Document:

May
      18,
      2007

     

    

     

    Mr.
      Richard M. Shepperd

    1664
      Rockcrest Hills Ave.

    Henderson,
      NV 89052

     

    Dear
      Richard:

     

    The
      Board
      of Directors of Bioanalytical Systems, Inc. (the "Company")
      has
      approved the grant of non-qualified stock options to you. This letter will
      serve
      as notice of the grant, effective as of the date of this letter (the
      "Date
      of Grant"),
      and
subject
      to and conditioned in all respects on the approval of the shareholders of the
      Company,
      of
      an
      option to purchase (the "Option")
      275,000 of the Common Shares of the Company (the "Option
      Shares")
      on the
      terms and conditions set forth herein, and upon your execution and delivery
      to
      the Company of the copy of this letter included herein will constitute our
      agreement as to those terms. This
      Option has not been granted under the terms of the Company’s employee stock
      option plans, and is not a "qualified" stock option as defined by the Internal
      Revenue Service.
      You are
      urged to consult with your tax advisors concerning the tax effect of the grant
      and exercise of this Option.

     

    1. OPTION
      PRICE.
      The
      purchase price of the Option Shares is $7.10 per share (the "Option
      Price").

     

    2. MEDIUM
      AND TIME OF PAYMENT.
      You
      must pay the Option Price with respect to the Option Shares being purchased
      at
      the time you exercise the Option. The Option Price may be paid either (a) in
      cash; (b) by certified check or by bank cashier's check; (c) if you can do
      so
      without violating Section 16(b) of the Securities Exchange Act of 1934, through
      the tender to the Company of outstanding Common Shares, which shall be valued,
      for purposes of determining the extent to which the purchase price has been
      paid, at the fair market value of the Common Shares on the date of exercise
      of
      the Option; (d)
      by
surrendering
      a sufficient portion of the vested Option based on the difference between the
      exercise price of the Option and the fair market value at the time of exercise
      of the Shares subject to the Option,
      or (e)
      by any combination of (a), (b), (c) and (d).

     

    3. TERM
      AND EXERCISABILITY OF OPTIONS.
      The
      Option is effective immediately upon your acceptance of this letter subject
      only
      to approval of the Company's shareholders. Unless the Option is terminated
      or
      vesting of the Option or any portion thereof is accelerated (in each case as
      provided in this letter), the Option shall vest and become exercisable in three
      installments, as follows: (a) as to the first installment of 75,000 shares,
      at
      5:00 p.m., West Lafayette, Indiana time, on the day the shareholders of the
      Company approve the Option, (b) as to the second installment of 100,000 shares,
      on December 1, 2008, and (c) as to the third installment of 100,000 shares,
      on December 1, 2009. The Option shall also vest and become exercisable as
      to all unvested Option Shares upon the occurrence of a "Change in Control"
      as
      defined in your Employment Agreement with the Company of even date herewith,
      as
      the same may be amended from time to time. The Option will be considered to
      have
      been effectively exercised only upon delivery to the Company, with a copy to
      the
      Chair of the Compensation Committee of the Board of Directors of the Company,
      of
      the Option Price and a "Notice
      of Exercise"
      in the
      form attached hereto, and the satisfaction of all other conditions described
      in
      this letter. The Option shall expire as to all unexercised Option Shares at
      the
      close of business on the tenth anniversary of the date of this letter (or on
      the
      next business day if that date is a Saturday, Sunday or holiday).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
      Mr.
        Richard M. Shepperd

      May
        18,
        2007

      Page
        2

       

    

    4. APPROVAL
      BY SHAREHOLDERS.
      The
      Option granted hereby is conditioned upon and subject to approval by the
      shareholders of the Company. In the event that the shareholders of the Company
      fail to approve the grant of the Option within twelve (12) months of the date
      of
      this letter, the Option shall be null and void and of no effect, and neither
      you
      nor the Company shall have any continuing rights or obligations hereunder.
      The
      Company will submit the Option to its shareholders for approval at the first
      annual or special meeting of its shareholders occurring after the date hereof,
      and in any event prior to the expiration of twelve (12) months from the date
      hereof.

