BIOANALYTICAL SYSTEMS INC - 10-K Annual Report

Name	Age	Position
Peter T. Kissinger, Ph.D.	60	Chairman of the Board; President; Chief Executive Officer
Ronald E. Shoup, Ph.D.	53	Chief Operating Officer, BASi Contract Research Services; Director
Michael R. Cox	58	Vice President, Finance; Chief Financial Officer; Treasurer
Candice B. Kissinger	53	Senior Vice President, Marketing; Secretary and Director
Craig S. Bruntlett, Ph.D.	55	Senior Vice President, International Sales
Lina L. Reeves-Kerner	54	Vice President, Human Resources
Michael P. Silvon, Ph.D.	57	Vice President, Planning and Development

BIOANALYTICAL SYSTEMS INC.
Consolidated Statements of Cash Flows

Years ended September 30,

(1) Significant Accounting Policies

(a) Nature of Business

Bioanalytical Systems, Inc. and its subsidiaries (“We,” the “Company” or “BASi”) 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.

(b) 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.

(c) 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 the specific performance method, revenue and related direct costs are recognized when services are performed. Our other service contracts generally consist of 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. When we revise profit estimates, we adjust on a cumulative basis in the period in which the revisions become known. The establishment of contract prices and total contract costs involves estimates made by us at the inception of the contract period. 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 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.

(d) Cash Equivalents

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

(e) 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 do not anticipate any significant losses and, accordingly, we have recorded trade receivables in the accompanying balance sheet at their outstanding unpaid balances. Historically, we have not experienced significant losses.

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.

(f) Inventories

We state our inventories at the lower of cost or market, using the last-in, first-out (LIFO) method.

(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 of the asset. 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. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and other indefinite lived intangible assets, collectively referred to as “indefinite lived useful 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, the Company determines the fair value of a reporting unit and compares 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 useful assets over the implied fair value of those indefinite lived useful assets. The implied fair value of the indefinite lived useful assets is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with FASB Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit’s indefinite lived useful assets.

(h) 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 years; machinery and equipment, 5 to 10 years, and office furniture and fixtures, 10 years. Expenditures for maintenance and repairs are expensed as incurred.

(i) Goodwill and Intangible Assets

We carry goodwill at cost. Prior to October 1, 2002, we amortized goodwill on a straight-line basis ranging from 15 to 20 years. Other intangible assets are stated at cost and are amortized on a straight-line basis over five years. In June 2001, the Financial Accounting Standards Board (“FASB”) changed the accounting and reporting requirements for goodwill and other intangible assets. All intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented, or exchanged, must be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives are no longer amortized, but are subject to an annual assessment for impairment by applying a fair value based test.

We applied these provisions beginning on October 1, 2002. 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. The carrying amount of goodwill is as follows:


Goodwill at September 30, 2003	$	983,883
Additions resulting from adjustments to prior year's acquisitions		460,769

Goodwill at September 30, 2004	$	1,444,652

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

			September 30, 2004
	Weighted average life (years)		Gross carrying amount		Accumulated amortization
Methodologies		5	$	754,561	$	189,835
Volunteer database		5		561,993		135,978
Customer relationships		5		359,000		125,658

			$	1,675,554	$	451,471

			September 30, 2003
	Weighted average life (years)		Gross carrying amount		Accumulated amortization
Methodologies		5	$	416,477	$	38,824
Customer relationships		5		830,593		77,429

			$	1,247,070	$	116,253

The Company has indefinite-lived intangible assets of $1,266,811 and $1,647,025 assigned to the acquired regulated facilities/Food and Drug Administration (FDA) compliant research sites as of September 30, 2004 and 2003, respectively.

Amortization expense for intangible assets during the fiscal years ended September 30, 2004 and 2003 was $335,111 and $116,253, respectively. The following table provides information regarding estimated amortization expense for each of the following years ended September 30:



2005	$	335,111
2006		335,111
2007		335,111
2008		218,758

	$	1,224,091

The following table adjusts earnings and earnings per share for the adoption of SFAS 142:

	Year ended September 30
	2004		2003	2002
Reported net income/(loss)	$ (203,354	)	$ 87,306	$ 1,066,445
Goodwill amortization	---		---	54,794

Adjusted net income/(loss)	(203,354	)	$ 87,306	$ 1,121,239

Basic net income/(loss) per share:
As reported	$ (0.04)		$ (0.02)	$ (0.23)
Add goodwill amortization	---		---	0.02

Adjusted net income/(loss)
per share	$ (0.04)		$ (0.02)	$ (0.25)

Diluted net income/(loss) per share:
As reported	$ (0.04)		$ (0.02)	$ (0.23)
Add goodwill amortization	---		---	(0.01)

Adjusted net income/(loss)
per share	$ (0.04)		$ (0.02)	$ (0.24)

(j) Advertising Expense

We expense advertising costs as incurred. Advertising expense was $270,780, $237,337, and $266,225 for the years ended September 30, 2004, 2003, and 2002, respectively.

(k) Stock-Based Compensation

We use the intrinsic value method to account for stock options. Our option grants to employees and directors are always at or above the market price at the date of grant; therefore, we do not have a charge against operations.

Below is pro forma information of the potential effect on net income/(loss) and earnings/(loss) per share had we expensed stock options using the fair value method. We estimated the fair value for options we granted using a binomial option pricing model with the following weighted average assumptions:

	2004	2003	2002
Risk-free interest rate	3.50%	5.50%	5.50%
Dividend yield	0.00%	0.00%	0.00%
Volatility factor of the expected market price of the Company’s common stock	0.724	0.14	0.53
Expected life of the options (years)	7.0	7.0	7.0

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

	2004			2003			2002
Net income (loss) as reported	$	(203,354	)	$	87,306		$	1,066,445
Deduct: Total stock-based employee
compensation expense determined
under the fair value-based method for
all awards, net of tax effects		(43,911	)		(22,596	)		(20,256	)

Pro forma net income (loss)	$	(247,265	)	$	64,710		$	1,046,189

Pro forma net income (loss) per share		(0.05	)		0.01			0.23

(l) New Accounting Pronouncements

In November, 2004 the FASB issued Statement of Financial Accounting Standards (“SFAS”) Number 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 current costing methodology substantially conforms with the new standard; therefore, we do not expect a material change in our costing methods from adoption of this statement.

