,852Total
                  revenue
              
              
              45,245
              
              
              43,048
              
              
              42,395
              
              
              37,152
              
              
              29,839Cost
                  of service revenue
              
              
              27,544
              
              
              25,691
              
              
              23,589
              
              
              21,348
              
              
              15,625Cost
                  of product revenue *(1)*
              
              
              3,909
              
              
              3,647
              
              
              3,426
              
              
              4,224
              
              
              3,866Total
                  cost of revenue *(1)*
              
              
              31,453
              
              
              29,338
              
              
              27,015
              
              
              25,572
              
              
              19,491Gross
                  profit
              
              
              13,792
              
              
              13,710
              
              
              15,380
              
              
              11,580
              
              
              10,348Operating
                  expenses:Selling
              
              
              2,783
              
              
              2,750
              
              
              2,591
              
              
              2,703
              
              
              2,853Research
                  and development
              
              
              881
              
              
              1,444
              
              
              1,326
              
              
              1,100
              
              
              1,327General
                  and administrative
              
              
              7,738
              
              
              11,939
              
              
              10,167
              
              
              7,505
              
              
              5,067Impairment
                  loss
              
              
              
              
              
              1,100Total
                  Operating Expenses
              
              
              11,402
              
              
              17,233
              
              
              14,084
              
              
              11,308
              
              
              9,247Operating
                  income (loss) *(1)*
              
              
              2,390
              
              
              (3,523
              )
              
              1,296
              
              
              272
              
              
              1,101Other
                  (expense), net
              
              
              (891
              )
              
              (1,012
              )
              
              (969
              )
              
              (833
              )
              
              (592
              )Income
                  (loss) before income taxes *(1)*
              
              
              1,499
              
              
              (4,535
              )
              
              327
              
              
              (561
              )
              
              509Income
                  tax expense (benefit) *(1)*
              
              
              573
              
              
              (1,865
              )
              
              407
              
              
              (386
              )
              
              463Net
                  income (loss) *(1)*
              
              $
              926
              
              $
              (2,670
              )
              $
              (80
              )
              $
              (175
              )
              $
              46Net
                  income (loss) per share: *(1)*Basic
              
              $
              0.19
              
              $
              (0.55
              )
              $
              (0.02
              )
              $
              (0.04
              )
              $
              0.01Diluted
              
              $
              0.19
              
              $
              (0.55
              )
              $
              (0.02
              )
              $
              (0.04
              )
              $
              0.01Weighted
                  average common shares outstandingBasic
              
              
              4,909
              
              
              4,883
              
              
              4,870
              
              
              4,860
              
              
              4,655Diluted
              
              
              4,960
              
              
              4,883
              
              
              4,870
              
              
              4,860
              
              
              4,673




**September 30,**BALANCE
                SHEET DATA:
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**(in
                thousands)Working
                capital (deficit) *(1)*
            
            $
            2,353
            
            $
            3,602
            
            $
            4,782
            
            $
            (406
            )
            $
            (234
            )Property
                and equipment, net
            
            
            22,927
            
            
            25,765
            
            
            26,565
            
            
            31,901
            
            
            31,172Goodwill
                and other intangible assets, net
            
            
            2,159
            
            
            2,372
            
            
            3,600
            
            
            3,936
            
            
            3,762Total
                assets *(1)*
            
            
            42,037
            
            
            42,364
            
            
            47,949
            
            
            46,884
            
            
            45,046Long-term
                debt, less current portion
            
            
            7,861
            
            
            8,186
            
            
            8,579
            
            
            8,893
            
            
            6,949Subordinated
                debt
            
            
            4,477
            
            
            4,477
            
            
            4,829
            
            
            5,188
            
            
            5,188Shareholders’
                equity *(1)*
            
            
            18,554
            
            
            17,404
            
            
            19,709
            
            
            19,510
            
            
            19,787





*(1)
      Amounts have been retrospectively adjusted for our change in 2007 from the
      last-in, first-out method of inventory accounting to the first-in, first-out
      method.*




21




***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; and (vi) our ability to make capital
      expenditures and finance operations. 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 Selected Consolidated Financial Data and 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 involve risks and uncertainties which are discussed in Item 1A, Risk
      Factors. Our actual results could differ materially from those discussed in
      the
      forward-looking statements. (Amounts in thousands unless otherwise
      indicated.)*




**Overview**




The
      business of Bioanalytical Systems, Inc. is largely dependent on the level of
      pharmaceutical and biotech 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, and 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 clinical 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 BASi. 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.




Although
      the past year has not seen large mergers in either the pharmaceutical or CRO
      industries, consolidation continues at a smaller pace in the CRO sector. We
      believe that consolidation of the CRO sector will continue to be a factor in
      our
      markets.




22




Research
      services are capital intensive. The investment in equipment and facilities
      to
      serve our markets is substantial and continuing. While our physical facilities
      are excellent 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 our capacity, sustained growth will require
      additional investment in future periods.




**Results
      of Operations**




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




**Year Ended September 30,****2007**
            
            **2006**
            
            **2005**Service
                revenue
            
            
            79.7
            %
            
            79.7
            %
            
            77.7
            %Product
                revenue
            
            
            20.3
            
            
            20.3
            
            
            22.3Total
                revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of service revenue
***(a)***
            
            
            76.4
            
            
            74.9
            
            
            71.6Cost
                of product revenue
***(a)***
            
            
            42.5
            
            
            41.8
            
            
            36.3Total
                cost of revenue
            
            
            69.5
            
            
            68.2
            
            
            63.7Gross
                profit
            
            
            30.5
            
            
            31.8
            
            
            36.3Total
                operating expenses
            
            
            25.2
            
            
            40.0
            
            
            33.2Operating
                income (loss)
            
            
            5.3
            
            
            (8.2
            )
            
            3.1Other
                (expense)
            
            
            (2.0
            )
            
            (2.3
            )
            
            (2.3
            )Income
                (loss) before income taxes
            
            
            3.3
            
            
            (10.5
            )
            
            0.8Income
                tax expense (benefit)
            
            
            1.3
            
            
            (4.3
            )
            
            1.0Net
                income (loss)
            
            
            2.0
            %
            
            (6.2
            )%
            
            (0.2
            )%





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





During
      2007, we changed our method of accounting for our inventories from the last-in,
      first-out (LIFO) method to the first-in, first-out (FIFO) method. Fiscal 2005
      and 2006 have been retrospectively adjusted on a FIFO basis.





**2007
      Compared to 2006**




*Service
      and Product Revenues*




Total
      revenue for the year ended September 30, 2007 increased 5.1% to $45.2 million
      from $43.0 million for the year ended September 30, 2006. Service revenue
      increased to $36.1 million for the year ended September 30, 2007 from $34.3
      million for the year ended September 30, 2006, an increase of 5.2%. This
      increase was the result of 20.4% growth in our toxicology business and a 1.3%
      growth in our bioanalytical laboratories, offset by a 7.1% decline in revenues
      of our clinical research unit. The revenue decline in our clinical research
      unit
      was the result of the acquisition of its largest client, resulting in the
      cessation of research by them in our facility in fiscal 2006. As a consequence,
      we revalued the assets of that unit as of September 30, 2006, recording an
      impairment charge in the third quarter of that fiscal year (discussed below).
      We
      experienced strong demand in our pre-clinical toxicology business in line with
      industry trends. Revenues in our bioanalytical laboratories were negatively
      impacted by product mix as the current year had a larger number of generic
      drug
      samples, at lower prices, compared to the prior year. Our revenues from products
      increased in the current year to $9.2 million, a 5.7% growth from last year's
      product revenues of $8.7 million. This growth stemmed mainly from new adopters
      of our Culex® system as well increased adoptions from our existing customers,
      which was impacted by a stronger sales and marketing effort in the current
      year.
      Our mature analytical instruments line continued prior trends of declining
      sales. Inflation in prices did not have a material impact on revenue
      increases.




23




*Costs
      of Revenues*




Costs
      of
      revenue increased 7.5% to $31.5 million for the year ended September 30, 2007
      from $29.3 million for the year ended September 30, 2006. This increase of
      $2.2
      million was due to: a) increases in the cost of service revenue as a result
      of
      the capacity added in our bioanalytical laboratories in fiscal 2005 which was
      not fully utilized in the current fiscal year as a result the lack of revenue
      growth in the current year, b) increased staffing in our *in
      vivo* pharmacology unit as we increased our commercial offerings, and c) additional
      costs in our toxicology business as a result of its growth. Cost of revenue
      as a
      percentage of revenues increased in the service segment due to the lower
      utilization of capacity. A significant portion of our production costs are
      relatively fixed, which results in decreased margins as we decrease our
      utilization of facilities. Costs of revenue for our products segment increased
      to 42.5% as a percentage of product revenue for the year ended September 30,
      2007 from 41.8% of product revenue for the year ended September 30, 2006. This
      increase is the result of continuing growth of sales of Culex
      supplies which have a lower margin than the capital equipment.




*Operating
      Expenses*




Selling
      expenses for the year ended September 30, 2007 increased by 1.2% to $2,783
      from
      $2,750 during the year ended September 30, 2006, as we filled positions in
      our
      expanded sales group during the current year. Research and development
      expenses for the year ended September 30, 2007 decreased 39.0% to $881 from
      $1,444 for the year ended September 30, 2006. This decrease is primarily a
      result of our pharmacokinetics and pharmacodynamics (“PKPD”) services payroll
      costs being changed to cost of services in the current fiscal year, whereas
      they
      were included in research and development expenses in the prior fiscal year
      due
      to the commercialization of main products.




General
      and administrative expenses for the year ended September 30, 2007 decreased
      36.2% to $7,646 from $11,976 for the year ended September 30, 2006. The major
      contributors to our cost reduction in the current year were the strategic
      reductions in personnel (approximately 12%) in 2006 which reduced costs at
      all
      locations for 2007. Included in these expenses in the current year is
      approximately $360 of severance costs for former officers of the
      Company.




In
        our
        third fiscal quarter of the prior year, we determined that, due to the loss
        of a
        significant customer in our Baltimore clinical research unit, there had been
        a
        permanent impairment in the value of its assets. The $1.1 million impairment
        loss is shown as a separate line item in our Consolidated Statement of
        Operations for fiscal 2006.


*Other
      Income/Expense*




Other
      income (expense), net, was $(891) for the year ended September 30, 2007 as
      compared to $(1,012) in the year ended September 30, 2006. This decline is
      due
      to our lower average outstanding borrowings between the comparable years. This
      expense was offset by interest income of $87 in fiscal 2007 as compared to
      $11
      in fiscal 2006. This increase is primarily attributable to higher interest
      rates
      available on short-term cash investments and higher average cash balances to
      invest during the year ended September 30, 2007 compared to the previous fiscal
      year.




*Income
      Taxes*




We
      computed our income taxes using an effective tax rate of 41.5% on domestic
      earnings for the year ended September 30, 2007. We did not provide income taxes
      on foreign earnings due to the availability of net operating loss carryforwards
      to offset our taxable income, which have not previously been recognized for
      financial statement purposes due to the uncertainty of future utilization.
      The
      income tax benefit for the year ended September 30, 2006 was computed using
      the
      effective rate of 41.2%.




24




*Net
      Income*




In
        summary, the combined result of slightly higher revenue and significantly
        lower
        operating expenses resulted in net income for fiscal 2007 of $926, or $0.19
        per
        basic and diluted share, as compared to a net loss in fiscal 2006 of $(2,670),
        or $(0.55) per basic and diluted share.


**2006
      Compared to 2005**




*Service
      and Product Revenues*




Total
      revenue for the year ended September 30, 2006 increased 1.4% to $43.0 million
      from $42.4 million for the year ended September 30, 2005. Service revenue
      increased to $34.3 million for the year ended September 30, 2006 from $33.0
      million for the year ended September 30, 2005, an increase of 3.9%. This
      increase was the result of 36% growth in our toxicology business, offset by
      a
      25% decline in revenues of our clinical research unit. Revenues in our
      bioanalytical laboratories were essentially flat compared to the prior year.
      The
      revenue decline in our clinical research unit was the result of the acquisition
      of its largest client, resulting in the cessation of research by them in our
      facility. As a consequence, we revalued the assets of that unit, recording
      an
      impairment charge in the third quarter of our 2006 fiscal year (discussed
      below). Revenues in our bioanalytical laboratories were negatively impacted
      by
      delays in critical projects by our clients. Our revenues from products declined
      in fiscal 2006 to $8.7 million, a 7.4% decline from fiscal 2005’s product
      revenues of $9.4 million. This decline was across our product line. In the
      fiscal year ended September 30, 2006, we did not have any major new adopters
      of
      our Culex® system, which resulted in flat year-to-year sales. Our mature
      analytical instruments line continued prior trends of declining sales. Inflation
      in prices did not have a material impact on revenue increases.




