We compute basic income/(loss) per share using the weighted average number of common shares outstanding. We compute diluted income/(loss) per share using the weighted average number of common and potential common shares outstanding. Potential common shares include the dilutive effect of shares issuable upon exercise of options to purchase common shares. Shares issuable upon conversion of convertible subordinated debt have not been included as they were not dilutive. NoAt December 31, 2006, we had 404 shares issuable upon exercise of stock options or conversionthat are excluded from our outstanding share calculation as they are anti-dilutive. Shares issuable upon exercise of debt are included inoptions were excluded from the computation of loss per share for the six monthscurrent quarter ended MarchDecember 31, 20062007 as they are anti-dilutive.

Inventories consisted of the following:

We operate in two principal segments - research Servicesservices and research Products.products. Our Servicesservices segment provides research and development support on a contract basis directly to pharmaceutical companies. Our Productsproducts segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies found in Note 12 to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2006.2007.

On April 9,October 1, 2007, we soldrecognized a building and lot adjacent to our facility in West Lafayette, IN that was not being utilized$183 increase in our operations, recognizingliability for uncertain income tax positions, which was accounted for as a loss on the sale of $98. The loss was recorded in our resultsreduction to retained earnings, for the three and six monthscumulative effect change of adopting FIN 48, which was the total reserve at that date. During the quarter ended March 31, 2007. The net realizable value of the asset is shown as Asset Held for Resale in our balance sheet at March 31, 2007.

Our Agreement limits outstanding borrowings to the borrowing base as defined in the agreement, to a maximum available amount of $5,000. As of December 31, 2007, there were 320 shares availableno borrowings on this line. We also had an outstanding letter of credit to collateralize our lease in Baltimore, Maryland for grants$1,000, which was counted against our allowable borrowings. Borrowings under the two plans.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 $3,419 of available additional borrowing capacity at December 31, 2007.

The following applies to options outstanding at March 31, 2007:

This Form 10-Q may contain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and/or Section 21E of the Securities and Exchange Act of 1934, as amended. Those statements may include, but are not limited to, discussions regarding BASi'sour intent, belief or current expectations with respect to (i) BASi'sour strategic plans; (ii) BASi'sour future profitability; (iii) BASi'sour capital requirements; (iv) industry trends affecting the Company'sour financial condition or results of operations; (v) the Company'sour sales or marketing plans; or (vi) BASi'sour growth strategy. Investors in BASi's Common Sharesour common shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in BASi’sour annual report on Form 10-K for the year ended September 30, 2006.2007. Although the Company believeswe 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. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Companyus that BASi'sour plans and objectives will be achieved. (Amounts in thousands unless otherwise indicated.)

"Management's Discussion and biotech companies’ effortsAnalysis 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 new drug discovery and approval. Our Services segment isaccordance with accounting principles generally accepted in the direct beneficiaryUnited States. Preparation of these efforts, through outsourcingfinancial statements requires management to make judgments and estimates that affect the reported amounts of laboratoryassets, liabilities, revenues and analytical needs, and our Products segment is the indirect beneficiary, as increased drug development leads to capital expansion, providing opportunities to sell the equipment we produceexpenses, and the consumable supplies we provide that support our products.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.

We use the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year ended September 30, 2006,in which the temporary differences are expected to reverse.  The effect on deferred taxes of a change in enacted tax rates is recognized in income in the period when the change is effective.

The majority of our service contracts involve the processing of bioanalytical samples for pharmaceutical industrycompanies. 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 we made 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.

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 stock-based compensation related to employee stock options of $148 and $43 with tax benefits of $38 and $0 during the three months ended December 31, 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 businesses,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 material potential risks posedterm 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:

Changes to our business by these industries. Those commentsunderlying 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.

Revenues for the second fiscal quarter ended MarchDecember 31, 2007 decreased 9%increased 5.2% to $11.3 million$11,452 compared to $12.4 million$10,884 for the second quartersame period last year.

Our Service segment revenue decreasedincreased by 13%3.6% from $10.1 million$8,608 to $8.7 million$8,922 compared to the comparablesame period last year. This was primarily the result of strong increases in toxicology and pharmaceutical analysis revenues as well as an increase in pharmacokinetics and pharmacodynamics revenues. These gains were partially offset by declines in clinical and bioanalytical analysis revenues. The clinical operations have declined mainly as a result of an unfavorable trial mix, volume and duration of trials. We experienced a decline in revenuessamples available to assay in our bioanalytical laboratories, where revenues inanalysis areas which contributed to the year earlier quarter were particularly strong due to a large study in that quarter that had been rescheduled from an earlier quarter.revenue decrease. Our toxicology revenues increased $0.4 million (a 10%$295 (an 11.6% increase), reflecting the continued healthstrength of our toxicology operations. Revenueoperations in our Baltimore clinic increased 4% overline with industry trends. Revenues for pharmaceutical analysis grew 31.7% to $512 from $388. Finally, the increase in pharmacokinetics and pharmacodynamics revenues of $197 or 74.8% versus the comparable quarterperiod last year reflecting our continuing effort to cultivate new clients forreflects the strength of these services. operations with continued growth since inception in fiscal 2005.