In December, SFAS 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, and charge this value to operations over the period earned, generally the vesting period. The only instruments we use that are governed by this statement are stock options for Directors and employees. The impact on reported results of adoption of this statement, required for interim and annual periods after June 15, 2005, is presented in (k) above. The impact on operations in future periods will be determined by amortizing the remaining value of our currently outstanding options, plus the value imputed to future option grants using the above described methods. There is no impact on cash flow.

In December, 2003 SFAS Number 132 was revised regarding employers’ disclosures about pensions and other postretirement benefits. We do not have any plans addressed by this revision.

(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.

(2) Earnings per Share

We compute basic earnings per share on the basis of the weighted average number of common shares outstanding. We compute diluted earnings per share on the basis of the weighted average number of common and potential common shares outstanding. Potential common shares include the dilutive effect of employee and director options to purchase common shares and convertible subordinated debt, which is assumed to be converted. The convertible subordinated debt was not dilutive in any period presented.

The following table reconciles the basic earnings per share computation to the diluted earnings per share computation from continuing operations as of September 30:

	2004			2003		2002
Shares:
Basic shares		4,860,095			4,654,595		4,575,995
Effect of dilutive securities:
Options		---			18,853		49,386
Convertible subordinated debt		---			---		---

Diluted shares		4,860,095			4,673,448		4,625,381

Basic and diluted net income (loss)	$	(203,354	)	$	87,306	$	1,066,445
Basic EPS	$	(0.04	)	$	0.02	$	0.23
Diluted EPS	$	(0.04	)	$	0.02	$	0.23

(3) Acquisitions

We acquired two laboratory services companies during the year ended September 30, 2003. We used the purchase method of accounting for each of these acquisitions. The purchase price has been allocated to the estimated fair values of net assets acquired.

(a) LC Resources, Inc.

On December 13, 2002 we acquired LC Resources, Inc. (“LCR”), now BASi Northwest Laboratories, Inc., purchasing all of the outstanding shares of LCR for $1,999,000. The purchase price consisted of cash payments of $199,000 and issuance of $1,800,000 in 10% subordinated notes payable. We engaged an independent valuation firm to determine the fair value of identifiable intangible assets. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:


Current assets	$	638,527
Property and equipment		347,217
Intangible assets		1,251,000
Goodwill		561,024

Total assets acquired		2,797,768

Liabilities assumed		(798,921	)

Net assets acquired	$	1,998,847

As of December 31, 2003 we recorded a deferred tax liability in the amount of $518,000 with a corresponding increase in goodwill. The intangible assets arising from this transaction include $180,000 assigned to methodologies, $359,000 assigned to customer relationships and $712,000 assigned to the regulated facility/FDA compliant research site. We estimated the economic useful lives of the acquired methodologies and customer relationships to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA compliant laboratory site is an indefinite-lived intangible asset not subject to amortization. The recorded goodwill is not expectd to be deductible for tax purposes.

(b) PharmaKinetics Laboratories, Inc.

On May 26, 2003, we converted our $791,000 of convertible notes of PharmaKinetics Laboratories, Inc. (“PKLB”) into 4,992,300 shares of PKLB common stock, representing a 67% ownership interest in PKLB. On June 30, 2003, we purchased the remaining common stock and all preferred stock of PKLB through the exchange of 228,857 shares of the Company’s common stock valued at $1,178,614 and the issuance of $3,999,840 of 6% convertible notes due 2008. These notes plus any accrued interest are convertible into shares of the Company’s common stock at the holder’s option any time after June 1, 2004 at the conversion rate of sixteen dollars per share of our common stock.

The Company paid cash aggregating $1,646,501 representing cash advances and acquisition costs made to PKLB from June 2002 through May 2003. PKLB was a publicly traded company based in Baltimore, Maryland, that provided clinical research and development services to the pharmaceutical and biotechnology industries in the development of prescription and non-prescription drug products. PKLB has been renamed BASi Maryland, Inc.

The purchase price has been allocated based on the estimated fair values of the assets and liabilities acquired. The purchase price has been allocated as follows:


Current assets	$	625,581
Property and equipment		6,280,435
Intangible assets		1,691,365

Total assets acquired		8,597,381

Liabilities assumed		(1,772,266	)

Net assets acquired	$	6,825,115

During the quarter ended September 30, 2004, we received a revised final valuation report and adjusted the amounts reported as the final purchase price allocation in our report on Form 10-Q from our independent valuation firm the quarter ended June 30, 2004.

During the year ended September 30, 2004, we recorded additional adjustments from our original estimates to reduce deferred revenue at the acquisition date by $189,450, record taxes on the revaluation of the basis of property of $85,877 and record acquisition costs of $54,739. Of the $1,691,365 in value of the acquired intangible assets, $574,561 was assigned to methodologies, $561,993 was assigned to volunteer database and $554,811 has been assigned to the regulated facility/FDA compliant research site. We estimated the economic useful lives of the acquired methodologies and volunteer database to be 5 years, using straight-line amortization, and determined that the acquired regulated facility/FDA research laboratory site is an indefinite-lived intangible asset not subject to amortization.