*Costs
      of Revenues*




Costs
      of
      revenue increased 8.5% to $29.3 million for the year ended September 30, 2006
      from $27.0 million for the year ended September 30, 2005. This increase of
      $2.3
      million was due to: a) increases in the cost of service revenue as a result
      of
      the capacity added in our bioanalytical laboratories in fiscal 2005 which was
      not fully utilized in the current fiscal year as a result the lack of revenue
      growth in the current year, b) increased staffing in our *in
      vivo* pharmacology unit as we increased our commercial offerings, and c) additional
      costs in our toxicology business as a result of its growth. Cost of revenue
      as a
      percentage of revenues increased in both service and product segments due to
      the
      lower utilization of capacity. A significant portion of our production costs
      are
      relatively fixed, which results in decreased margins as we decrease our
      utilization of facilities. Costs of revenue for our products segment increased
      to 41.8% as a percentage of product revenue for the year ended September 30,
      2006 from 36.3% of product revenue for the year ended September 30, 2005.




*Operating
      Expenses*


Selling
        expenses for the year ended September 30, 2006 increased by 6.1% to $2,750
        from
        $2,591 during the year ended September 30, 2005, as we filled positions in
        our
        expanded sales group during the year. Research and development expenses for
        the
        year ended September 30, 2006 increased 8.9% to $1,444 from $1,326 for the
        year
        ended September 30, 2005. This increase is primarily due to additional research
        activities around our Culex® product line.
  General
        and administrative expenses for the year ended September 30, 2006 increased
        17.6% to $11,976 from $10,188 for the year ended September 30, 2005. In
        September of 2006, in order to address our lack of profitability, we reduced
        our
        headcount by approximately 12%, which resulted in severance costs of $600.
        In
        the fiscal 2006, we began expensing employee stock options, increasing expenses
        by $319. Our provision for bad debts increased by $480, principally the result
        of one contract that we were not able to collect. Increases in our costs
        of
        health insurance, property taxes, outside audit, and additional administrative
        support of our growth in toxicology were major contributors to the remainder
        of
        the increase.
  In
        our
        third quarter of fiscal 2006, we determined that, due to the loss of a
        significant customer in our Baltimore clinical research unit, there had been
        a
        permanent impairment in the value of its assets. The $1.1 million impairment
        loss is shown as a separate line item in our 2006 Consolidated Statement
        of
        Operations.


25




*Other
      Income/Expense*




Other
        income (expense), net, was $(1,012) for the year ended September 30, 2006
        as
        compared to $(969) in the year ended September 30, 2005, as a result of
        increased interest expense. We reduced our average outstanding borrowings
        on
        both our revolving line of credit and our mortgage financing, while adding
        $1.5
        million of lease financing to acquire laboratory equipment.


*Income
      Taxes*




Our
      effective tax rate was 41.2% for the benefits of our loss for fiscal
      2006.




*Net
      Income*




In
        summary, only slightly higher revenue, more than offset by higher cost of
        revenue, increased general and administrative expenses and a significant
        impairment loss resulted in a net loss of $0.55 per share in fiscal 2006,
        both
        basic and diluted, compared to a net loss in fiscal 2005 of $0.02 per share,
        both basic and diluted.


**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, 2007, we had cash and cash equivalents of $2.8 million compared
      to
      $1.6 million at September 30, 2006.




We
      generated $2.9 million of cash from operating activities for the year ended
      September 30, 2007, compared to cash generated of $3.8 million in fiscal 2006
      and cash used of $0.5 million in fiscal 2005. Cash generated was primarily
      from
      net income of $0.9 million for the full year 2007 as compared to net losses
      in
      fiscal years 2006 and 2005 plus employee stock option expense of $0.2 in 2007,
      offset by an increase in accounts receivable of $1.1 million. Non-cash charges
      to operations of $3.5 million for depreciation and amortization increased our
      expenses, but did not consume cash. Our receivables vary depending on where
      we
      stand in our mix of contracts; however, we believe that new procedures
      instituted during the current year in billings and collections contributed
      to
      the improved cash flow.




For
      fiscal 2007, we used $0.3 million from investing activities as compared to
      cash
      used of $1.5 million and cash provided of $3.6 million for the years ended
      September 30, 2006 and 2005, respectively. During fiscal 2005, we sold and
      leased back the majority of our facility in Baltimore. With a sales price of
      $6.5 million, this transaction resulted in net cash of $5.9 million, after
      expenses, helping finance the $2.3 million investment in capital assets in
      the
      fiscal 2005. In fiscal years 2007 and 2006, our investments were in recurring
      capital asset additions and replacements with $0.8 million less used in capital
      spending in fiscal 2007 versus fiscal 2006.




Cash
      used
      by financing activities was $1.1 million for the year ended September 30, 2007,
      compared to cash used of $2.0 and cash used of $2.8 million, respectively for
      fiscal 2006 and 2005. Cash utilized in fiscal 2007 was used for payment of
      debt
      and lease obligations similar to fiscal years 2006 and 2005, slightly offset
      by
      $79 of proceeds from stock option exercises. Cash used was lower in 2007 due
      to
      the paydown of the line of credit in fiscal 2006.




*Capital
      Resources*




Property
      and equipment spending totaled $0.9 million, $1.7 million (funded by proceeds
      from the sale of the Baltimore building), and $2.3 million (funded by funds
      generated from operations, long-term debt and revolving credit), in fiscal
      2007,
      2006 and 2005, respectively. Expenditures in fiscal 2007 and 2006 were primarily
      for the purchase of laboratory equipment. The decline in capital expenditures
      in
      fiscal 2007 and 2006 is the result of the completion of expansion programs
      in
      fiscal 2005 to 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. Additionally, we funded $1.5 million of laboratory equipment
      in fiscal 2006 through capital leases. Although we may consider strategic
      acquisition opportunities, we do not intend to aggressively pursue additional
      acquisitions until we fully utilize existing capacity.




26




We
      amended our revolving credit facility in October 2007, reducing our line of
      credit to $5 million from $6 million as we did not have qualifying assets
      sufficient to borrow the higher amount and were paying fees on amounts we could
      not use. We also have three mortgage notes payable to another bank aggregating
      $8.2 million. Borrowings under these 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 these credit agreements, we have agreed to
      restrict advances to subsidiaries, limit additional indebtedness and capital
      expenditures as well as to comply with certain financial covenants outlined
      in
      the borrowing agreements. These credit agreements contain cross-default
      provisions. Details of each debt issue are discussed below. We were in
      compliance with our loan covenants at September 30, 2007 and expect to be in
      compliance with the loan covenants in the future.




The
      maximum amount available under the terms of our amended revolving line of credit
      is $5 million with outstanding borrowings limited to the borrowing base as
      defined in the amendment to the agreement. As of September 30, 2007 there were
      no outstanding balances on this line of credit. Borrowings
      under the Revolving Facility bear interest at a variable rate based on the
      London Interbank Offer Rate (LIBOR) or a base rate determined by the lender’s
      prime rate plus an applicable margin, as defined in the agreement. The
      applicable margin for borrowings under the Revolving Facility ranges from 0.00%
      to 0.50% for base rate borrowings and 1.50% to 3.00% for LIBOR borrowings,
      subject to adjustment based on the average availability under the Revolving
      Facility. The Company also pays a commitment fee on the unused portion of the
      facility ranging from 0.20% - 0.30%. All interest and fees are paid monthly. Borrowings
      under the facility are based on a lending formula utilizing accounts receivable
      and inventory. At September 30, 2007, we had $3.3 million available under the
      facility after offsetting a $1 million outstanding letter of credit which
      secures the Baltimore lease. This letter of credit expires in January 2008
      and
      will not be required to be renewed under the terms of our new lease. The line
      of
      credit is a revolver against which we apply cash receipts, and draws cash as
      needed. The line of credit is committed until December, 2009.




We
      have
      three outstanding mortgages with a commercial bank on our facilities in West
      Lafayette and Evansville, Indiana, which total $8.2 million.  Two of the
      mortgages mature in November, 2012, while the other matures in May 2008. 
As of June 2007, the mortgages have a floating interest rate currently at 7.10%.
       We have a commitment from our bank to renew the mortgage due in May 2008
      for an additional five years on essentially the same terms.  See Note 7 to
      the Consolidated Financial Statements.




The
      following table summarizes the cash payments under our contractual term debt
      and
      lease obligations at September 30, 2007 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 subordinated debt is described in Note 7, Debt
      Arrangements.




**2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **After 2012**
            
            **Total**Mortgage
                notes payable
            
            $
            344
            
            $
            369
            
            $
            396
            
            $
            426
            
            $
            458
            
            $
            6,212
            
            $
            8,205Subordinated
                debt*
            
            
            4,477
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,477Capital
                lease obligations
            
            
            510
            
            
            553
            
            
            453
            
            
            132
            
            
            —
            
            
            —
            
            
            1,648Operating
                leases
            
            
            1,768
            
            
            1,698
            
            
            1,597
            
            
            1,608
            
            
            1,628
            
            
            2,812
            
            
            11,111$
            7,099
            
            $
            2,620
            
            
            2,446
            
            
            2,166
            
            $
            2,086
            
            $
            9,024
            
            $
            25,441





* *Subordinated
      debt includes notes to related parties.*




We
      anticipate spending approximately $3.0 million in fiscal 2008 on capital assets,
      primarily laboratory equipment which will be financed using capital leases.
      We
      have committed to funding tenant improvements on our new lease in the UK, along
      with other commitments at September 30, 2007 that total approximately $1
      million.




The
      covenants in our credit agreement require the maintenance of certain ratios
      of
      interest-bearing indebtedness (not including subordinated debt) to EBITDA and
      net cash flow to debt servicing requirements, which may restrict the amount
      we
      can borrow to fund future operations, acquisitions and capital
      expenditures.




Based
      on
      current business activities, we believe cash generated from operations and
      amounts available under our existing credit facilities will be sufficient to
      fund working capital and capital expenditure requirements for the foreseeable
      future and through September 30, 2008. We have $4.5 million of subordinated
      convertible notes maturing in January, 2008. We intend to use proceeds from
      a
      mortgage and cash on hand to pay the notes principal on January 1, 2008. If
      necessary, we may use a portion of our existing line of credit to make up the
      remaining balance. At this time, we do not anticipate the need to borrow on
      the
      line of credit to pay the note balance.




**Inflation**




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




27




**Critical
      Accounting Policies**




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


*Revenue
      Recognition*




The
      majority of our service contracts involve the processing of bioanalytical
      samples for pharmaceutical companies. These contracts generally provide for
      a
      fixed fee for each assay method developed or sample processed and revenue is
      recognized under the specific performance method of accounting. Under the
      specific performance method, revenue and related direct costs are recognized
      when services are performed. Other service contracts generally consist of
      preclinical and clinical trial studies for pharmaceutical companies. Service
      revenue is recognized based on the ratio of direct costs incurred to total
      estimated direct costs under the proportional performance method of accounting.
      Losses on contracts are provided in the period in which the loss becomes
      determinable. Revisions in profit estimates are reflected on a cumulative basis
      in the period in which such revisions become known. The establishment of
      contract prices and total contract costs involves estimates made by 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.




Our
      product revenue is derived primarily from sales of equipment utilized for
      scientific research. Revenue from 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 this product is recognized upon
      completion of the installation, testing and training.




*Impairment
      of Long-Lived Assets, Including Goodwill*




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




Goodwill
      and other indefinite lived intangible assets, collectively referred to as
      "indefinite lived assets", are tested annually for impairment, and are tested
      for impairment more frequently if events and circumstances indicate that the
      asset might be impaired. An impairment loss is recognized to the extent that
      the
      carrying amount exceeds the asset's fair value. This determination is made
      at
      the reporting unit level and consists of two steps. First, we determine the
      fair
      value of a reporting unit and compare it to its carrying amount. Second, if
      the
      carrying amount of a reporting unit exceeds its fair value, an impairment loss
      is recognized for any excess of the carrying amount of the reporting unit's
      indefinite lived assets over the implied fair value of those indefinite lived
      assets. The implied fair value of the indefinite lived assets is determined
      by
      allocating the fair value of the reporting unit in a manner similar to a
      purchase price allocation, in accordance with SFAS No. 141, *Business
      Combinations* .
      The
      residual fair value after this allocation is the implied fair value of the
      reporting unit's indefinite lived assets.