Sales in our Products segment increased 9.3%11.2% from $2.4 million$2,276 in our secondfirst fiscal quarter last year to $2.6 million$2,530 in the current quarter. Sales of our Culex automated pharmacologyin vivo sampling systems showed continued strength posting a $0.5 million$353, or 25.6%, increase over the same period last year. The Culex systems improvement in sales was partially offset by declinesa decline of $97, or 12.1%, in our more mature, analytical products. We also experienced a decline in our Vetronics business of $108 from last year as a contract with a long-time client was not renewed, which caused most of the decline in Vetronics revenue.

Cost of revenues for the secondcurrent quarter ended March 31, 2007 was $8.1 million$7,947 or 72%69.4% of revenue compared to $7.5 million,$7,499, or 60%68.9% of revenue for the second quarter last year. Our costprior year period.

Cost of Service revenue as a percentage of Service revenue in our service segment increased from 67%to 77.5% in the second fiscalcurrent quarter last year to 80%from 76.9% in the quarter ended March 31, 2007. A substantial portion of our cost of productive capacity (personnel, facilities and laboratory equipment) is relatively fixed, resulting in a higher cost of services as a percentage of sales when comparedcomparable period last year. Due to the same periodcommercialization of a year ago due tonew product, costs associated with our pharmacokinetics and pharmacodynamics services are included in costs of revenue for the revenue decrease. The revenue decrease did not create a corresponding decreaseservice segment; whereas in the costsprior year period they were considered research and development expenses.

Costs of productive capacity. In addition, we transferred our pre-clinical services payroll related costs from our research group to cost of services. Similarly, our costs of Product revenue as a percentage of Product revenue in our products segment increased from 31%38.5% to 45%40.9%. A substantial portionThis increase is the result of products shipped incontinuing growth of sales of Culex supplies, which have a lower margin than the quarter ended March 31, 2007 were manufactured in the prior quarter, with manufacturing activity lower in the current fiscal quarter. This resulted in under-absorption of manufacturing costs in the current quarter, which is included in cost of products and raises the percentage of costs compared to sales.capital equipment.

Selling expenses for the three months ended MarchDecember 31, 2007 decreased 1%increased 16.6% to $673 thousand$792 from $680 thousand$679 for the three months ended March 31, 2006. There were no significant changes in ourcomparable period last year. This increase is driven by enhanced sales efforts betweenand new hires in both our West Lafayette and UK sites and by the comparable quarters.increase in revenue experienced in the current quarter. Research and development expenses for the three months ended March 31, 2007first quarter of fiscal 2008 decreased 50%47.0% to $101 thousand$188 from $201 thousand for the three months ended March 31, 2006$355 mainly as a result of $118 thousand of payroll costs related to the commercialization of our pharmacokinetics and pharmacodynamics services being transferred from our research group toconsidered as cost of servicesservices; whereas in the current quarter.prior year period they were considered research and development expenses.

General and administrative expenses for the three months ended March 31, 2007 decreased 35%current quarter increased 38.8% to $1.9 million, down$2,252 from $2.9 million$1,622 for the three months ended March 31, 2006.prior year period. The major contributorsincrease is mainly due to our cost reduction were the strategic reduction infollowing: 1) expenses for attracting and hiring new management personnel in September 2006,our Baltimore and UK facilities; 2) an increase in stock compensation expense with the impairment charge taken on the Baltimore clinic in fiscal 2006 reducing our expensesnew option grants to executive officers in the current year,second quarter of fiscal 2007 and a shift to utilizationfirst quarter of temporary personnel in the Baltimore clinic which enables us to reduce personnel costs when the clinic is not occupied. We also recorded a loss of $98 thousand on the sale of an excess building adjacent to our main facility in West Lafayette, IN.fiscal 2008; 3) higher legal and other professional consulting costs; and 4) increased spending for computer infrastructure and supplies.

Our interest expense declined $18 thousandeffective tax rate for the quarter ended December 31, 2007 was 123.6% compared to $230 thousand41.5% used for the prior year period. The main differences stem from the FIN 48 adoption and subsequent additional tax in the first three months of fiscal 2008 versus a tax benefit in the first three months of fiscal 2007 due to lower average outstanding borrowings betweendomestic losses and the comparable quarters, in spiteuse of higher short term rates in the current quarter. A significant amount of our borrowings are at fixed rates that did not change between the comparable quarters.tax loss carryforwards to offset foreign earnings.