Unaudited Pro Forma Results

We have included the results of LCR's and PKLB's operations in the consolidated financial statements since the acquisition dates of December 13, 2002, and May 26, 2003, respectively. Both of the acquired companies are included in the research services segments. Unaudited pro forma results of operations, presented as if the business combinations had occurred at the beginning of fiscal 2002, after giving effect to certain adjustments resulting from the 2003 acquisitions were as follows:

	Year ended September 30
	2003			2002

	(In thousands, except per share data)

Revenue	$	32,704		$	32,323
Net income (loss)		(1,328	)		(49	)

Earnings (loss) per share:
Basic and diluted	$	(0.27	)	$	(0.01	)

(4) Subsequent Event

In connection with the purchase of PKLB, we acquired land and a building valued at approximately $6.2 million, which approximates fair value. These assets are presented in the consolidated balance sheet in land and building. On January 5, 2005 we sold the building for a $6.5 million cash selling price, with a three year leaseback of approximately 85% of the space in the building for $800,000 annually, plus operating expenses, which approximates market rental. We will account for the transaction as a sale/leaseback transaction. The net cash received in the transaction, after expenses, approximated the carrying value of the building. The net proceeds of the sale were used to pay off our revolving credit facility and for working capital.

(5) Inventories

Inventories at September 30 consisted of the following:

	2004			2003
Raw materials	$	1,391,688		$	1,161,010
Work in progress		196,100			337,676
Finished goods		129,048			657,969

		1,716,836			2,156,655

Less LIFO reserve		(147,309	)		(101,516	)

	$	1,569,527		$	2,055,139

(6) Lease Arrangements

We sometimes use capital lease arrangements to finance the acquisition of equipment. Future minimum lease payments, based upon scheduled payments under lease arrangements, as of September 30, 2004, total $168,400, of which $14,295 represents interest. Remaining payments relating to principal are $73,981 and $80,124 in fiscal 2005 and 2006, respectively.

The total amount of property and equipment capitalized under capital lease obligations as of both September 30, 2004 and 2003 was $1,917,625. Accumulated amortization on capital leases at September 30, 2004 and 2003 was $1,413,842 and $1,227,596, respectively.

On November 15, 2002 the Company sold $1,087,976 of equipment, including equipment under a capital lease, to a bank and is leasing the equipment back under an operating lease.

We lease office space and equipment under noncancelable operating leases that terminate at various dates through 2007. Certain of these leases contain renewal options. Total rental expense under these leases was $488,294, $591,580, and $213,111 in fiscal 2004, 2003, and 2002, respectively.

Future minimum lease payments for the following fiscal years under operating leases at September 30, 2004 are as follows:


2005	$	563,403
2006		518,005
2007		59,712

	$	1,141,120

(7) Debt Arrangements

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


Mortgage note payable to a bank, payable in monthly principal and
interest installments of $36,500 until June 1, 2007 when they
adjust under the terms of the note. Interest is fixed at 5.69%
to June 1, 2007, when it adjusts based on market rates	$ 4,934,731	$ 5,162,038

Mortgage note payable to a bank, payable in monthly principal and
interest installments of $18,241 until May 17, 2007 when they
adjust under the terms of the note. Interest is fixed at 5.69%
to June 1, 2007, when it adjusts based on market rates	2,058,696	2,167,396

Note payable to former director of PKLB and current director of the
Company refinanced in December 2003 (note 12). Payment of
interest only at 8% per annum until maturity in June 2005
Payable in a combination of common shares and cash at payee
election	100,000	350,000

Demand note payable to former officer of PKLB and current employee of
the Company. Interest payable at 8% per annum (note 12)	---	41,000

6% convertible subordinated notes payable due January 1, 2008
Interest payable in arrears on the 15th of January and July after
June 1, 2004 (4.67% effective rate)	3,999,840	4,000,000

10% subordinated 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	1,548,270	1,548,270

Mortgage note payable to a bank, payable in monthly principal and
interest installments of $15,755 until June 1, 2007, when they
adjust under the terms of the note. Interest is fixed at 5.69% to
June 1, 2007, when it adjusts based on market rates (a)	2,222,257	1,675,753

	14,863,794	14,944,457
Less current portion	782,748	1,131,904

	$14,081,046	$13,812,553

(a) Was a construction loan at September 30, 2003, with no principal payments, which converted under its term into a mortgage in June, 2004.

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


2005		$ 782,748
2006		704,390
2007		724,020
2008		6,458,083
2009		277,148
Thereafter		5,917,405

		$ 14,863,794

Cash interest payments of $522,838, $599,317, and $250,615 were made in 2004, 2003, and 2002, respectively. Cash interest payments for 2004 and 2003 included interest of $33,834 and $37,302, respectively, which was capitalized.

(a) Senior Debt

On October 29, 2002, we obtained new credit agreements with two different banks that completely refinanced and replaced all outstanding bank debt arrangements that were in place at September 30, 2002. Borrowings under these new credit agreements are collateralized by substantially all assets related to the Company’s operations and all common stock of the Company’s United States subsidiaries and 65% of the common stock of its non-United States subsidiaries, and the assignment of a life insurance policy on the Company’s Chairman and CEO. Under the terms of these credit agreements, 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 agreements. These credit agreements contain cross-default provisions. Details of each debt issue are discussed below.

Our revolving line of credit limits outstanding borrowings to the borrowing base as defined in the agreement, to a maximum available amount of $6,000,000. As of September 30, 2004, the outstanding balance on this line of credit was $2,825,660. Under the computation of the borrowing base, we had $1,827,906 of unused availability at that time. Interest accrues monthly on the outstanding balance at the bank’s prime rate to prime rate plus 125 basis points or at the Eurodollar rate plus 200 to 350 basis points, as elected by the Company, depending upon certain financial ratios. As of September 30, 2004, interest was 5.75% based on prime of 4.25%. The Company pays a fee equal to 25 to 50 basis points, depending on certain financial ratios, on the unused portion of the line of credit.