Our
        Baltimore clinical research unit was acquired in a business combination in
        fiscal 2003. Although improvement has been achieved in operating results
        since
        acquisition, the 2006 acquisition of one of its major customers by a company
        that had other clinical study providers, and the subsequent cancellation
        of
        previously scheduled studies seriously impacted operating results in fiscal
        2006. Consequently, in the third quarter of fiscal 2006, we determined that
        there was a permanent impairment of value of the assets acquired, and recorded
        an impairment loss of $1,100 to write down the value of property and equipment,
        other intangible assets and the value of goodwill. We also recorded a deferred
        tax benefit of $436 related to these charges. The clinical research unit
        is
        included in the Services segment in the financial statements and
        footnotes.


28




*Stock-Based
      Compensation*




On
      October 1, 2005, we changed our accounting to recognize the cost resulting
      from
      all share-based payment transactions in our financial statements using a
      fair-value-based method versus the previously used method in which no expense
      was recorded in the financial statements. We elected to use the modified
      prospective transition method of adoption. We measured compensation cost for
      all
      outstanding unvested stock-based awards made to our employees and directors
      based on estimated fair values and recognized compensation over the service
      period for awards expected to vest. We recognized $304 and $356 of
      stock-based compensation related to employee stock options during the fiscal
      years ended September 30, 2007 and 2006, respectively.





We
      use
      the binomial option valuation model to determine the grant date fair value.
      The
      binomial option valuation model requires us to make certain assumptions about
      the future. 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 and consider the implied
                volatility computed based on the price of short-term options publicly
                traded 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 2007 and 2006 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 to be recognized in fiscal
      2008
      and future periods.





*Income
      Tax Accounting*




Income
      taxes are accounted for by recognition of deferred tax liabilities and assets
      for the expected future tax consequences of events that have been included
      in
      the financial statements or tax returns. Deferred tax assets and liabilities
      are
      determined based on the difference between the financial statement and tax
      bases
      of assets and liabilities. These deferred taxes are measured by applying the
      provisions of tax laws expected to be in effect at the time the differences
      reverse.




We
      recognize deferred tax assets on the balance sheet, which typically represents
      items deducted currently in the financial statements that will be deducted
      in
      future periods in tax returns. A valuation allowance, if necessary, is recorded
      against these deferred tax assets to reduce the total deferred tax assets to
      an
      amount that will, more likely than not, be realized in future periods. The
      valuation allowance is based, in part, on management's estimate of future
      taxable income, the expected utilization of tax loss carry forwards and the
      expiration dates of tax loss carry forwards. Significant assumptions are used
      in
      developing the analysis of future taxable income for purposes of determining
      the
      valuation allowance for deferred tax assets which, in the opinion of management,
      are reasonable under the circumstances.




We
      have
      an accumulated net deficit in our UK subsidiaries, consequently, United States
      deferred tax liabilities on such earnings have not been recorded.




29




*Inventories*




Inventories
      are stated at the lower of cost or market using the first-in, first-out (FIFO)
      cost method of accounting. Prior to 2007, our inventories were accounted for
      using the last-in, first-out (LIFO) method of accounting. During the fourth
      quarter of 2007, we changed our method of accounting for inventories from the
      LIFO method to the FIFO method. The FIFO method of inventory accounting better
      matches revenues and expenses in accordance with sales contract terms. All
      periods presented have been retrospectively adjusted on a FIFO
      basis.





*New
      Accounting Pronouncements*




We
      adopted the following two pronouncements for periods beginning October 1,
      2005.




In
      November, 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards ("SFAS") No. 151 dealing with inventory costs.
      The statement clarifies what costs can be included in inventory, requiring
      that
      absorption factors be based on normal capacities of manufacturing facilities
      and
      excess capacity be expensed as incurred. Our historical costing methodology
      substantially conformed with this standard; therefore, we did not experience
      any
      change from this pronouncement.




In
      December, 2004, SFAS No. 123 (Revised) was issued dealing with Share-Based
      Payments. In general, this statement requires that companies compute the fair
      value of options and other stock-based employee incentives, charging this value
      to operations over the period earned, generally the vesting period. We incurred
      expenses, net of tax benefit, of $208 and $319 in fiscal 2007 and 2006,
      respectively (see Notes 2 and 9 to the consolidated financial
      statements) relating to our stock option plans.




The
      following recent pronouncements may impact the Company’s accounting
      policies:




In
      July
      2006, the FASB released Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      This
      Interpretation revises the recognition tests for tax positions taken in tax
      returns such that a tax benefit is recorded only when it is more likely than
      not
      that the tax position will be allowed upon examination by taxing authorities.
      The amount of such a tax benefit to record is the largest amount that is more
      likely than not to be allowed. Any reduction in deferred tax assets or increase
      in tax liabilities upon adoption will correspondingly reduce retained earnings.
      We do not expect the adoption of this Interpretation, which is effective for
      our
      fiscal year beginning October 1, 2007, to have a material impact on our
      financial statements.




In
        September, 2006 the staff of the Securities and Exchange Commission issued
        Staff
        Accounting Bulletin 108, dealing with the methods of measuring misstatements
        when determining materiality to the financial statements. We have been using
        such methods since the SAB 108 was issued


***ITEM
      7A.-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK***




Our
      primary market risk exposure with regard to financial instruments is the changes
      in interest rates. We have a Revolving Credit Agreement with National City
      Bank,
      bearing interest at a rate of either the bank's prime rate plus 50 basis points,
      or at LIBOR plus 325 basis points, depending in each case upon the ratio of
      our
      interest-bearing indebtedness (less subordinated debt) to EBITDA. Historically,
      we have not used derivative financial instruments to manage exposure to interest
      rate changes. Hypothetically, we believe that a 10% adverse change in interest
      rates would not materially affect our consolidated operating results. Interest
      on our revolving line of credit and our real estate mortgages are at floating
      rates.




Because
      we operate internationally, we are subject to potentially adverse movements
      in
      foreign currency exchange rates. The effect of movements in the exchange rates
      was not material to our consolidated operating results for fiscal years 2007,
      2006 and 2005. A hypothetical 10% adverse change in foreign currency exchange
      rates would not materially affect our consolidated operating
      results.


30


***ITEM
      8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA***





**Index
      to Consolidated Financial Statements**





**Page**Consolidated
                Financial Statements of Bioanalytical Systems, Inc. and
                subsidiaries:Consolidated
                Balance Sheets as of September 30, 2007 and 2006
            32Consolidated
                Statements of Operations for the Years Ended September 30, 2007,
                2006 and
                2005
            33Consolidated
                Statements of Shareholders’ Equity and Comprehensive Income
                (Loss) for the Years Ended September 30, 2007, 2006 and
                2005
            34Consolidated
                Statements of Cash Flows for the Years Ended September 30, 2007,
                2006 and
                2005
            35Notes
                to Consolidated Financial Statements
            36Reports
                of Independent Registered Public Accounting FirmsFinancial
                Statement Schedules:Schedules
                are not required, are not applicable or the information is shown
                in the
                Notes to the ConsolidatedFinancial
                Statements.


31


**BIOANALYTICAL
      SYSTEMS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


(In
      thousands)





**As of September 30,****2007**
            
            **2006****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            2,837
            
            $
            1,647Accounts
                receivable:Trade, net of allowance for bad debts of $220 in 2007 and $520 in
                2006
            
            
            6,674
            
            
            6,492Unbilled revenues and other
            
            
            2,565
            
            
            1,545Inventories*(a)***
            
            
            1,977
            
            
            1,970Deferred
                income taxes*(a)***
            
            
            897
            
            
            571Refundable
                income taxes
            
            
            774
            
            
            888Prepaid
                expenses
            
            
            776
            
            
            599Total
                current assets
            
            
            16,500
            
            
            13,712Property
                and equipment, net
            
            
            22,927
            
            
            25,766Goodwill
            
            
            1,855
            
            
            1,855Intangible
                assets, net
            
            
            304
            
            
            517Debt
                issue costs, net
            
            
            211
            
            
            246Other
                assets
            
            
            240
            
            
            268Total
                assets
            
            $
            42,037
            
            $
            42,364**Liabilities
                and Shareholders' Equity**Current
                liabilities:Accounts
                payable
            
            $
            1,589
            
            $
            1,610Accrued
                expenses
            
            
            3,056
            
            
            3,081Customer
                advances
            
            
            4,115
            
            
            4,226Income taxes payable
            
            
            56
            
            
            —Current
                portion of capital lease obligations
            
            
            510
            
            
            472Current
                portion of long-term debt
            
            
            4,821
            
            
            721Total
                current liabilities
            
            
            14,147
            
            
            10,110Capital
                lease obligations, less current portion
            
            
            1,138
            
            
            1,648Long-term
                debt, less current portion
            
            
            7,861
            
            
            8,186Subordinated
                notes payable, less current portion
            
            
            —
            
            
            4,477Deferred
                income taxes
            
            
            337
            
            
            539Shareholders'
                equity:Preferred
                shares:Authorized 1,000 shares; none issued and outstanding
            
            
            —
            
            
            —Common
                shares, no par value:Authorized
                    19,000 shares; issued and outstanding 4,909 shares in 2007 and 4,892
                    shares in 2006
            
            
            1,189
            
            
            1,182Additional
                paid-in-capital
            
            
            11,957
            
            
            11,677Retained
                earnings*(a)***
            
            
            5,560
            
            
            4,634Accumulated
                other comprehensive loss
            
            
            (152
            )
            
            (89
            )Total
                shareholders' equity
            
            
            18,554
            
            
            17,404Total
                liabilities and shareholders' equity
            
            $
            42,037
            
            $
            42,364




*(a)
      2006 has been retrospectively adjusted for our change in 2007 from the last-in,
      first-out method of inventory accounting to the first-in, first-out
      method.*




*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,****2007**
            
            **2006**
            
            **2005**Service
                revenue
            
            $
            36,051
            
            $
            34,318
            
            $
            32,951Product
                revenue
            
            
            9,194
            
            
            8,730
            
            
            9,444Total
                revenue
            
            
            45,245
            
            
            43,048
            
            
            42,395Cost
                of service revenue**
            
            
            27,544
            
            
            25,691
            
            
            23,589Cost
                of product revenue*(a)***
            
            
            3,909
            
            
            3,647
            
            
            3,426Total
                cost of revenue*(a)***
            
            
            31,453
            
            
            29,338
            
            
            27,015Gross
                profit*(a)***
            
            
            13,792
            
            
            13,710
            
            
            15,380Operating
                expenses:Selling
            
            
            2,783
            
            
            2,750
            
            
            2,591Research
                and development
            
            
            881
            
            
            1,444
            
            
            1,326General
                and administrative
            
            
            7,646
            
            
            11,976
            
            
            10,188(Gain)
                loss on sale of property and equipment
            
            
            92
            
            
            (37
            )
            
            (21
            )Impairment
                loss
            
            
            —
            
            
            1,100
            
            
            —Total
                operating expenses
            
            
            11,402
            
            
            17,233
            
            
            14,084Operating
                income (loss)*(a)***
            
            
            2,390
            
            
            (3,523
            )
            
            1,296Interest
                income
            
            
            87
            
            
            11
            
            
            18Interest
                expense
            
            
            (981
            )
            
            (1,033
            )
            
            (988
            )Other
                income
            
            
            3
            
            
            10
            
            
            1Income
                (loss) before income taxes*(a)***
            
            
            1,499
            
            
            (4,535
            )
            
            327Income
                tax provision (benefit)*(a)*
            
            
            573
            
            
            (1,865
            )
            
            407Net
                income (loss)*(a)***
            
            $
            926
            
            $
            (2,670
            )
            $
            (
                80
            )Net
                income (loss) per share:*(a)***Basic
            
            $
            0.19
            
            $
            (0.55
            )
            
            (0.02
            )Diluted
            
            $
            0.19
            
            $
            (0.55
            )
            
            (0.02
            )Weighted
                average common shares outstanding:Basic
            
            
            4,909
            
            
            4,883
            
            
            4,870Diluted
            
            
            4,960
            
            
            4,883
            
            
            4,870




*(a)
      2006 and 2005 have been retrospectively adjusted for our change in 2007 from
      the
      last-in, first-out method of inventory accounting to the first-in, first-out
      method.*




*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- capital**
            
            **Retained**
              **earnings*****(a)***
            
            **Accumulated**
              **other**
              **comprehensive**
              **loss**
            
            **Total**
              **shareholders'**
              **equity****Number**
            
            **Amount**Balance
                at October 1, 2004
            
            
            4,869
            
            $
            1,177
            
            $
            11,263
            
            $
            7,384
            
            $
            (314
            )
            $
            19,510Comprehensive
                income (loss):Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (80
            )
            
            —
            
            
            (80
            )Other
                comprehensive
                income:Foreign
                currency translation
                adjustments
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            273
            
            
            273Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            193Exercise
                of stock options
            