     

    5. CESSATION
      OF SERVICE WITH THE COMPANY.
      In the
      event you cease to serve as an employee of the Company or any of its
      subsidiaries, this Option shall terminate immediately upon termination of
      employment as to any unexercised Option Shares; provided, however, that if
      termination of employment is due to retirement with the consent of the Company,
      the expiration of the term of your employment with the Company set forth in
      your
      employment agreement, or is due to a permanent and total disability, you shall
      have the right to exercise the Option with respect to the Common Shares for
      which it could have been exercised on the effective date of termination of
      employment at any time within three (3) months after the termination date.
      In
      the event of your death while serving as an employee of the Company or any
      of
      its subsidiaries, your personal representative shall have the right to exercise
      this Option with respect to the Common Shares for which it could have been
      exercised on the date of your death at any time within six (6) months of your
      death. Whether termination is a retirement with the consent of the Company
      or
      due to permanent and total disability, and whether an authorized leave of
      absence on military or government service shall be deemed to constitute
      termination of employment for the purposes of this Option, shall be determined
      by the Board of Directors in its sole discretion, which determination shall
      be
      final and conclusive.

     

    6. RECAPITALIZATION.
      The
      number of Option Shares and the Option Price each shall be proportionally
      adjusted for any increase or decrease in the number of issued Common Shares
      resulting from a subdivision or consolidation of shares of the Company, the
      payment of a share dividend, a share split or other increase or decrease in
      the
      outstanding Common Shares effected without receipt of consideration by the
      Company (including an increase or decrease effected as a part of the
      Recapitalization of the Company, as defined herein). In the event that there
      shall be a recapitalization or reorganization of the Company or a
      reclassification of its outstanding shares (each a "Recapitalization")
      as a
      result of which other shares (the "New
      Shares")
      are
      issued in exchange for Common Shares, then there shall be substituted for the
      Option Shares then issuable hereunder that number of New Shares into which
      those
      Option Shares have been converted had they been outstanding at the effective
      date of the Recapitalization.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

      Mr.
        Richard M. Shepperd

      May
        18,
        2007

      Page 3
        

    

     

    7. MERGER,
      DISSOLUTION.
      If the
      Company shall enter into any agreement of merger or consolidation (whether
      or
      not it shall be the surviving entity thereunder), the Company shall have the
      right to terminate this Option as of any date specified in a written notice
      given to you not less than 30 days prior to the termination date. If the merger
      or consolidation described in that notice is not consummated within 180 days
      following the termination date of this Option specified in the notice, this
      Option thereafter shall be deemed to have been continuously in effect since
      the
      date hereof. In the event of the sale of all or substantially all of the assets
      of the Company and the distribution of the proceeds thereof to shareholders
      in
      liquidation of the company, the Company shall give you 30 days prior written
      notice specifying record date for the purpose of determining the shareholders
      entitled to participate in that distribution and this Option shall expire as
      to
      all Option Shares that remain unexercised as of the date of that
      distribution.

     

    8. NONASSIGNABILITY.
      This
      Option is not assignable or transferable except by will or under the laws of
      descent and distribution. During your lifetime, this Option shall be exercisable
      only by you (or if you become incapacitated, by your legal guardian or
      attorney-in-fact).

     

    9. ISSUANCE
      OF SHARES AND COMPLIANCE WITH SECURITIES LAWS.
      The
      Company may postpone the issuance and delivery of certificates representing
      Common Shares until (a) the admission of such shares to listing on any exchange
      on which shares of the Company of the same class are then listed and (b) the
      completion of any requirements for registration or other qualification of the
      shares under any state or Federal law, rule or regulation or the rules and
      regulations of any exchange upon which the Common shares are traded as the
      Company shall determine to be necessary or advisable. The Company shall use
      its
      reasonable commercial efforts to complete any required registration or other
      qualification. You have no right to require the Company to register the Common
      Shares acquired upon the exercise of this Option under federal or state
      securities laws. As a condition to the effective exercise of this Option you
      may
      be required to make such representations and furnish such information as may,
      in
      the opinion of counsel for the Company, be appropriate to permit the Company
      to
      determine whether registration or qualification of those shares is required
      in
      connection with that transaction.