On January 5, 2005, we amended and restated this facility for a three year term with the successor to our lead bank, on substantially the same terms as above.

On October 29, 2002, we obtained a $2,250,000 construction loan with a bank which expires November 1, 2012. We converted this loan under its terms to a mortgage on the completed facility on June 1, 2004.

In fiscal 2003, we paid consulting fees of $300,000 for assistance in arranging the above transactions to Periculum Capital Company, LLC. A principal of Periculum is a shareholder of the Company.

The loan agreements contain covenants which require maintenance of certain financial ratios, restrict the amount of unfunded capital additions, and place restrictions on the payment of principal and interest on subordinated debt, among other things. We were in compliance with our loan covenants at September 30, 2004.

(b) Subordinated Debt

In connection with the acquisition of LCR (note 3), we issued 10% subordinated notes of $1,800,000. The Company made principal payments of $360,000 and interest payments of $197,435 on October 1, 2004, which was included in current portion of long-term debt at September 30, 2004. These notes are subordinated to the Company’s senior debt.

In connection with the acquisition of PKLB (note 3), we issued $3,999,840 of 6% convertible notes payable, including $500,000 payable to a current director of the Company, due January 1, 2008. These notes were non-interest bearing until June 1, 2004. We are accruing interest expense over the term of these notes using the effective interest rate method. After June 1, 2004 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 249,990 shares of the Company’s common stock. The Company, at its option, may prepay all or any portion of the outstanding notes plus accrued interest, with prior written notice to the holders. As of September 30, 2004, we have not made any prepayment elections. These notes are subordinated to the Company’s senior debt.

(8) Income Taxes

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

	2004			2003
Deferred tax liabilities:
Tax over book depreciation	$	1,746,783		$	1,770,583
Lower tax basis on assets of acquired company		615,572			---
Deferred DISC income		---			56,773

Total deferred liabilities		2,362,355			1,827,356

Deferred tax assets:
Inventory pricing		82,339			87,056
Accrued vacation		229,898			202,645
Accrued expenses and other — net		156,796			174,981
Foreign net operating loss		253,836			422,974

Total deferred tax assets		722,869			887,656
Valuation allowance for deferred tax assets		(253,836	)		(422,974	)

Net deferred tax assets		469,033			464,682

Net deferred tax liabilities	$	1,893,322		$	1,362,674

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

	2004			2003			2002
Current:
Federal	$	(394,167	)	$	163,820		$	223,761
State		(28,747	)		117,400			310,724
Foreign		6,679			(3,820	)		14,034

Total current	$	(416,235	)	$	277,400		$	548,519

Deferred:
Federal	$	(46,129	)	$	163,288		$	(60,603	)
State		59,056			42,583			(6,922	)

Total deferred		12,927			205,871			(67,525	)

	$	(403,308	)	$	483,271		$	480,994

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


Statutory federal income tax rate	(34	.0)%	34	.0%	34	.0%
Increases (decreases):
Amortization of goodwill and
other nondeductible expenses	3	.9	3	.3	2	.2
Tax benefit of foreign sales	(2	.8)	(4	.5)	(2	.4)
State income taxes, net of
federal tax benefit	3	.3	17	.7	9	.3
Research and development credit		---		---	(0	.8)
Nontaxable foreign (gains) losses	(29	.6)	24	.8	(12	.5)
Other	(7	.3)	9	.4	1	.1

	(66	.5)%	84	.7%	30	.9%

In fiscal 2004, 2003, and 2002, our foreign operations generated income (loss) before income taxes of $528,556, $(415,977), and $621,699, respectively.

Payments made in 2004, 2003, and 2002 for income taxes amounted to $113,000, $351,589, and $400,600, respectively.

The Company has foreign net operating loss carryforwards of $793,238 that have an indefinite life under current UK tax law.

(9) Stock Option Plans

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

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

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

	2004						2003						2002
	Options			Weighted average exercise price			Options			Weighted average exercise price			Options			Weighted average exercise price
Outstanding — beginning of year		106,527		$	4	.70		113,114		$	4	.59		124,964		$	4	.39
Exercised		---				---		(24,087	)		1	.61		(9,100	)		1	.83
Granted		254,000			4	.53		27,000			2	.80		---				---
Terminated		(18,027	)		2	.49		(9,500	)		5	.83		(2,750	)		4	.93

Outstanding — end of year		342,500			4	.66		106,527			4	.70		113,114			4	.59

In 2004, the Company granted 5,000 shares under the Outside Director Stock Option Plan at an exercise price of $4.57 per share. These options become exercisable in two equal installments at six months and one year from the grant date. At September 30, 2004, there are 80,000 shares available for grants under the two plans.

The following applies to options outstanding at September 30, 2004:

Range of exercise prices	Number outstanding at September 30, 2004		Weighted average exercise price		Number exercisable at September 30, 2004	Weighted average exercise price

$2.80-4.58	320,500	8.54	$	4.43	57,500	$	4.35
$ 8.00	22,000	2.17	$	8.00	22,000	$	8.00

(10) Retirement Plan

The Company has an Internal Revenue Code Section 401(k) Retirement Plan (the Plan) covering all employees over twenty-one years of age with at least one year of service. Under the terms of the Plan, the Company contributes 2% of each participant’s total wages to the Plan and matches 44% 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. The Company made no discretionary contributions under the plan in 2004, 2003, and 2002. Contribution expense was $432,283, $402,148, and $369,023 in fiscal 2004, 2003, and 2002, respectively.

(11) Segment Information

We operate in two principal segments – research services and research products. Our services unit provides research and development support on a contract basis directly to pharmaceutical companies. Our analytical products unit 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.