            
            2
            
            
            1
            
            
            5
            
            
            —
            
            
            —
            
            
            6Balance
                at September 30, 2005
            
            
            4,871
            
            
            1,178
            
            
            11,268
            
            
            7,304
            
            
            (41
            )
            
            19,709Comprehensive
                loss:Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,670
            )
            
            —
            
            
            (2,670
            )Other
                comprehensive
                loss:Foreign
                currency translation
                adjustments
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (48
            )
            
            (48
            )Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,718
            )Stock
                compensation
            
            
            —
            
            
            —
            
            
            319
            
            
            —
            
            
            —
            
            
            319Exercise
                of stock options
            
            
            21
            
            
            4
            
            
            90
            
            
            —
            
            
            —
            
            
            94Balance
                at September 30, 2006
            
            
            4,892
            
            
            1,182
            
            
            11,677
            
            
            4,634
            
            
            (89
            )
            
            17,404Comprehensive
                income :Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            926
            
            
            —
            
            
            926Other
                comprehensive
                loss:Foreign
                currency translation
                adjustments
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (63
            )
            
            (63
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            863Stock
                compensation
            
            
            —
            
            
            —
            
            
            208
            
            
            —
            
            
            —
            
            
            208Exercise
                of stock options
            
            
            17
            
            
            7
            
            
            72
            
            
            —
            
            
            —
            
            
            79Balance
                at September 30, 2007
            
            
            4,909
            
            $
            1,189
            
            $
            11,957
            
            $
            5,560
            
            $
            (152
            )
            $
            18,554




*(a)
      2006, 2005 and 2004 have been retrospectively adjusted for our change in
      2007 from the last-in, first-out method of inventory accounting to the first-in,
      first-out method.*




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


34


**BIOANALYTICAL
      SYSTEMS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(In
      thousands)





**Years Ended September 30,****2007**
            
            **2006**
            
            **2005**Operating
                activities:Net
                income (loss)
            
            $
            926
            
            $
            (2,670
            )
            $
            (80
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            3,458
            
            
            3,889
            
            
            3,441Asset
                impairment loss
            
            
            —
            
            
            1,100
            
            
            —Employee
                stock compensation expense
            
            
            208
            
            
            319
            
            
            —Bad
                debt expense (recovery)
            
            
            (132
            )
            
            473
            
            
            —(Gain)
                loss on sale of property and equipment
            
            
            92
            
            
            (37
            )
            
            (21
            )Deferred
                income taxes*(a)*
            
            
            (472
            )
            
            (1,375
            )
            
            (609
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,070
            )
            
            4,518
            
            
            (6,590
            )Inventories*(a)*
            
            
            (7
            )
            
            254
            
            
            (507
            )Refundable
                and payable income taxes
            
            
            114
            
            
            (919
            )
            
            634Prepaid
                expenses and other assets
            
            
            (32
            )
            
            (180
            )
            
            (84
            )Accounts
                payable
            
            
            (21
            )
            
            (71
            )
            
            (1,081
            )Accrued
                expenses
            
            
            (25
            )
            
            291
            
            
            1,199Customer
                advances
            
            
            (111
            )
            
            (1,748
            )
            
            3,157Net
                cash provided (used) by operating activities
            
            
            2,928
            
            
            3,844
            
            
            (541
            )Investing
                activities:Capital
                expenditures
            
            
            (878
            )
            
            (1,687
            )
            
            (2,301
            )Proceeds
                from sale of property and equipment
            
            
            625
            
            
            271
            
            
            5,887Net
                cash provided (used) by investing activities
            
            
            (253
            )
            
            (1,416
            )
            
            3,586Financing
                activities:Payments
                of long-term debt
            
            
            (702
            )
            
            (723
            )
            
            (756
            )Borrowings
                on line of credit
            
            
            —
            
            
            12,624
            
            
            7,888Payments
                on line of credit
            
            
            —
            
            
            (13,544
            )
            
            (9,794
            )Payments
                on capital lease obligations
            
            
            (472
            )
            
            (438
            )
            
            (181
            )Net
                proceeds from the exercise of stock options
            
            
            79
            
            
            94
            
            
            6Net
                cash used by financing activities
            
            
            (1,095
            )
            
            (1,987
            )
            
            (2,837
            )Effect
                of exchange rate changes
            
            
            (390
            )
            
            (48
            )
            
            273Net
                increase in cash and cash equivalents
            
            
            1,190
            
            
            393
            
            
            481Cash
                and cash equivalents at beginning of year
            
            
            1,647
            
            
            1,254
            
            
            773Cash
                and cash equivalents at end of year
            
            $
            2,837
            
            $
            1,647
            
            $
            1,254





*(a)
      2006 and 2005 have been retrospectively adjusted for our change in 2007 from
      the
      last-in, first-out method of inventory accounting to the first-in, first-out
      method.*




*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,
      Maryland 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.
        These
        contracts generally provide for a fixed fee for each sample processed, and
        revenue is recognized under the specific performance method of accounting.
        Under
        this method, revenue and related direct costs are recognized when services
        are
        performed. Our other service contracts generally involve preclinical and
        clinical trial studies for pharmaceutical companies. We recognize service
        revenue on these contracts based on the ratio of direct costs incurred to
        total
        estimated direct costs under the proportional performance method of accounting.
        The establishment of contract prices and total contract costs involves estimates
        made by us at the inception of the contract period. When we revise profit
        estimates, we adjust revenue on a cumulative basis in the period in which
        the
        revisions become known. These estimates could change during the term of the
        contract, which impacts the revenue and costs we report in the consolidated
        financial statements. We provide for projected losses on contracts in their
        entirety when the loss becomes determinable.


We
      generally bill a portion of service contract fees upon acceptance by our
      customers. These billings are classified as customer advances until earned.
      Unbilled revenues represent revenues earned under contracts in advance of
      billings.




Our
      product revenue is derived primarily from sales of instruments utilized for
      scientific research. Revenue from products not requiring installation, testing,
      or training is recognized upon shipment to customers. One of our products
      includes internally developed software and sometimes requires installation,
      testing, and training, which occur concurrently. Revenue is recognized upon
      completion of the installation, testing, and training.




*(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 its trade receivables. The allowance for doubtful accounts is
      determined by management based on our historical losses, specific customer
      circumstances, and general economic conditions. Periodically, management reviews
      accounts receivable and adjusts the allowance based on current circumstances
      and
      charges off uncollectible receivables when all attempts to collect have failed. Our
      allowance for doubtful accounts was $220 and $520 at September 30, 2007 and
      2006, respectively.




36




A
        summary of activity in our allowance for doubtful
        accounts is as follows:
  2007
                
                2006
                
                2005Opening
                    balance
                
                
                $
                520
                
                
                $
                40
                
                $
                0Charged
                    to expense
                
                
                
                103
                
                
                
                488
                
                
                40Accounts
                    written off
                
                
                
                (54
                )
                
                
                (8
                )
                
                —Recoveries
                
                
                
                (349
                )
                
                
                —
                
                
                —Ending
                    balance
                
                
                $
                220
                
                
                $
                520
                
                $
                40
 Our
        cash
        and cash equivalents, accounts receivable, accounts payable and certain other
        accrued liabilities are all short-term in nature and their carrying amounts
        approximate fair value. We have both variable rate borrowings, which adjust
        to
        the current market, and borrowings with fixed rates for up to three years.
        The
        carrying value of our fixed rate debt also approximates its fair value .




*(e)*
            *Inventories*




Prior
        to
        2007, our inventories were accounted for using the last-in, first-out (LIFO)
        method of accounting. During the fourth quarter of 2007, we changed our method
        of accounting for inventories from the LIFO method to the FIFO method. The
        FIFO
        method of accounting provides better matching of revenues with expenses in
        accordance with sales contract terms. All periods have been retrospectively
        adjusted using FIFO 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. Our depreciation expense was $3,218 in fiscal
      2007, $3,228 in fiscal 2006 and $3,047 in fiscal 2005. Expenditures for
      maintenance and repairs are expensed as incurred.





Property
      and equipment, net, as of September 30, 2007 and 2006 consisted of the
      following:





**2007**********
            
            **2006**Land
                and improvements
            
            $
            453
            
            $
            450Buildings
                and improvements
            
            
            20,745
            
            
            21,584Machinery
                and equipment
            
            
            21,048
            
            
            20,663Office
                furniture and fixtures
            
            
            1,306
            
            
            1,425Construction
                in progress
            
            
            79
            
            
            25243,631
            
            
            44,374Less:
                accumulated depreciation
            
            
            (20,704
            )
            
            (18,608
            )Net
                property and equipment
            
            $
            22,927
            
            $
            25,766




*(g)*
            *Impairment
                of Long-Lived Assets*


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. Assets to be disposed of would be separately presented in the
        balance sheet and reported at the lower of the carrying amount or fair value
        less costs to sell, and are no longer depreciated.
  Goodwill
        is tested annually for impairment, and more frequently if events and
        circumstances indicate that an asset might be impaired. An impairment loss
        is
        recognized to the extent that the carrying amount exceeds the asset’s fair
        value. This determination is made at the reporting unit level and consists
        of
        two steps. First, we determine the fair value of a reporting unit and compare
        it
        to its carrying amount. Second, if the carrying amount of a reporting unit
        exceeds its fair value, an impairment loss is recognized for any excess of
        the
        carrying amount of the reporting unit’s goodwill over the implied fair value of
        goodwill. The implied fair value of goodwill is determined by allocating
        the fair value of the reporting unit in a manner similar to a purchase price
        allocation. The residual fair value after this allocation is the implied
        fair
        value of the reporting unit’s goodwill. In fiscal 2006, we determined that an
        impairment loss existed at our Baltimore facility and accordingly recorded
        an
        impairment loss of $1,100.


37




*(h)*
            *Goodwill
              and Intangible Assets*




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, but are subject to an
      annual assessment for impairment by applying a fair value based
      test.




In
      fiscal
      2003, we completed acquisitions of a bioanalytical laboratory performing
      chemical analyses and a clinical research unit performing clinical testing
      in
      humans to establish drug safety or bioequivalence. In valuing the intangible
      assets acquired in these two acquisitions, we determined that the replacement
      cost, in a start-up situation, of establishing these two operations as FDA
      compliant research sites was $1,267 and recorded intangible assets of that
      amount. We determined that these assets had an indefinite life, and accordingly
      did not amortize the assets. During the fiscal year ended September 30, 2006,
      we
      re-examined the make-up of these assets, and determined that of the total
      recorded, $793 related to the hiring and training of the in-place workforce.
      Such assets should be included in goodwill and, accordingly, we reclassified
      that amount to goodwill in fiscal 2006. The remaining $474 of the intangible
      assets relates to the replacement costs of creating and documenting the
      operating systems and procedure, their validation and audit. The evolving nature
      of procedures in a regulated environment requires that we constantly monitor
      and
      update those procedures. Accordingly, we have revised our estimate of the useful
      life of that asset to a ten year life, and recorded the amortization in Cost
      of
      Service Revenue.




We
      complete a fair value-based impairment test on our goodwill and intangible
      assets not subject to amortization at the close of each fiscal year, in addition
      to other times if events indicate there is a likely decline in
      value.  Our
      clinical research unit acquired in fiscal 2003 had experienced losses since
      acquisition, including $2,952 in fiscal 2006 before impairment charge. Although
      improvement had been achieved in operating results since acquisition and prior
      to fiscal 2006, the acquisition of one of our major customers by a company
      that
      had other clinical study providers, and the subsequent cancellation of
      previously scheduled studies seriously impacted operating results for this
      unit
      in fiscal 2006. Establishing future profitable operations of the unit will
      require additional sales effort to attract new customers. Consequently, in
      the
      third quarter of fiscal 2006, we determined there was a permanent impairment
      of
      the value of the assets acquired, and recorded a charge of $1,100 to write
      down
      the value of property and equipment by $330, other intangible assets by $387
      and
      reduced the value of goodwill by $383 (net of accumulated amortization). The
      impairment charge was necessary to adjust the carrying values of the respective
      assets to our estimate of fair value. We also recorded a deferred tax benefit
      of
      $436 related to these charges. The clinical research unit is included in the
      Services segment in these financial statements and footnotes.