     

    10. RIGHTS
      AS A SHAREHOLDER.
      You
      shall have no rights as a shareholder with respect to Common Shares subject
      to
      this Option until the date of issuance of a certificate to you. A certificate
      will not be issued until you have exercised the Option, fully paid for the
      Common Shares acquired thereby and satisfied all other details described in
      this
      letter. No adjustment will be made for dividends or other rights for which
      the
      record date is prior to the date a certificate is issued.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    
      Mr.
        Richard M. Shepperd

      May
        18,
        2007

      Page
        4

    

     

    11. NO
      OBLIGATION TO EXERCISE OPTION.
      The
      grant of this Option imposes no obligation upon you to exercise the
      Option.

     

    12. NO
      OBLIGATION TO CONTINUE EMPLOYMENT.
      The
      grant of this Option to you does not constitute any contract of employment
      between you and the Company, and does not impose any obligation of the Company
      to continue your employment.

     

    13. WITHHOLDINGS.
      As a
      condition to the effective exercise of this Option, the Company shall have
      the
      right to require you to remit to the Company amounts sufficient to satisfy
      any
      applicable withholding requirements set forth in the Internal Revenue Code
      of
      1986, as amended, or under state or local law relating to the Option. The
      Company shall have the right, to the extent permitted by law, to deduct from
      any
      payment of any kind otherwise due to you any federal, state or local taxes
      of
      any kind required by law to be withheld with respect to the exercise of the
      Option.

     

    14. POWER
      AND AUTHORITY.
      The
      Board of Directors shall have the full power and authority to take all actions
      and make all determinations required or provided for under the terms of this
      Option; to interpret and construe the provisions of this letter, which
      interpretation or construction shall be final, conclusive and binding on the
      Company and you; and to take any and all other actions and make any and all
      other determinations not consistent with the specific terms and provisions
      of
      this letter which the Board of Directors deems necessary or
      appropriate.

     

    Please
      acknowledge your receipt of this letter and your agreement to the terms set
      forth herein by signing and returning the copy enclosed for that
      purpose.

     

    
      	 	 	 
	 	
              Very
                truly yours,

              

              BIOANALYTICAL
                SYSTEMS, INC.

            
	 
 	 
 	 
 
	Date: 	By:  	/s/ Michael
              R. Cox
	 	 	
              
Michael
              R. Cox, Vice President-Finance and
              Chief
                Financial Officer

            
	 	 	 
	 	Accepted
              and agreed to:   
	 	 
	 	/s/ Richard M. Shepperd
	 	
              
                

              

              Richard M. Shepperd

               

              Date:  May
                18, 2007

            

    

    
 

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      A

     

    BIOANALYTICAL
      SYSTEMS, INC.

     

    NOTICE
      OF EXERCISE

     

    

    Date:
      __________

     

    Mr.
      Michael R. Cox

    Chief
      Financial Officer

    BIOANALYTICAL
      SYSTEMS, INC.

    2701
      Kent
      Avenue

    West
      Lafayette, Indiana 47906

     

    Dear
      Mr.
      Cox:

     

    Pursuant
      to the agreement dated May 18, 2007 granting me an option ("Option")
      with
      respect to the purchase of Common Shares of Bioanalytical Systems, Inc.,
      please accept this letter as notice of exercise of the Option with respect
      to
      ___________ Common Shares. I am tendering full payment to the Company for the
      Common Shares and all applicable withholdings in one or more of the following
      forms:

     

    
      	
            	1.	
              Cash
                in the amount of $  .

            

    

     

    
      	
            	2.	
              Certified
                or bank cashier's check in the amount of $   .

            

    

     

    
      	
            	3.	
              Tender
                to the Company of   
                outstanding Common Shares.

            

    

     

    
      	
            	4.	
              Surrender
                of vested Options to purchase  
                Common Shares that are subject to the
                Option.

            

    

     

    Unless
      I
      have delivered herewith sufficient funds to pay in full all required
      withholdings under applicable law, I authorize the Company to withhold from
      the
      Common Shares otherwise issuable to me as a result of this exercise of the
      Option to pay in full all such required withholdings.