(a) Operating Segments

	Year ended September 30
	2004			2003			2002
	(In thousands)

Revenue:
Service	$	24,928		$	19,987		$	16,140
Product		12,224			9,852			10,373

Total	$	37,152		$	29,839		$	26,513

Operating income:
Service	$	(4,850	)	$	(205	)	$	1,142
Product		5,104			1,005			485

Total operating income		254			800			1,627
Corporate expenses		(861	)		(229	)		(80	)

Income before
income taxes	$	(607	)	$	571		$	1,547



	Year ended September 30
	2004			2003			2002
	(In thousands)

Identifiable assets:
Service	$	29,245		$	36,387		$	25,582
Product		8,506			6,267			6,565
Corporate		9,044			2,331			1,316

Total	$	46,795		$	44,985		$	33,463

Goodwill, net:
Service	$	1,071		$	610		$	510
Product		374			374			374

Total	$	1,445		$	984		$	884

Intangible assets, net:
Service	$	2,491		$	2,778		$	---
Product		---			---			---

Total	$	2,491		$	2,778		$	---

Depreciation and amortization:
Service	$	3,175		$	2,416		$	1,518
Product		266			266			524

Total	$	3,441		$	2,682		$	2,042

Capital expenditures:
Service	$	3,534		$	5,291		$	3,843
Product		34			38			841

Total	$	3,568		$	5,329		$	4,684

(b) Geographic Information

	Year ended September 30
	2004		2003		2002
	(In thousands)

Sales to external customers:
North America	$	29,664	$	23,887	$	20,238
Pacific Rim		924		988		913
Europe		4,871		3,073		4,401
Other		1,693		1,891		961

Total	$	37,152	$	29,839	$	26,513

Long-lived assets:
North America	$	34,049	$	33,630	$	22,700
Europe		2,391		2,031		1,969

Total	$	36,440	$	35,661	$	24,669

(c) Major Customers

During 2003 Pfizer and Pharmacia, our two largest clients in 2002 and 2001, merged. In 2004, 2003 and 2002, Pfizer (and predecessor companies) would have accounted for approximately 12.5%, 16.0%, and 28.3%, respectively, of the Company’s total revenues and 11.0% and 17.2% of total trade accounts receivable at September 30, 2004 and 2003, respectively.

(12) Related Party Transactions

As of September 30, 2004, we have two notes payable totaling $600,000 to one of our current directors (a former director of PKLB). Prior to the acquisition of PKLB, this director made loans to PKLB to support their cash needs under the terms of a $350,000 convertible promissory note dated November 22, 2002 (Old Note). On December 31, 2003, the Company issued a $350,000 8% new convertible note payable (New Note), in exchange for the Old Note. The New Note was convertible into the Company’s common shares at a price based upon the market price of the common shares at or about the time of the conversion and was scheduled to mature on June 1, 2005. On that same day, the Company prepaid $100,000 of the outstanding principal amount of the New Note, plus approximately $31,000 in accrued interest, and the holder converted $150,000 of the New Note into 38,042 of the Company’s common shares. Following the prepayment and conversion, the Company issued the holder a new 8% note due June 2, 2005, on substantially the same terms as the New Note, for the remaining $100,000 principal amount. The director also received a $500,000 6% subordinated note, in exchange for his preferred shares of PKLB, issued in the acquisition of PKLB (note 7).

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On July 14, 2004, the Company’s Audit Committee of the Board of Directors approved the dismissal of the Company’s independent public accountants and replaced Ernst & Young, LLP (“E&Y”) with KPMG LLP (“KPMG”).

The reports of E&Y for the past two fiscal years ended September 30, 2003 and 2002, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with its audits for the two fiscal years ended September 30, 2003 and 2002 and through July 14, 2004, there have been no disagreements with E&Y 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 E&Y, would have caused them to make reference to the subject matter of the disagreement in connection with their report on the financial statements for such period.

During the two fiscal years ended September 30, 2003 and 2002, and through July 14, 2004, there have been no reportable events (as defined in Regulation S-K, Item 304(a)(1)(v)), except for a material weakness in the Company’s internal control for the year ended September 30, 2003 which was identified by E&Y and disclosed in Item 9A in the Company’s Annual Report on Form 10-K for the year ended September 30, 2003. Specifically, the independent auditors noted that the Company’s internal control failed to timely alert management of potential loan covenant noncompliance. The Company did not have procedures in place to monitor near-term future financial position and results of operations to enable it to take operational action in the event of potential loan covenant noncompliance. The Company has taken measures to correct this material weakness in the form of enhancing its planning process and creating procedures to more timely identify credit agreement compliance issues. E&Y discussed this issue with the Audit Committee of the Board of Directors, and has responded as authorized by the Company to the inquiries of KPMG.

Item 9A. Controls and Procedures.

Based on their most recent evaluation, which was completed as of September 30, 2004, the Company’s Chief Executive Officer and Chief Financial Officer believe that, because of the situation described below, the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective as of September 30, 2004 to ensure that information required to be disclosed by the Company 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. The Company currently operates on accounting systems that are different at its various locations, and which are decentralized and obsolete. The Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current accounting systems have prevented the Company from completing and having audited on a timely basis the accounting information necessary to complete this Form 10-K. The Company is taking steps to standardize, centralize and update the accounting systems. The Chief Executive Officer and Chief Financial Officer believe that implementation of these new accounting systems will allow the Company to record, process, summarize and report accounting information to timely file its Exchange Act reports.

There were no significant changes in the Company’s 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, 2004.

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, 2004. 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	Position
Peter T. Kissinger, Ph.D	60	Chairman of the Board; President; Chief Executive Officer
Ronald E. Shoup, Ph.D	53	Chief Operating Officer, BASi Contract Research Services; Director
Candice B. Kissinger	53	Senior Vice President, Marketing; Secretary and Director
William E. Baitinger	71	Director
David W. Crabb	50	Director
Leslie B. Daniels	57	Director
Gayl W. Doster	66	Director
W. Leigh Thompson	66	Director

Information concerning Peter T. Kissinger, Ph.D. is incorporated by reference to the discussion under Item 1 "Executive Officers of the Registrant" in this report.