The
      carrying amount of goodwill at both September 30, 2007 and 2006 was $1,855.
      The
      components of intangible assets subject to amortization are as
      follows:




**September 30, 2007****Weighted**
              **average life**
              **(years)**
            
            **Gross****Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**FDA
                compliant facility
            
            
            10
            
            $
            402
            
            $
            171Methodologies
            
            
            5
            
            
            180
            
            
            171Volunteer
                database
            
            
            5
            
            
            326
            
            
            280Customer
                relationships
            
            
            5
            
            
            359
            
            
            341$
            1,267
            
            $
            963




**September 30, 2006****Weighted**
              **average life**
              **(years)**
            
            
            **Gross
                Carrying Amount**
            
            
            **Accumulated
                Amortization**FDA
                compliant facility
            
            
            10
            
            $
            402
            
            $
            131Methodologies
            
            
            5
            
            
            180
            
            
            135Volunteer
                database
            
            
            5
            
            
            326
            
            
            215Customer
                relationships
            
            
            5
            
            
            359
            
            
            269$
            1,267
            
            $
            750




38


Amortization
        expense for intangible assets for fiscal years ended September 30, 2007,
        2006 and 2005 was $213, $459 and $335 respectively. The following table provides
        information regarding estimated amortization expense for the next five
        years:
 
 2008
              
              $
              1132009
              
              
              402010
              
              
              402011
              
              
              402012
              
              
              40
  *(i)*
              *Advertising
                  Expense*
  We
        expense advertising costs as incurred. Advertising expense was $118, $284
        and
        $112 for the years ended September 30, 2007, 2006, and 2005,
        respectively.
  *(j)*
              *Stock-Based
                  Compensation*
  On
          October 1, 2005, to comply with current accounting for stock options, we
          changed
          our accounting policy to recognize compensation expense for all share-based
          payment awards made to employees and directors under our stock option plans
          based on fair values. Previously, we had not recognized expense for employee
          stock options. We used the modified prospective transition method, which
          requires the application of the accounting standard as of October 1, 2005,
          the
          first day of our fiscal year. In accordance with this method, our Consolidated
          Financial Statements for fiscal 2005 do not include expenses for share-based
          payments. Stock-based compensation expense for employee stock options for
          the
          years ended September 30, 2007 and 2006 was $304 and $356 with related
          tax
          benefits of $96 and $37, respectively.
  SFAS
          123(R) requires companies to estimate the fair value of share-based payment
          awards on the date of grant using an option-pricing model. The value of
          the
          portion of the award that is ultimately expected to vest is recognized
          as
          expense over the requisite service periods in our Statements of Operations.
          Prior to the adoption of SFAS 123(R), we accounted for stock-based awards
          to
          employees and directors using the intrinsic value method in accordance
          with APB
          No. 25 as allowed under SFAS No. 123. Under the intrinsic value method,
          no
          stock-based compensation expense was recognized in our Consolidated Statements
          of Operations in fiscal 2005.
  Stock-based
          compensation expense is recognized based on the value of the portion of
          share-based payment awards that is expected to vest during the period,
          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. Stock-based compensation expense recognized in
          our
          Consolidated Statement of Operations for the years ended September 30,
          2007 and
          2006 included compensation expense for share-based payment awards granted
          prior
          to, but not yet vested as of October 1, 2006 and 2005, respectively, based
          on
          the grant date fair value. There were 305 shares of stock awards granted
          during
          fiscal 2007, including grants contingent on shareholder approval. In the
          event
          such approval is not attained, the Company will make cash payments on each
          vesting date equal to the value that would have been realized on the options
          vesting on that date. Compensation expense for all share-based payment
          awards
          are recognized using the straight-line single option approach.
  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
  *[Remainder
        of page intentionally left blank.]*
  39
  The
        following table presents the effect on earnings and earnings per share had
        we
        applied the same treatment to stock-based employee compensation in the year
        ended September 30, 2005:
  Net
                  loss as adjusted*(a)*
              
              $
              (80
              )Deduct:  Total
                  stock-based employee compensation expense determined under the
                  fair value
                  based method for all awards, net of related tax effects
              
              
              (177
              )Pro
                  forma net loss
              
              $
              (257
              )Loss
                  per share:Basic
                  and diluted - as reported
              
              $
              (0.02
              )Basic
                  and diluted - pro forma
              
              $
              (0.05
              )
  *(a)
        2005 has been retrospectively adjusted for our change in 2007 from the last-in,
        first-out method of inventory accounting to the first-in, first-out
        method.*
  *(k)*
              *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.
  *(l)*
              *New
                  Accounting Pronouncements*
  In
        July
        2006, the FASB released Interpretation No. 48, *Accounting
        for Uncertainty in Income Taxes* .
        This
        Interpretation revises the recognition tests for tax positions taken in tax
        returns such that a tax benefit is recorded only when it is more likely than
        not
        that the tax position will be allowed upon examination by taxing authorities.
        The amount of such a tax benefit to record is the largest amount that is
        more
        likely than not to be allowed. Any reduction in deferred tax assets or increase
        in tax liabilities upon adoption will correspondingly reduce retained earnings.
        We do not expect the adoption of this Interpretation, which is effective
        for our
        fiscal year beginning October 1, 2007, to have a material impact on our
        financial statements.
  In
          September, 2006 the staff of the Securities and Exchange Commission issued
          Staff
          Accounting Bulletin 108, dealing with the methods of measuring misstatements
          when determining materiality to the financial statements. We have been
          using
          such methods since the SAB 108 was issued.
  *(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 financial statements
        and
        accompanying notes. Our actual results could differ from those
        estimates.
  **3.
        INCOME (LOSS) PER SHARE**
  We
        compute basic income or loss per share using the weighted average number
        of
        common shares outstanding. We compute diluted income or 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 the
        conversion of convertible subordinated debt have not been included as they
        were
        not dilutive. Because of losses in each year of the two year period ended
        September 30, 2006, outstanding potential common shares were anti-dilutive
        in
        each year; therefore, basic and diluted loss per share are the
        same.
  40
  The
        following table reconciles our computation of basic income/(loss) per share
        to
        diluted income/(loss) per share (in thousands except per share
        amounts):
 Years
                    Ended September 30,2007
                
                2006
                
                2005Basic
                    net income/(loss) per share:Net
                    income/(loss) applicable to common shareholders*(a)*
                
                
                
                
                $
                926
                
                $
                (2,670
                )
                $
                (80
                )Weighted
                    average common shares outstanding
                
                
                
                
                
                4,909
                
                
                4,883
                
                
                4,870Basic
                    net income/(loss) per share
                
                
                
                
                $
                0.19
                
                $
                (0.55
                )
                $
                (0.02
                )Diluted
                    net income/(loss) per share:Diluted
                    net income/(loss) applicable to common*(a)*
                
                
                
                
                $
                926
                
                $
                (2,670
                )
                $
                (80
                )Weighted
                    average common shares outstanding
                
                
                
                
                
                4,909
                
                
                4,883
                
                
                4,870Dilutive
                    stock options/shares
                
                
                
                
                
                51
                
                
                —
                
                
                —Dilutive
                    weighted average common shares outstanding
                
                
                
                
                
                4,960
                
                
                4,883
                
                
                4,870Diluted
                    net income/(loss) per share
                
                
                
                
                $
                0.19
                
                $
                (0.55
                )
                $
                (0.02
                )
  *a)* *2006
        and 2005 have been retrospectively adjusted for our change in 2007 from the
        last-in, first-out method of inventory accounting to the first-in, first-out
        method.*
  At
        September 30, 2007, 2006 and 2005 we had 250 shares issuable upon the conversion
        of our subordinated debt and 564, 404 and 480 shares, respectively, issuable
        upon exercise of stock options that are not included in our outstanding share
        calculation as they are anti-dilutive.
  **4.
        SALE OF BUILDING**
  On
        January 5, 2005 we sold our building in Baltimore, valued at approximately
        $6.2
        million for a $6.5 million cash selling price. Concurrently, we entered into
        a
        three year leaseback of approximately 85% of the building for $800
        annually, plus operating expenses. Accordingly, we have accounted for the
        transaction as a sale/leaseback transaction. We recorded a deferred gain
        on the
        building of $218 which is being amortized over the life of the lease which
        expires December 31, 2007. The net proceeds of the sale were used to pay
        off our
        revolving credit facility and for working capital. The unamortized remaining
        value of the deferred gain was $18 and $91 as of September 30, 2007 and 2006,
        respectively.
  **5.
        INVENTORIES**
  Inventories
        at September 30 consisted of the following:
 **2007**
                
                **2006**Raw
                    materials
                
                $
                1,480
                
                $
                1,335Work
                    in progress
                
                
                273
                
                
                278Finished
                    goods
                
                
                224
                
                
                357$
                1,977
                
                $
                1,970
  Prior
          to
          2007, our inventories were accounted for using the last-in, first-out (LIFO)
          method of accounting. During the fourth quarter of 2007, we changed our
          method
          of accounting for inventories from the LIFO method to the FIFO method.
          The FIFO
          method of accounting provides better matching of revenues with expenses
          in
          accordance with sales contract terms. All periods have been retrospectively
          adjusted using FIFO accounting, resulting in an $89 increase in retained
          earnings as of October 1, 2004 .
          The
          impact to the fourth quarter is not material.
  41
  The
        following table summarizes the effect of the accounting change on our
        consolidated financial statements for the fiscal years ended September 30,
        (in
        thousands):
 2006
                
                2005As
                  Originally
                  Reported
                
                As
                  Adjusted
                  for
                  Accounting
                  Change
                
                As
                  Originally
                  Reported
                
                As
                  Adjusted
                  for
                  Accounting
                  ChangeConsolidated
                    statements of operations:Cost
                    of product revenue
                
                $
                3,547
                
                $
                3,647
                
                $
                3,462
                
                $
                3,426Tax
                    provision (benefit)
                
                
                (1,825
                )
                
                (1,865
                )
                
                392
                
                
                407Net
                    income (loss)
                
                
                (2,610
                )
                
                (2,670
                )
                
                (101
                )
                
                (80
                )Basic
                    net income (loss) per share
                
                
                (0.53
                )
                
                (0.55
                )
                
                (0.02
                )
                
                (0.02
                )Diluted
                    net income (loss) per share
                
                
                (0.53
                )
                
                (0.55
                )
                
                (0.02
                )
                
                (0.02
                )Consolidated
                    balance sheets:Inventories
                
                
                1,887
                
                
                1,970
                
                
                2,041
                
                
                2,225Deferred
                    taxes, current
                
                
                604
                
                
                571
                
                
                381
                
                
                308Retained
                    earnings
                
                
                4,584
                
                
                4,634
                
                
                7,194
                
                
                7,304Consolidated
                    statements of cash flows:Deferred
                    taxes
                
                
                (1,335
                )
                
                (1,375
                )
                
                (623
                )
                
                (609
                )Inventory
                    working capital change
                
                
                154
                
                
                254
                
                
                (472
                )
                
                (507
                )
 Had
        we
        continued to use the LIFO method for fiscal 2007, our cost of product revenue
        would have been $59 higher and our net income would have been reduced to
        $891.
  **6.
        LEASE ARRANGEMENTS**
   The
        total
        amount of equipment capitalized under capital lease obligations as of September
        30, 2007and 2006 was $2,739 and  $2,739, respectively. Accumulated
        amortization on capital leases at September 30, 2007 and  2006 was $825 and
        $343, respectively. Amortization of assets acquired through capital leases
        is
        included in depreciation expense.
  We
        acquired equipment totaling $1,473 through capital lease arrangements during
        the
        year ended September 30, 2006. Future minimum lease payments on capital leases
        at September 30, 2007 are as follows:
 **Principal**
                
                **Interest**
                
                **Total**2008
                
                $
                510
                
                $
                117
                
                $
                6272009
                
                
                553
                
                
                74
                
                
                6272010
                
                
                453
                
                
                30
                
                
                4832011
                
                
                132
                
                
                3
                
                
                135$
                1,648
                
                $
                224
                
                $
                1,872
 We
        lease
        office space and equipment under noncancelable operating leases that terminate
        at various dates through 2013. Certain of these leases contain renewal options.
        Total rental expense under these leases was $2,265, $1,808, and $914 in fiscal
        2007, 2006, and 2005, respectively.  42
  Future
        minimum lease payments for the following fiscal years under operating leases
        at
        September 30, 2007 are as follows:
  2008
              
              $
              1,7682009
              
              
              1,6982010
              
              
              1,5972011
              
              
              1,6082012
              
              
              1,628After
                  2012
              
              
              2,812$
              11,111
   **7.
        DEBT ARRANGEMENTS**
  Long-term
        debt consisted of the following at September 30:
 **2007**
                
                **2006**Mortgage
                    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 adjusts based on market rates. Collateralized
                    by
                    underlying property. Due November, 2012.
                
                $
                4,445
                
                $
                4,610Mortgage
                    note payable to a bank, payable in monthly principal and interest
                    installments of $19.  Interest adjusts based on market rates.
                    Collateralized by underlying property. Due May, 2008.
                    *(1)*
                
                
                1,735
                
                
                1,843Mortgage
                    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 adjusts based on market rates. Collateralized
                    by
                    underlying property. Due November, 2012.
                