     

    
      	 	 	 	 
	 	 	 	 
	
            	 	 	
              
Signature
	 	 	 	 
	 	 	 	 
	 	 	 	
              
Printed
              Name
	 	 	 	 
	 	 	 	 
	 	 	 	
              
 
	 	 	 	
              
AddressFIRST
      AMENDMENT TO LEASE

    

    This
      FIRST
      AMENDMENT TO LEASE (this
      "First Amendment") is made and entered into as of this 4th day of May, 2007,
      by
      and between 300 W. FAYETTE STREET, LLC (hereinafter, the "Landlord") and BASI
      MARYLAND, INC. (hereinafter, the "Tenant").

     

    RECITAL

     

    

    A. Landlord
      and Tenant entered into a Lease Agreement fully executed on the 7th
      day of
      December 2004, which is scheduled to terminate on January 4, 2008 (the
      "Lease").

    

    B. The
      parties wish to reduce the size of the Premises by returning the seventh
      (7th
      floor to
      Landlord, and by providing permission to Landlord to relet floors 4, 5 and
      6 of
      the Premises.

    

     

    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants contained herein and intending to be
      legally bound, the parties hereto covenant and agree as follows:

    

    1. Effective
      on the day after the lease between Landlord and Bioanalytical Systems Inc.
      for
      space in 300-306 West Fayette Street, Baltimore, Maryland 21201, is fully
      executed (the "Effective Date"), the seventh (7th
      floor),
      consisting of an agreed upon amount of seven thousand two hundred thirty-one
      (7,231) rentable square feet shall be removed from the Premises. The seventh
      (7th)
      floor
      shall be returned to Landlord in the condition described in Section 6 of the
      Lease. As of the Effective Date, the total monthly rental shall be reduced
      by
      Four Thousand Eight Hundred Twenty Dollars and Sixty-seven Cents ($4,820.67)
      to
      the new total monthly rental of Sixty-two Thousand Five Hundred Twelve Dollars
      and Sixty-six Cents ($62,512.66) and Tenant's Proportionate Share shall be
      adjusted in accordance with the Lease.

     

    2. In
      order
      to accommodate Tenant's desire to reduce the size of its Premises, Tenant agrees
      to vacate any or all of its Premises located on floors 4, 5 and 6 of the
      Building upon thirty (30) days notice from Landlord, and to leave the designated
      space in the condition described in Section 6 of the Lease. Tenant understands
      and agrees that Landlord will be marketing such space as available for lease.
      If
      the Landlord is able to lease such designated space to a third party, as of
      the
      date Landlord receives rent for such space, such designated space shall be
      removed from the Premises, and there shall be a reduction in the total monthly
      Base Rent, and Tenant's Proportionate Share, reflecting the new, reduced size
      of
      the Premises.

     

    3. General:

     

    (a) In
      all
      other respects, the Lease shall remain in full force and effect. 

    

    (b) This
      First Amendment shall be binding upon the parties hereto and their respective
      successors, and assigns.

     

    (c) This
      First Amendment shall be interpreted and construed in accordance with the laws
      of the State of Maryland.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    WITNESS
      the
      hands and seals of the parties hereto as of the day and year first above
      written.

     

    
      	WITNESS:	 

              LANDLORD:

               

              
                300
                  W. FAYETTE STREET, LLC,

                a
                  Delaware limited liability company

              

            	 
	
               

               

               

               

               

               

               

               

               

            	 

              By: KFD
                Fayette Street, LLC, 

              a
                Delaware limited liability company,

              its
                Managing Member 

              

                By: The
                  Kevin F. Donohoe Company, Inc.

                a
                  Pennsylvania corporation, its
                  Managing Member 

                 

              

            	 
	
              /s/ Jayne
                Caggiano

            	By:  /s/
              Henry B. Glover, Jr.
              Henry
                B. Glover, Jr.

              Vice
                President

            	 
	 	 	 
	WITNESS	TENANT:	 
	 	 	 
	 	BASI MARYLAND, INC.	 
	 	 	 
	/s/ L. Colby	
               By:
                 /s/
                Edward Chait

              Name:
                 Edward
                M. Chait

              Title:
                 Executive
                Vice President

            	 

    

     

    

      
        
           

        

        
          2

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