Information concerning Ronald E. Shoup, Ph.D. is incorporated by reference to the discussion under Item 1 "Executive Officers of the Registrant" in this report.

Information concerning Candice B. Kissinger is incorporated by reference to the discussion under Item 1 “Executive Officers of the Registrant” in this report.

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 Scientific Counselors for the National Institute on Alcohol Abuse and Alcoholism. He is a recipient of a NIH Merit award and numerous other research and teaching awards.

Leslie B. Daniels served as a director of PharmaKinetics Laboratories, Inc., recently acquired by the Company. 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.

Gayl W. Doster has served as a Director and member of the Audit Committee of the Company since August, 2004. Mr. Doster is also a director of META Group, Inc., a publicly traded NASDAQ company. He is a CPA and was the President and Chief Operating Officer of Sigma Micro Corporation, a computer software company, from January 1997 until his retirement in December 2002. Previously, he served as Professor of Community Pharmacy Management, College of Pharmacy, University of Rhode Island from October 1995 to January 1997. Mr. Doster received a BS in Accounting from the Indiana University Kelley School of Business and earned his CPA in 1965 while working for Ernst & Young.

W. Leigh Thompson, Ph.D., M.D. has served as a director of the Company since January 1997. Since 1995, Dr. Thompson has been Chief Executive Officer of Profound Quality Resources, Inc., a scientific consulting firm. Prior to 1995, Dr. Thompson was Professor of Medicine at Case Western Reserve and Indiana Universities, President of the society of Critical Care Medicine and Chief Scientific Officer at Eli Lilly and Company. He earned a Bachelor of Science degree in Biology from the College of Charleston, a Master of Science and a Ph.D. in Pharmacology from the Medical University of South Carolina, a Medical Doctor degree from The Johns Hopkins University and was awarded a Ph.D. of Science from the Medical University of South Carolina. Dr. Thompson is also a director and Chairman of the Board of Inspire Pharmaceuticals, Inc.

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. The Board of Directors has determined that Gayl W. Doster is an audit committee financial expert (as defined by Item 401(h) of Regulation S-K). Gayl W. Doster is “independent” (as defined by Item 7(d)(3)(iv) of Schedule 14A).

The Board of Directors has adopted a Code of Ethics that applies to the Company’s Officers and Directors.

Item 11. Executive Compensation.

The information included under the captions “Election of Directors – Compensation of Directors” and “Executive Compensation” 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 captions “Share Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement is incorporated herein by reference in response to this item.

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

Item 13. Certain Relationships and Related Transactions.

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

Item 14. Principal Accounting Fees and Services.

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

[Remainder of page intentionally left blank.]

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) Documents filed as part of this Report.

Financial Statements:

Included in Item 8 of Part II of this report as follows:

Report of Independent Auditors.

Consolidated Balance Sheets as of September 30, 2004 and 2003.

Consolidated Statements of Operations for the Years Ended September 30, 2004, 2003 and 2002.

Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 2004, 2003 and 2002.

Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002.

Notes to Consolidated Financial Statements.

Financial Statement Schedules:

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

(b) Reports on Form 8-K.

Report dated September 22, 2004 under Item 7.01 “Regulation FD Disclosure” the Company issued a press release announcing the termination of the Purchase and Sale Agreement between PKLB Limited Partnership, a wholly-owned subsidiary of the Company, and Donohoe dated July 26, 2004.

Report dated August 19, 2004 under Item 9 “Regulation FD Disclosure” the Company issued a press release announcing that Gayl W. Doster has been elected to its Board of Directors.

Report dated August 11, 2004, under Item 12 “Results of Operations and Financial Condition” the Company issued a press release providing information on earnings and other financial results for its third quarter of fiscal 2004 ended June 30, 2004.

Report dated July 26, 2004, under Item 9 “Regulation FD Disclosure” the Company issued a press release announcing that the Company has reached an agreement (in principle) providing for the sale and leaseback of the building that currently houses its clinical research facility in downtown Baltimore, Maryland.

Report dated July 14, 2004 under Item 4 “Changes in Registrant’s Certifying Accountants” the Company’s Audit Committee of the Board of Directors approved a change in the Company’s independent public accountants and replaced Ernst & Young, LLP (“E&Y”) with KPMG LLP (“KPMG”).

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: January 13, 2005

BIOANALYTICAL SYSTEMS, INC.
(Registrant)

By: /s/ Peter T. Kissinger

Peter T. Kissinger
President, Chairman and Chief Executive Officer

By: /s/ Michael R. Cox

Michael R. Cox
Vice President, Finance, 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/ Peter T. Kissinger Peter T. Kissinger	President, Chairman and Chief Executive Officer and Director (Principal Executive Officer)	January 13, 2005


/s/ Michael R. Cox Michael R. Cox	Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)	January 13, 2005


/s/ William E. Baitinger	Director	January 13, 2004
William E. Baitinger


/s/ David W. Crabb	Director	January 13, 2005
David W. Crabb


/s/ Gayl W. Doster	Director	January 13, 2005
Gayl W. Doster


/s/ Candice B. Kissinger	Director	January 13, 2005
Candice B. Kissinger


/s/ Ronald E. Shoup	Director	January 13, 2005
Ronald E. Shoup


	Director
Leslie B. Daniels


	Director
W. Leigh Thompson

INDEX TO EXHIBITS

Number Assigned In Regulation S-K Item 601		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 Restated Bylaws of Bioanalytical Systems, Inc. (incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended December 31, 1997).

(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, 2003 (incorporated by reference to 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, 2003 (incorporated by reference to B to definitive Proxy Statement SEC File No. 000-23357).