                
                2,025
                
                
                2,094Convertible
                    subordinated 6% notes payable due January 1, 2008. Interest payable
                    in
                    arrears on the 15th of January and July after June 1, 2005 (4.67%
                    effective rate).
                
                
                4,000
                
                
                4,000Subordinated
                    10% notes payable due October 1, 2007. Holders can require the
                    Company to
                    repay 20% of the original outstanding balance each October 1.
                    Interest
                    payable upon demand each October 1 through maturity.
                
                
                477
                
                
                83712,682
                
                
                13,384Less
                    current portion
                
                
                4,821
                
                
                721$
                7,861
                
                $
                12,663
  *(1)* 
We
        have a commitment from our bank to
        renew this loan for an additional five years on essentially the same
        terms.
  The
        following table summarizes our principal payment obligations for the years
        ending September 30:
  2008
              
              $
              4,8212009
              
              
              3692010
              
              
              3962011
              
              
              4262012
              
              
              458Thereafter
              
              
              6,212$
              12,682
 
 Cash
          interest payments of $869, $1,169, and $1,112 were made in 2007, 2006,
          and 2005,
          respectively.
 43
  *(a)*
              *Subordinated
                  Debt*
 
 In
          connection with an acquisition in fiscal 2003, we issued 10% subordinated
          notes
          of $1.8 million. The remaining outstanding principal on these notes was
          $477 at
          September 30, 2007. We made the final principal payment of $477, which
          was
          included in current portion of long-term debt at September 30, 2007, and
          interest payment of $48 in October, 2007. These notes were subordinated
          to our
          mortgage and revolving line of credit.
  In
          connection with another acquisition in fiscal 2003, we issued $4.0 million
          of 6%
          convertible notes payable, including $500 payable to a current director
          of the
          Company, due January 1, 2008. These notes were non-interest bearing until
          June
          1, 2005. We are accruing interest expense over the term of these notes
          using the
          effective interest rate method. The holders of these notes may convert
          all or
          part of the outstanding notes and accrued interest into our common stock
          at a
          conversion rate of $16 per common share. These notes are convertible into
          250
          shares of our common stock. We may, at our option, prepay all or any portion
          of
          the outstanding notes plus accrued interest, with prior written notice
          to the
          holders. As of September 30, 2007, we have not made any prepayment elections.
          We
          intend to use proceeds from a mortgage and cash on hand to pay the principal
          of
          $4.0 million on January 1, 2008. If necessary, we may use a portion of
          our
          existing line of credit to make up the remaining balance. At this time,
          we do
          not anticipate the need to borrow on the line of credit to pay the note
          balance.
          These notes are subordinated to our mortgages and revolving line of
          credit.
 *(b)*
              *Revolving
                    Line of Credit*
  Based
          on
          the Amended and Restated Loan
          and
          Security Agreement (Revolving Line of Credit) effective as of October 24,
          2007, we
          have a
          revolving line of credit through December 31, 2009 with our commercial
          bank
          which we use for working capital and other purposes. Borrowings under the
          agreement are collateralized by substantially all assets related to our
          operations and all common stock of our United States subsidiaries and 65%
          of the
          common stock of our non-United States subsidiaries. Under the terms of the
          agreement, the Company has agreed to restrict advances to subsidiaries,
          limit
          additional indebtedness and capital expenditures as well as to comply with
          certain financial covenants outlined in the borrowing agreement. The credit
          agreement contains cross-default provisions with our mortgages or other
          borrowings.
  Our
          amended revolving line of credit limits outstanding borrowings to the borrowing
          base as defined in the agreement, to a maximum available amount of $5.0
          million.
          As of September 30, 2007, there were no borrowings on this line. We also
          have an
          outstanding letter of credit to collateralize our lease in Baltimore,
          Maryland for $1.0 million, which is counted against our allowable borrowings. Borrowings
          under the line of credit bear interest at a variable rate based on the
          London
          Interbank Offer Rate (LIBOR) or a base rate determined by the lender’s prime
          rate plus an applicable margin, as defined in the agreement. The applicable
          margin for borrowings under the line of credit  ranges from 0.00% to
          0.50% for base rate borrowings and 1.50% to 3.00% for LIBOR borrowings,
          subject
          to adjustment based on the average availability under the line of credit.
          We
          also pay a commitment fee on the unused portion of the line of credit ranging
          from 0.20% - 0.30%. All interest and fees are paid monthly. Under
          the
          computation of the borrowing base, we had $3.3 million of available additional
          borrowing capacity at September 30, 2007. We were in compliance with our
          loan
          covenants at September 30, 2007.
 44
  **8.
        INCOME TAXES**
  Significant
        components of our deferred tax liabilities and assets as of September 30
        are as follows:
 **2007**
                
                **2006**(a)Long-term
                  deferred tax liabilities:Tax
                    over book depreciation
                
                $
                495
                
                $
                683Lower
                    tax basis on assets of acquired company
                
                
                (101
                )
                
                (144
                )Stock
                    options expensed
                
                
                (
                    57
                )
                
                —Total
                    long-term deferred tax liabilities
                
                $
                337
                
                $
                539Current
                    deferred tax assets:Inventory
                    pricing
                
                $
                176
                
                $
                111Accrued compensation and vacation
                
                
                410
                
                
                230Accrued
                    expenses and other - net
                
                
                184
                
                
                74Foreign
                    tax credit carryover
                
                
                120
                
                
                120Deferred
                    gain on sale/leaseback
                
                
                7
                
                
                36Foreign
                    net operating loss
                
                
                326
                
                
                456Total
                    current deferred tax assets
                
                $
                1,223
                
                $
                1,027Valuation
                    allowance for deferred tax assets
                
                
                (326
                )
                
                (456
                )Net
                    deferred tax assets
                
                $
                897
                
                $
                571Net
                    deferred tax (assets) liabilities
                
                $
                (560
                )
                $
                (32
                )
  Significant
        components of the provision (benefit) for income taxes are as follows as
        of the
        end of the year September 30:
 **2007**
                
                **2006**
                
                **2005**(a)
                
                
                (a)Current:Federal
                
                $
                875
                
                $
                (553
                )
                $
                814State
                
                
                224
                
                
                (97
                )
                
                216Foreign
                
                
                (15
                )
                
                120
                
                
                —Total
                    Current
                
                $
                1,084
                
                $
                (530
                )
                $
                1,030Deferred:Federal
                
                $
                (453
                )
                $
                (1,074
                )
                $
                (489
                )State
                
                
                (58
                )
                
                (261
                )
                
                (134
                )Foreign
                
                
                130
                
                
                45
                
                
                —Reduction
                    of valuation allowance
                
                
                (130
                )
                
                (45
                )
                
                —Total
                    deferred
                
                $
                (511
                )
                $
                (1,335
                )
                $
                (623
                )$
                573
                
                $
                (1,865
                )
                $
                407
  (a) *2006
        and 2005 have been retrospectively adjusted for our change in 2007 from the
        last-in, first-out method of inventory accounting to the first-in, first-out
        method.*
  45
  The
        effective income tax rate varied from the statutory federal income tax rate
        as
        follows:
 **2007**
                
                **2006**
                
                **2005**Statutory
                    federal income tax rate
                
                
                34.0
                %
                
                (34.0
                )%
                
                34.0
                %Increases
                    (decreases):Nondeductible
                    expenses
                
                
                7.7
                
                
                0.5
                
                
                6.8Tax
                    benefit of foreign sales
                
                
                (0.7
                )
                
                (1.5
                )
                
                (14.6
                )State
                    income taxes, net of federal tax benefit
                
                
                7.3
                
                
                (5.1
                )
                
                18.1Nontaxable
                    foreign (gains) losses
                
                
                (9.1
                )
                
                1.1
                
                
                80.2Other
                
                
                (1.0
                )
                
                (2.1
                )
                
                0.038.2
                %
                
                (41.1
                )%
                
                124.5
                %
  In
        fiscal
        2007, 2006, and 2005, our foreign operations generated income (loss) before
        income taxes of $405, $142, and $(774), respectively. We have foreign net
        operating loss carryforwards of $1,425that
        have
        an indefinite life under current UK tax law.
  Payments
        made in 2007, 2006, and 2005 for income taxes amounted to $984, $498, and
        $407,
        respectively.
  **9.
        STOCK-BASED COMPENSATION**
  *Summary
        of Stock Option Plans and Activity*
  We
        have
        an Employee Stock Option Plan whereby options to purchase our common shares
        at
        fair market value at date of grant can be granted to our employees. Options
        granted vest and become exercisable in four equal installments beginning
        two
        years after the 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 2008.
  We
        established an Outside Director Stock Option Plan whereby options to purchase
        our common shares at fair market value at date of grant can be granted to
        outside directors. Options granted vest and become exercisable in four equal
        installments beginning two years after the date of grant and expire upon
        the
        earlier of the director's termination of board service with us, or ten years
        from the date of grant. This plan terminates in fiscal 2008.
  A
        summary
        of our stock option activity and related information for the years ended
        September 30 is as follows (in thousands except for share prices):
 
 **2007**
              
              **2006**
              
              **2005****Options****(shares)**
              
              **Weighted-
                  Average**
                **Exercise Price**
              
              **Options**
                **(shares)**
              
              **Weighted-
                  Average**
                **Exercise Price**
              
              **Options**
                **(shares)**
              
              **Weighted-
                  Average**
                **Exercise Price**Outstanding –
                  beginning
                  of year
              
              
              404
              
              $
              4.98
              
              
              480
              
              $
              4.95
              
              
              343
              
              $
              4.66Exercised
              
              
              (17
              )
              
              4.48
              
              
              (21
              )
              
              4.50
              
              
              (2
              )
              
              4.25Granted
              
              
              305
              
              
              6.98
              
              
              —
              
              
              —
              
              
              173
              
              
              5.39Terminated
              
              
              (77
              )
              
              4.91
              
              
              (55
              )
              
              4.90
              
              
              (34
              )
              
              4.63Outstanding –
                  end of year
              
              
              615
              
              $
              6.00
              
              
              404
              
              $
              4.98
              
              
              480
              
              $
              4.95Weighted
                  grant date fair values
              
              
              
              
              $
              3.57
              
              
              
              
              $
              —
              
              
              
              
              $
              3.38
  The
        intrinsic values of options exercised in the years ended September 30, 2007,
        2006 and 2005 were $10, $37 and $4 respectively. We received $79, $94 and
        $6
        from the exercise of qualified employee stock options in fiscal 2007, 2006
        and
        2005, respectively, for which no tax benefit was recognized. The options
        on the
        615 shares outstanding at September 30, 2007 had an aggregate intrinsic value
        of
        $909 and a weighted average contract term of 7.9 years.  46
  A
        summary
        of non-vested options for the year ended September 30, 2007 is as
        follows:
 **Number of**
                  **Shares**
                
                **Weighted**
                  **Average**
                  **Grant Date**
                  **Fair Value**Non-vested
                    options, beginning of year
                
                
                278
                
                $
                3
                    .75Granted
                
                
                305
                
                
                3
                    .79Vested
                
                
                (134
                )
                
                3
                    .38Forfeited
                
                
                (31
                )
                
                3
                    .47Non-vested
                    options, end of year
                
                
                418
                
                $
                3
                    .71
  At
        September 30, 2007, there were 197 shares vested, all of which were exercisable.
        The weighted average exercise price for these shares was $5.02 per share;
        the
        aggregate intrinsic value of these shares was $490 and the weighted average
        remaining term was 5.7 years. As
        of
        September 30, 2007, our total unrecognized compensation cost related to
        non-vested stock options was $932 and is expected to be recognized over a
        weighted-average service period of 2.43 years.
  At
        September 30, 2007, there are 347 shares available for grants under the two
        plans .
  The
        following table summarizes outstanding and exercisable options as of
        September 30, 2007 (In thousands except per share
        amounts):


**Range
                  of exercise prices**
              
              **Number
                  of shares**
                **outstanding**
                **at
                  September 30,**
                **2007**
              
              **Weighted**
                **average**
                **remaining**
                **contractual**
                **life
                  (years)**
              
              **Weighted**
                **average**
                **exercise**
                **price**
              
              **Number
                  of**
                **shares**
                **exercisable**
                **at**
                **September**
                **30,
                  2007**
              
              **Weighted**
                **average**
                **exercise**
                **price**$
              2.80
                  - 4.58
              
              
              158
              
              
              5
                  .61
              
              $
              4
                  .35
              
              
              119
              
              $
              4
                  .33$
              5.00
                  - 5.74
              
              
              155
              
              
              7
                  .76
              
              $
              5
                  .42
              
              
              61
              
              $
              5
                  .54$
              7.10
                  - 8.00
              
              
              302
              
              
              9
                  .11
              
              $
              7
                  .16
              
              
              17
              
              $
              8
                  .00




The
      assumptions used in computing our stock based compensation expense for the
      fiscal years ended September 30 were as follows (because we had no grants during
      fiscal 2006, no assumptions are presented for that year):





**2007**
            
            **2005**Risk-free
                interest rate
            
            
            4.65
            %
            
            3.00
            %Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Volatility
                of the expected market priceof
                the Company's common stock
            
            
            44.00
              63.00
            %-
              %
            
            67.00
            %Expected
                life of the options (years)
            
            
            7.0
            
            
            7.0




**11.
      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% (2% in 2006 and 2005) 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 2007, 2006, and 2005. Contribution expense
      was
      $326, $638, and $555 in fiscal 2007, 2006, and 2005, respectively .