Number Assigned In Regulation S-K Item 601		Description of Exhibits

10.6

Form of Bioanalytical Systems, Inc. 1997 Outside Director Stock Option Agreement.

10.7

Master Equipment Lease Agreement by and between Bioanalytical Systems, Inc. and Keycorp Leasing, dated December 5, 1997 (incorporated by reference to Exhibit 10.9 of Form 10-K for the fiscal year ended September 30, 2002).

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

Trademark Security Agreement by and between Bioanalytical Systems and The Provident Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.12 of Form 10-K for the fiscal year ended September 30, 2002).

10.11

Patent Security Agreement by and between Bioanalytical Systems and The Provident Bank, dated October 29, 2002 (incorporated by reference to Exhibit 10.13 of Form 10-K for the fiscal year ended September 30, 2002).

10.12

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).

10.13

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).

10.14

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

10.15

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).

Number Assigned In Regulation S-K Item 601		Description of Exhibits

10.16

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).

10.17

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).

10.18

Letter Agreement by and between Bioanalytical Systems, Inc. and Michael P. Silvon dated March 12, 1997.

10.19

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).

10.20

First Amendment to the Purchase and Sale Agreement dated September 7, 2004.

10.21

Second Amendment to the Purchase and Sale Agreement dated on or about November 11, 2004.

10.22

Office Lease by and between BASi Maryland, Inc. and 300 W. Fayette Street LLC, dated on or about January 5, 2005.

(13)

2004 Annual Report. This report, except for those portions which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Commission and is not to be deemed "filed" as part of this Form 10-K.

(21)

21.1

Subsidiaries of the Registrant

(23)

23.1

Consent of Independent Public Accountants KPMG LLP

23.2

Consent of Independent Public Accountants Ernst & Young LLP

(31)

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

(32)

Section 1350 Certifications

(99)

Risk Factors

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 principle executive offices)	(Zip Code)
(765) 463-4527
(Registrant's telephone number, including area code)

	Registrant's Document	Parts Into Which Incorporated

	Annual Report to security holders for the fiscal year ended September 30, 2004	Part II

	Proxy Statement	Part III

Plan Category		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	317,500	$	4	.67	109,750

Equity compensation plans not approved by security holders	25,000	$	4	.58	---
Total	342,500	$	4	.66	109,750

Assets	2004			2003

Current assets:

Cash and cash equivalents	$	772,889		$	1,378,311
Accounts receivable:
Trade		5,352,244			3,978,058
Grants		---			13,318
Unbilled revenues and other		1,086,121			954,369
Inventories		1,569,527			2,055,139
Deferred income taxes		469,033			464,682
Refundable income taxes		602,639			83,876
Prepaid expenses		503,492			396,487

Total current assets		10,355,945			9,324,240


Property and equipment:
Land and improvements		653,534			653,534
Buildings and improvements		27,910,706			23,426,966
Machinery and equipment		15,927,910			14,549,497
Office furniture and fixtures		1,207,512			1,105,042
Construction in process		136,920			2,414,366

		45,836,582			42,149,405

Less accumulated depreciation and amortization		(13,935,307	)		(10,977,775	)

		31,901,275			31,171,630

Goodwill		1,444,652			983,883

Intangible assets, net of accumulated amortization of
$451,363 in 2004 and $116,253 in 2003		2,490,902			2,777,842
Debt issue costs, net		339,583			427,683
Other assets		262,774			299,953

Total assets	$	46,795,131		$	44,985,231

Liabilities and Shareholders' Equity	2004			2003

Current liabilities:

Accounts payable	$	2,761,960		$	3,072,866
Accrued expenses		1,590,247			1,245,353
Customer advances		2,816,826			1,657,518
Revolving line of credit		2,825,661			2,387,846
Current portion of capital lease obligations		73,981			123,371
Current portion of long-term debt, including
$218,670 in 2004 and $509,670 in 2003 to
related parties		782,748			1,131,904

Total current liabilities		10,851,423			9,618,858

Capital lease obligations, less current portion		80,124			---
Long-term debt, less current portion		8,892,937			6,948,538
Construction line of credit		---			1,675,753
Subordinated notes payable, including $735,989 in
2004 and $854,660 in 2003 to related parties, less
current portion		5,188,109			5,188,262
Deferred income taxes		2,362,355			1,827,356

Shareholders' equity:
Preferred shares:
Authorized 1,000,000 shares; none issued and outstanding		---			---
Common shares, no par value:
Authorized 19,000,000 shares; issued and
outstanding 4,869,502 shares in 2004 and
4,831,460 shares in 2003		1,176,590			1,168,163
Additional paid-in-capital		11,263,368			11,121,795
Retained earnings		7,295,063			7,498,417
Accumulated other comprehensive loss		(314,838	)		(61,911	)

Total shareholders' equity		19,420,183			19,726,464

Total liabilities and shareholders' equity	$	46,795,131		$	44,985,231

See accompanying notes to consolidated financial statements

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

		Page
Part I		1
Item 1.	Business	1
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16

Part II		17
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	17
Item 6.	Selected Financial Data	17
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46
Item 9A.	Controls and Procedures	46

Part III		47
Item 10.	Directors and Executive Officers of the Registrant	47
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management	48
Item 13.	Certain Relationships and Related Transactions	48
Item 14.	Principal Accounting Fees and Services	48

Part IV		49
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	49

	2005		2006		2007		2008		2009		After 2009		Total

Mortgage notes payable	$	323	$	342	$	362	$	1,993	$	277	$	5,915	$	9,216
Subordinated debt*		460		362		362		4,464		---		---		5,648
Capital lease obligations		74		80		---		---		---		---		154
Operating leases		563		518		60		---		---		---		1,140


	$	1,420	$	1,302	$	784	$	6,457	$	277	$	5,915	$	16,158

	2004			2003			2002
Service revenue	$	24,928,305		$	19,986,734		$	16,139,602
Product revenue		12,224,155			9,852,220			10,373,444

Total revenue		37,152,460			29,838,954			26,513,046

Cost of service revenue		21,347,731			15,624,636			11,556,269
Cost of product revenue		4,270,720			3,804,105			4,393,009

Total cost of revenue		25,618,451			19,428,741			15,949,278


Gross profit		11,534,009			10,410,213			10,563,768


Operating expenses:
Selling		2,703,450			2,853,229			2,939,929
Research and development		1,099,533			1,326,933			1,521,001
General and administrative		7,476,646			5,430,051			4,476,105
(Gain) loss on sale of property and equipment		28,757			(362,755	)		12,883

Total operating expenses		11,308,386			9,522,907			8,949,918


Operating income		254,380			800,000			1,626,733
Interest income		7,621			3,322			3,492
Interest expense		(942,463	)		(709,777	)		(205,002	)
Other income		102,557			114,277			135,099

Income (loss) before income taxes		(606,662	)		570,577			1,547,439
Income taxes		(403,308	)		483,271			480,994

Net income (loss)	$	(203,354	)	$	87,306		$	1,066,445


Net income (loss) per share:
Basic	$	(0.04	)	$	0.02		$	0.23
Diluted	$	(0.04	)	$	0.02		$	0.23
Weighted average common shares outstanding:
Basic		4,860,095			4,654,595			4,575,995
Diluted		4,860,095			4,673,448			4,625,381

				Additional paid in capital		Retained earnings			Accumulated other comprehensive loss			Total Shareholders' equity
Balance at September 30, 2001	4,569,416	$	1,012,190	$	10,506,200	$	6,344,666		$	(32,727	)	$	17,830,329

Comprehensive income (loss):
Net income	--		---		---		1,066,445			---			1,066,445
Other comprehensive loss:
Foreign currency translation adjustments	---		---		---		---			(15,065	)		(15,065	)

Total comprehensive income													1,051,380
Exercise of stock options	9,100		2,016		14,639		---			---			16,655
Balance at September 30, 2002	4,578,516		1,014,206		10,520,839		7,411,111			(47,792	)		18,898,364


Comprehensive income:
Net income	---		---		---		87,306			---			87,306
Other comprehensive loss:
Foreign currency translation adjustments	---		---		---		---			(14,119	)		(14,119	)

Total comprehensive income													73,187
Shares issued for acquisitions	228,857		148,621		567,512		---			---			716,133
Exercise of stock options	24,087		5,336		33,444		---			---			38,780

Balance at September 30, 2003	4,831,460		1,168,163		11,121,795		7,498,417			(61,911	)		19,726,464


Comprehensive income (loss):
Net loss	---		---		---		(203,354	)		---			(203,354	)
Other comprehensive loss:
Foreign currency translation adjustments	---		---		---		---			(252,927	)		(252,927	)

Total comprehensive loss													(456,281	)
Conversion of note	38,042		8,427		141,573		---			---			150,000

Balance at September 30, 2004	4,869,502	$	1,176,590	$	11,263,368	$	7,295,063		$	(314,838	)	$	19,420,183

	2004			2003			2002
Operating activities:

Net income (loss)	$	(203,354	)	$	87,306		$	1,066,445
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		3,441,127			2,681,692			2,042,004
(Gain) loss on sale of property and equipment		28,757			(362,755	)		12,883
Deferred income taxes		12,927			137,662			(67,525	)
Changes in operating assets and liabilities:
Accounts receivable		(1,492,620	)		503,049			(288,295	)
Inventories		485,612			618,900			(232,969	)
Prepaid expenses and other assets		(113,471	)		107,269			(426,269	)
Accounts payable		(310,906	)		(540,139	)		(428,391	)
Refundable income taxes		(518,763	)		(31,924	)		(11,958	)
Income taxes payable		--			(41,488	)		138,537
Accrued expenses		344,894			(130,267	)		6,193
Customer advances		1,159,308			(84,111	)		221,844

Net cash provided by operating activities		2,833,511			2,945,194			2,032,499


Investing activities:
Capital expenditures		(3,568,045	)		(5,329,166	)		(4,684,278	)
Proceeds from sale of property and equipment		79,010			1,639,808			16,663
Loans to PharmaKinetics Laboratories, Inc.		---			---			(407,858	)
Deferred acquisition costs for PharmaKinetics		---
Laboratories, Inc.		---			---			(186,625	)
Payments for purchase of PharmaKinetics
Laboratories, Inc., net of cash acquired		---			(818,011	)		---
Payments for purchase of LC Resources, Inc.,
net of cash acquired		(8,118	)		(185,398	)		---

Net cash used by investing activities		(3,497,153	)		(4,692,767	)		(5,262,098	)


Financing activities:
Borrowings of long-term debt		---			7,631,409			680,000
Payments of long-term debt		(504,749	)		(3,704,659	)		(252,328	)
Borrowings on line of credit		13,465,370			5,223,054			4,635,321
Payments on line of credit		(13,027,555	)		(6,584,581	)		(1,121,635	)
Borrowings on construction line of credit		574,247			1,675,753			---
Payments on capital lease obligations		(196,166	)		(1,138,948	)		(261,123	)
Payments of debt issue costs		---			(490,806	)		---
Payments on subordinated notes		---			(251,730	)		---
Net proceeds from the exercise of stock options		---			38,780			16,655

Net cash provided by financing activities		311,147			2,398,272			3,696,890

Effect of exchange rate changes		(252,927	)		(98,352	)		(15,065	)

Net increase (decrease) in cash and
cash equivalents		(605,422	)		552,347			452,226
Cash and cash equivalents at beginning of year		1,378,311			825,964			373,738

Cash and cash equivalents at end of year	$	772,889		$	1,378,311		$	825,964


See accompanying notes to consolidated financial statements

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549