47


**12.
      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 analytical 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
      service or product 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.




During
      2007, we changed our method of accounting for inventories from the LIFO method
      to the FIFO method, and accordingly, segment results for fiscal 2006 and
      2005 have been retrospectively adjusted on a FIFO basis.




*(a)*
            *Operating
                Segments*




**Year
                  ended September 30,****2007**
              
              **2006**
              
              **2005**Revenue:Service
              
              $
              36,051
              
              $
              34,318
              
              $
              32,951Product
              
              
              9,194
              
              
              8,730
              
              
              9,444Total
              
              $
              45,245
              
              $
              43,048
              
              $
              42,395Operating
                  income (loss):Service
              
              $
              1,720
              
              $
              (3,728
              )
              $
              148Product
              
              
              670
              
              
              205
              
              
              1,148Total
                  operating income (loss)
              
              
              2,390
              
              
              (3,523
              )
              
              1,296Corporate
                  expenses
              
              
              (891
              )
              
              (1,012
              )
              
              (969
              )Income
                  (loss) before income taxes
              
              $
              1,499
              
              $
              (4,535
              )
              $
              327


*[Remainder
          of page intentionally left blank.]*
 48


**Year
                  ended September 30,****2007**
              
              **2006**
              
              **2005**Identifiable
                  assets:Service
              
              $
              23,979
              
              $
              24,539
              
              $
              31,739Product
              
              
              9,258
              
              
              9,947
              
              
              10,322Corporate
              
              
              8,800
              
              
              7,878
              
              
              5,888Total
              
              $
              42,037
              
              $
              42,364
              
              $
              47,949Goodwill,
                  net:Service
              
              $
              1,481
              
              $
              1,481
              
              $
              1,071Product
              
              
              374
              
              
              374
              
              
              374Total
              
              $
              1,855
              
              $
              1,855
              
              $
              1,445Intangible
                  assets, net:Service
              
              $
              304
              
              $
              517
              
              $
              2,156Product
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              304
              
              $
              517
              
              $
              2,156Depreciation
                  and amortization:Service
              
              $
              3,222
              
              $
              3,414
              
              $
              3,125Product
              
              
              236
              
              
              475
              
              
              316Total
              
              $
              3,458
              
              $
              3,889
              
              $
              3,441Capital
                  expenditures:Service
              
              $
              759
              
              $
              1,518
              
              $
              1,483Product
              
              
              119
              
              
              169
              
              
              818Total
              
              $
              878
              
              $
              1,687
              
              $
              2,301




*(b)*
            *Geographic
                Information*




**Year
                  ended September 30,****2007**
              
              **2006**
              
              **2005**Sales
                  to external customers:North
                  America
              
              $
              39,420
              
              $
              37,615
              
              $
              34,046Pacific
                  Rim
              
              
              700
              
              
              693
              
              
              1,052Europe
              
              
              4,562
              
              
              4,299
              
              
              4,899Other
              
              
              563
              
              
              441
              
              
              2,398Total
              
              $
              45,245
              
              $
              43,048
              
              $
              42,395Long-lived
                  assets:North
                  America
              
              $
              24,729
              
              $
              27,676
              
              $
              29,499Europe
              
              
              808
              
              
              976
              
              
              1,204Total
              
              $
              25,537
              
              $
              28,652
              
              $
              30,703




49


*(c)*
            *Major
                Customers*




In
      2007,
      2006 and 2005, Pfizer (and its predecessor companies) accounted for
      approximately 5.3%, 7.3%, and 10.1%, respectively, of our total revenues and
      5.1% and 12.8% of total trade accounts receivable at September 30, 2007 and
      2006, respectively.




**13.
      RELATED PARTY TRANSACTIONS**




As
      of
      September 30, 2007, we have a 6% subordinated convertible note payable for
      $500 to one of our directors (a former director of PKLB). During fiscal 2004,
      we
      repaid $350 of debt to this director through a series of transactions which
      resulted in our paying $200 of principal in cash (plus accrued interest to
      the
      date of repayment) and exchanging 38 shares of common stock for $150 face amount
      of debt. On January 1, 2008, we expect to pay the remaining principal balance
      of
      the note in cash.




Included
        in fiscal 2007 operating expenses is approximately $360 of severance costs
        for
        former officers of the Company as agreed upon on September 28, 2007 in
        connection with their resignations. Approximately $88 was paid to each of
        Dr.
        and Mrs. Kissinger on October 5, 2007, with the remaining to be paid in six
        equal installments beginning November 2007 through April 2008.


**14.
      CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)**




The
      following is a summary of the unaudited quarterly results of operations for
      fiscal years 2007, 2006 and 2005 (in thousands except per share amounts).




First
                Quarter
              
              Second
                Quarter
              
              Third
                Quarter
              
              Fourth
                Quarter2007Total
                  Revenue
              
              $
              10,884
              
              $
              11,311
              
              $
              12,615
              
              $
              10,435Gross
                  Profit*(a)*
              
              
              3,391
              
              
              3,180
              
              
              4,118
              
              
              3,103Net
                  income (loss)*(a)*
              
              
              556
              
              
              124
              
              
              449
              
              
              (203
              )Basic
                  net income (loss) per common share outstanding*(a)*
              
              
              0.11
              
              
              0.03
              
              
              0.09
              
              
              (0.04
              )Diluted
                  net income (loss) per common share outstanding*(a)*
              
              
              0.11
              
              
              0.03
              
              
              0.09
              
              
              (0.04
              )2006Total
                  Revenue
              
              $
              9,844
              
              $
              12,417
              
              $
              10,038
              
              $
              10,749Gross
                  Profit*(a)*
              
              
              3,146
              
              
              4,934
              
              
              2,530
              
              
              3,100Impairment
                  loss
              
              
              —
              
              
              —
              
              
              1,100
              
              
              —Net
                  income (loss)*(a)*
              
              
              (716
              )
              
              538
              
              
              (1,756
              )
              
              (736
              )Basic
                  net income (loss) per common share outstanding (*a)*
              
              
              (0.15
              )
              
              0.11
              
              
              (0.36
              )
              
              (0.15
              )Diluted
                  net income (loss) per common share outstanding*(a)*
              
              
              (0.15
              )
              
              0.11
              
              
              (0.36
              )
              
              (0.15
              )2005Total
                  Revenue
              
              $
              9,694
              
              $
              9,139
              
              $
              11,304
              
              $
              12,258Gross
                  Profit*(a)*
              
              
              3,627
              
              
              2,426
              
              
              5,026
              
              
              4,301Net
                  income (loss)*(a)*
              
              
              404
              
              
              (896
              )
              
              356
              
              
              56Basic
                  net income (loss) per common share outstanding*(a)*
              
              
              0.08
              
              
              (0.18
              )
              
              0.07
              
              
              0.01Diluted
                  net income (loss) per common share outstanding*(a)*
              
              
              0.08
              
              
              (0.18
              )
              
              0.07
              
              $
              0.01
 *(a)
        Amounts have been retrospectively adjusted for our change in the fourth quarter
        of 2007 from the last-in, first-out method of inventory accounting to the
        first-in, first-out method.*


50


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




Report
      of
      Independent Registered Public Accounting Firm


To
      the
      Board of Directors


Bioanalytical
      Systems, Inc.


West
      Lafayette, Indiana





We
      have
      audited the consolidated balance sheets of Bioanalytical Systems, Inc.and
      subsidiaries as of September 30, 2007 and 2006, 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. 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
      and subsidiaries as of September 30, 2007 and 2006, and the results of their
      operations and their cash flows for the years then ended ,
      in
      conformity with U.S. generally accepted accounting principles.





As
        described in Notes 2 and 5 to the financial statements, the Company changed
        its method of accounting for inventories in 2007. This change has been applied
        retrospectively to fiscal 2005 and 2006 and, accordingly, all prior financial
        statements have been adjusted. We
        audited the adjustment described in Note 5 that was applied to adjust the
        2005 and 2006 financial statements. In our opinion, such adjustment is
        appropriate and has been properly applied.







/s/
      Crowe
      Chizek and Company LLC


Indianapolis,
      Indiana


December
      27, 2007


51


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Report
      of
      Independent Registered Public Accounting Firm


To
      the
      Board of Directors


Bioanalytical
      Systems, Inc.


West
      Lafayette, Indiana




We
          have
          audited the accompanying consolidated statements of operations, shareholders'
          equity and comprehensive income (loss), and cash flows of Bioanalytical
          Systems,
          Inc. and subsidiaries for the year ended September 30, 2005, before the
          restatement described in notes 2 and 5 to the financial statements. These
          consolidated financial statements are the responsibility of the Company's
          management. Our responsibility is to express an opinion on these consolidated
          financial statements based on our audit.
  We
          conducted our audit 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. 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 audit provides a
          reasonable basis for our opinion.
  In
          our
          opinion, the consolidated financial statements (before restatement) referred
          to
          above present fairly, in all material respects, the consolidated results
          of
          operations of Bioanalytical Systems, Inc. and subsidiaries and its cash
          flows
          for the year ended September 30, 2005, in conformity with U.S.
          generally accepted accounting principles.


/s/
      KPMG
      LLP


Indianapolis,
      Indiana


January
      7, 2006




52


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




Effective
        September 15, 2006 KPMG LLP (“KPMG”) resigned as the Company’s independent
        accountant. KPMG's reports on the Company's consolidated financial statements
        as
        of and for the year ended September 30, 2005 did not contain an adverse opinion
        or disclaimer of opinion, nor was such report qualified or modified as to
        uncertainty, audit scope or accounting principle. During the year ended
        September 30, 2005, and through September 15, 2006, there were (1) no
        disagreements with KPMG on any matter of accounting principles or practices,
        financial statement disclosure, or auditing scope or procedure, which
        disagreements if not resolved to the satisfaction of KPMG would have caused
        KPMG
        to make reference thereto in KPMG's reports on the financial statements for
        such
        years; and (2) no other reportable events, as defined in Item 304(a)(1)(v)
        of
        the Commission's Regulation S-K, except for the matters set forth below.
 
 In
        connection with KPMG's review of the Report on Form 10-Q and the First Amendment
        to the Report on Form 10-Q for the three and nine months ended June 30, 2006,
        KPMG presented a letter regarding the following items to the Audit Committee
        of
        the Board of Directors, dated August 29, 2006 relating to its review of the
        unaudited interim financial statements for the Company as of June 30, 2006,
        and
        for the three and nine months then ended (the “Letter”). KPMG noted certain
        conditions involving the Company’s internal control and its operation that KPMG
        considered to be “material weaknesses.” “Material weakness” was defined in the
        Letter as “a control deficiency, or combination of control deficiencies, that
        results in more than a remote likelihood that a material misstatement of
        the
        annual or interim financial statements will not be prevented or detected
        by the
        entity's internal control.” The material weaknesses noted by KPMG consisted of a
        failure to set an appropriate "tone at the top" to instill a company-wide
        attitude of control consciousness; failure to maintain adequate procedures
        for
        anticipating and identifying financial reporting risks and for reacting to
        changes in its operating environment that could have a material effect on
        financial reporting; failure to maintain adequately trained personnel to
        perform
        effective review of accounting procedures critical to financial reporting;
        and a
        lack of adequately trained finance and accounting personnel with the ability
        to
        apply U.S. generally accepted accounting principles associated with the
        impairment of certain long-lived assets in accordance with Statement of
        Financial Accounting Standards No. 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets* .
        Management concurred with the assessment of KPMG. KPMG discussed the matters
        described in this paragraph with the Audit Committee of the Company. The
        Company
        authorized KPMG to respond fully to the inquiries of its successor accountant
        concerning these matters.
  KPMG
        also
        communicated to the Audit Committee in the Letter that the Company had filed
        its
        Report on Form 10-Q for the three and nine month periods ended June 30, 2006,
        prior to the completion of its interim review. KPMG has subsequently completed
        its interim review and the Company filed an amended report on Form 10-Q/A
        for
        the three and nine month periods ended June 30, 2006.
  On
        October 30, 2006 the Audit Committee of the Company’s Board of Directors engaged
        Crowe Chizek and Company LLC (“Crowe Chizek”) to be the Company’s independent
        registered public accounting firm to audit and report on the Company’s
        consolidated financial statements for the year ended September 30, 2006.
        During
        the two most recent fiscal years ended September 30, 2006 and 2005, and through
        October 30, 2006, the Company had not consulted with Crowe Chizek regarding
        either: (i) the application of accounting principles to a specified
        transaction, either completed or proposed; or the type of audit opinion that
        might be rendered on the Company’s financial statements; or (ii) any matter that
        was either the subject of a disagreement (as that term is defined in Item
        304(a)(1)(iv) of Regulation S-K and the related instructions to that Item)
        or a
        reportable event (as that term is defined in Item 304(a)(1)(v) of Regulation
        S-K).




*[Remainder
      of page intentionally left blank.]*




53




***ITEM
      9A-CONTROLS AND PROCEDURES***




*Disclosure
      Controls and Procedures*




Based
        on
        their most recent evaluation, which was completed as of September 30, 2007,
        our
        Chief Executive Officer and Chief Financial Officer believe that our disclosure
        controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
        15d-15(e)) were effective as of September 30, 2007. In response to the matters
        described in Item 9 above, and to ensure that information required to be
        disclosed in this Form 10-K was recorded, processed, summarized and reported
        within the time periods specified by the Securities and Exchange Commission’s
        rules and forms,, as of September 30, 2007, we had retained a new Chief
        Executive Officer with a financial background to set a better “tone at the top”
regarding our systems, and regard for internal control. We have also instituted
        additional procedures to more timely identify financial statement risks.
        In
        order to maintain a capability to perform effective review of accounting
        procedures critical to financial reporting, we decided to retain an outside
        accounting firm, separate from our auditors, to consult on accounting and
        reporting issues where we do not have sufficient internal capabilities. The
        Chief Executive Officer and Chief Financial Officer believe that implementing
        these new procedures resulted in effective disclosure controls and procedures
        as
        of September 30, 2007.


*Changes
      in Internal Controls*




Except
      as
      noted above, there were no significant changes in the internal controls or
      other
      factors that could significantly affect those controls subsequent to the date
      of
      their evaluation, which was completed as of September 30, 2007.




***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, 2007. Except as indicated in the following
      paragraphs, the principal occupations of these persons has 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.




Name
              
              Age
              
              PositionWilliam
                  E. Baitinger
              
              74
              
              DirectorDavid
                  W. Crabb
              
              54
              
              DirectorLeslie
                  B. Daniels
              
              60
              
              DirectorLarry
                  S. Boulet
              
              61
              
              DirectorRichard
                  M. Shepperd
              
              67
              
              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.




**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.




54




**Larry
        S. Boulet** has
        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 the immediate past Chairman of
        the
        Board. He holds a Bachelor of Science degree in Accounting from Indiana State
        University.
  **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 and Leslie B. Daniels 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 filed as an exhibit to this Form 10-K.




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.




***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.




55




***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.]*
  56




**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 31 of this report.




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




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






**Number**
            
            **Description
                of Exhibits**





(3)
            3.1
            Second
                Amended and Restated Articles of Incorporation of Bioanalytical Systems,
                Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q for the
                quarter ended December 31, 1997).





3.2
            Second
                  Amended and Restated Bylaws of Bioanalytical Systems, Inc. (incorporated
                  by reference to Exhibit 3.2 to Form 10-Q for the quarter ended
                  March 31,
                  2007).




(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.





4.3
            Form
                of 6% Subordinated Convertible Note due 2008 (incorporated by reference
                to
                Form 8-K filed November 21, 2002).





4.4
            Form
                of 10% Subordinated Note due 2007 (incorporated by reference to Exhibit
                4.3 of Form 10-Q for the quarter ended June 30, 2003).





(10)
            10.1
            Bioanalytical
                Systems, Inc. 1990 Employee Incentive Stock Option Plan (*) (incorporated
                by reference to Exhibit 10.4  to Registration Statement on Form S-1,
                Registration No. 333-36429).





10.2
            Form
                of Bioanalytical Systems, Inc. 1990 Employee Incentive Stock Option
                Agreement (*) (incorporated by reference to Exhibit 10.5  to
                Registration Statement on Form S-1, Registration No. 333-36429).





10.3
            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).





10.4
            Form
                of Bioanalytical Systems, Inc. 1997 Employee Incentive Stock Option
                Agreement (*) (incorporated by reference to Exhibit 10.27 to Registration
                Statement on Form S-1, Registration No. 333-36429).





10.5
            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).


10.6
              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).


57
 **Number**
                  
                  **Description
                      of Exhibits**


10.7
            Loan
                Agreement between Bioanalytical Systems, Inc. and Regions Bank dated
                December 18, 2007 (filed herewith).





10.8
            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).





10.9
            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).




10.10
            Letter
                agreement between Bioanalytical Systems, Inc. and Ronald E. Shoup,
                Ph.D.
                dated June 19, 2003 (incorporated by reference to Exhibit 10.1 of
                Form 8-K filed July 24, 2007).




10.11
            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).





10.12
            Loan
                Agreement between Bioanalytical Systems, Inc. and Union Planters
                Bank,
                dated October 29, 2002 (incorporated by reference to Exhibit 10.15
                of Form
                10-K for the fiscal year ended September 30, 2002).





10.13
            Real
                Estate Mortgage and Security Agreement between Bioanalytical Systems,
                Inc.
                and Union Planters Bank, dated October 29, 2002 (incorporated by
                reference
                to Exhibit 10.16 of Form 10-K for the fiscal year ended September
                30,
                2002).





10.14
            Real
                Estate Mortgage and Security Agreement between Bioanalytical Systems,
                Inc.
                and Union Planters Bank, dated October 29, 2002 (incorporated by
                reference
                to Exhibit 10.17 of Form 10-K for the fiscal year ended September
                30,
                2002).





10.15
            Term
                Loan Promissory Note made by Bioanalytical Systems, Inc. in favor
                of Union
                Planters Bank, dated October 29, 2002 (incorporated by reference
                to
                Exhibit 10.18 of Form 10-K for the fiscal year ended September 30,
                2002).





10.16
            Promissory
                Note made by Bioanalytical Systems, Inc. in favor of Union Planters
                Bank,
                dated October 29, 2002 (incorporated by reference to Exhibit 10.19
                of Form
                10-K for the fiscal year ended September 30, 2002).




10.17
            Purchase
                and Sale Agreement between BASi Maryland, Inc. and 300 W. Fayette,
                LLC,
                closed January 5, 2005 (incorporated by reference to Exhibit 10.1
                of Form
                8-K filed January 10, 2005).


10.18
                First
                    Amendment to the Purchase and Sale Agreement dated September
                    7, 2004
                    (incorporated by reference to Exhibit 10.20 to Form 10-K for the
                    fiscal year ended September 30, 2004).
 
 10.19
                Second
                    Amendment to the Purchase and Sale Agreement dated on or about
                    November
                    11, 2004 (incorporated by reference to Exhibit 10.21 to Form 10-K for
                    the fiscal year ended September 30, 2004).
 
 10.20
                Office
                    Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street,
                    LLC,
                    dated on or about January 5, 2004 (incorporated by reference
                    to Exhibit
                    10.22 to Form 10-K for the fiscal year ended September 30, 2004).
 58
  **Number**
              
              **Description
                  of Exhibits**


10.21
            Employment
                Agreement by and between Bioanalytical Systems, Inc. and Edward M.
                Chait
                dated August 1, 2005 (*) (incorporated by reference to Exhibit 10.1
                to
                Form 8-K filed August 5, 2005).





10.22
            Form
                of Grant of non-qualified stock options dated August 1, 2005 to Edward
                M.
                Chait (*) (incorporated by reference to Exhibit 10.24 to Form 10-K
                for the fiscal year ended September 30, 2005).





10.23
            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 year ended March 31, 2004).




10.24
            Severance
                Agreement and Release of All Claims with Michael P. Silvon, dated
                July 17,
                2006 (*) (incorporated by reference to Exhibit 10.1 to Form 8-K filed
                July
                31, 2006).




10.25
            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).




10.26
            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).




10.27
            First
                Amendment to Lease by and between 300 W. Fayette Street, LLC and
                Bioanalytical Systems, Inc., entered into on May 20, 2007 (incorporated
                by
                reference to Exhibit 10.3 to Form 10-Q for the fiscal quarter ended
                June
                30, 2007).10.28
            Lease
                Agreement by and between 300 W. Fayette Street, LLC and Bioanalytical
                Systems, Inc., entered into on May 20, 2007 (incorporated by reference
                to
                Exhibit 10.4 to Form 10-Q for the fiscal quarter ended June 30, 2007).





10.29
            Severance
                Agreement and Release of All Claims, dated September 28, 2007, between
                Candice B. Kissinger and Bioanalytical Systems, Inc. (*) (incorporated
                by
                reference to Exhibit 10.1 to Form 8-K filed October 4, 2007)





10.30
            Severance
                Agreement and Release of All Claims, dated September 28, 2007, between
                Peter T. Kissinger, PhD. and Bioanalytical Systems, Inc. (*) (incorporated
                by reference to Exhibit 10.2 to Form 8-K filed October 4, 2007)





10.31
            License
                Agreement, dated September 28, 2007, between Phlebotics, Inc. and
                Bioanalytical Systems, Inc. (incorporated by reference to Exhibit
                10.3 to
                Form 8-K filed October 4, 2007).




10.32
              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).
 
 10.33
              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).10.34
              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).


59
 
  **Number**
                  
                  **Description
                      of Exhibits**


10.35
            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).10.36
            Nonqualified
                option letter agreement between Michael R. Cox and Bioanalytical
                Systems,
                Inc., dated November 6, 2007 (incorporated by reference to Exhibit
                10.3 to
                Form 8-K filed November 13, 2007).10.37
            Employment
                Agreement between Edward M. Chait and Bioanalytical Systems, Inc.,
                dated
                November 6, 2007 (incorporated by reference to Exhibit 10.4 to Form
                8-K
                filed November 13, 2007).10.38
            Employee
                Incentive Stock Option Agreement between Edward M. Chait and Bioanalytical
                Systems, Inc., dated November 6, 2007 (incorporated by reference
                to
                Exhibit 10.5 to Form 8-K filed November 13, 2007).10.39
            Nonqualified
                option letter agreement between Edward M. Chait and Bioanalytical
                Systems,
                Inc., dated November 6, 2007 (incorporated by reference to Exhibit
                10.6 to
                Form 8-K filed November 13, 2007).





(14)
            14
            Code
                of Ethics (incorporated
                by reference to Exhibit 14 to Form 10-K for the fiscal year ended
                September 30, 2006).(18)
            18
            Letter
                re: Change in Accounting Principles regarding the change in accounting
                for
                certain inventories (filed herewith).(21)
            21.1
            Subsidiaries
                of the Registrant (incorporated by reference to Exhibit 21.1 to Form
                10-K
                for the fiscal year ended September 30, 2005).





(23)
            23.1
            Consent
                of Independent Registered Public Accounting Firm Crowe Chizek and
                Company
                LLC (filed herewith).





23.2
            Consent
                of Independent Registered Public Accounting Firm KPMG 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
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002 (filed herewith).




32.2
            Certification
                of Executive Vice President, Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002 (filed
                herewith).





*     
      Management contract or compensatory plan or arrangement.





60






**SIGNATURES**




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




Date:  December
                27, 2007
              
              
              
              Date:  December
                27, 2007
            BIOANALYTICAL
                SYSTEMS, INC.
              (Registrant)
              
              By:  /s/  Richard
                M. Shepperd
              
              Richard
                M. Shepperd
              President
                and Chief Executive Officer
              
              By:  /s/  Michael
                R. Cox
              Michael
                R. Cox
              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
                
                Richard
                  M. Shepperd
              
              President and Chief Executive Officer
                (Principal
                  Executive Officer)
              
              December
                  27, 2007
  /s/  Michael
                  R. Cox
                
                Michael
                  R. Cox
              
              Vice
                  President, Finance and Administration, Chief Financial Officer
                  and
                  Treasurer (Principal Financial and Accounting Officer)
              
              December
                    27, 2007
 
 /s/  William
                  E. Baitinger
                
                William
                  E. Baitinger
              
              Director
              
              December
                    27, 2007
 
 /s/
                    David W. Crabb
                
                David
                  W. Crabb
              
              Director
              
              December
                    27, 2007
  /s/
                    Leslie B. Daniels
                
                Leslie
                  B. Daniels
              
              Director
              
              December
                    27, 2007
 /s/
                      Larry
                      S. Boulet
                  
                  Larry
                    S. Boulet
                
                Director
                
                December
                      27, 2007
 61