Since its inception, BASi’s principal sources of cash have been cash flow generated from operations and funds received from bank borrowings and other financings. At MarchDecember 31, 2007 we had cash and cash equivalents of $1.4 million,$641, compared to cash and cash equivalents of $1.6 million$2,837 at September 30, 2006. Approximately 26% of our cash balances were in the U.K at March 31, 2007 as compared to 60% at March 31, 2006. We monitor our U.K. cash needs to avoid currency conversion costs, which in the current interest rate environment can exceed interest.2007.

Net cash provided by operating activities was $0.4 million$1,979 for the sixthree months ended MarchDecember 31, 2007 compared to $1.1 million$1,157 for the sixthree months ended MarchDecember 31, 2006. This increase was the result of the earningspartially due to which is added our non-cash charges for depreciation, amortization and amortization, offset by receivables balances increasingemployee stock compensation expense. A decrease in total accounts receivable of $470 contributed as well mainly because of the timing of invoicing impacting the collections from customers. Refundable income taxes also added to the change with a result$630 decrease due to the receipt of new contracts, a building held for resale, and working downfederal tax refunds during the balances in customer deposits and accrued expenses.current quarter. The impact on operating cash flow of other changes in operating assets and liabilitiesworking capital was not material. Our current ratio for the quarter ended December 31, 2007 was 1.3 compared to 1.2 for the prior year period.

Net cash provided by investingInvesting activities was $0.3 millionused $848 as compared to $268 used for the first quarter of fiscal 2008 and 2007, respectively, mainly due to capital expenditures. Our principal investments were for laboratory equipment replacements and upgrades in our West Lafayette and UK facilities, new building improvements in the six months ended March 31, 2007UK as a result of the netting of disposals (includingwe prepare to relocate to new space, a building conversion in West Lafayette) against routine equipment purchases. Additionally, we repaid $0.8 millionour Evansville facility to increase the available space for toxicology analysis and general building and computer infrastructure expenditures at all sites.

Financing activities used $3,286 as compared to $487 used for the first quarter of principal onfiscal 2008 and 2007, respectively. The main use of cash in the first quarter of fiscal 2008 was to repay the balance of our long-termsubordinated debt, approximately $4,500, as well as other long term debt and capital leaseslease payments of $222, partially offset by the $1,400 borrowed from Regions Bank in the six months ended March 31, 2007.a new loan agreement described more fully below.

We have a $6.0 millionamended our revolving credit agreementfacility in October 2007, reducing our line of credit to $5,000 from $6,000 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 mortgage notes payable to another bank aggregating approximately $9,500. 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 a commercial bank which extends until December 31, 2007.certain financial covenants outlined in the borrowing agreements. These credit agreements contain cross-default provisions. We may utilize up to that amount based upon our qualifying inventory and accounts receivable. We are in discussions with our bank to extend this facility beyond its expiration date.

We have $4.0 millionOn December 18, 2007, we entered into a loan agreement with Regions Bank (“Regions”) under which Regions loaned us $1,400 under a term loan maturing December 18, 2010. Interest on the loan is equal to LIBOR plus 215 basis points. Monthly payments are $12 plus interest. The loan is secured by real estate at the Company’s West Lafayette and Evansville, Indiana locations. Regions holds an additional $8,000 of convertibledebt of the Company secured by mortgages on these facilities. A portion of the proceeds of the $1,400 loan were used to repay our subordinated debt which becomes dueof approximately $4,500 during the first quarter while existing cash on January 1, 2008. Accordingly, the entire amount is presented in current portion of long-term debt inhand made up the balance sheet at March 31, 2007. The debt is convertible at $16 per share into common stock, a conversion price that makes it unlikely to be converted before its maturity. This debt is subordinated to our bank debt, and cannot be repaid without the consent of our senior lenders. We are currently exploring options to refinance this debt, including acquiring additional mortgage debt, extending the terms of the debt, and obtaining funds by a private placement of debt or equity securities.payment.

Based on our current business activities and cash on hand after the debt paydown of $4,500 in the first quarter of the current fiscal year, we expect to borrow on our revolving credit facility to finance current operations, except for periods when rapid growth of new business may necessitate borrowing to finance the buildup of receivablesworking capital and inventory.

BASi operatesWe operate internationally and is,are, therefore, subject to potentially adverse movements in foreign currency exchange rates. The effect of movements in the exchange rates was not material to theour consolidated operating results of BASi in fiscal years 20062007 and 2005. BASi estimates2006. We estimate that a hypothetical 10% adverse change in foreign currency exchange rates would not materially affect theour consolidated operating results of BASi by a material amount in fiscal year 2007.results.

Based on their most recent evaluation, the Company'sour Chief Executive Officer and Chief Financial Officer believe that the Company'sour disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of MarchDecember 31, 2007 to ensure that information required to be disclosed by the Company in this Form 10-Q was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms.

There were no significant changes in the Company’sour internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, which was completed as of December 31, 2007.

You should carefully consider the risks described in our Annual Report on Form 10-K for the year ended September 30, 2006.2007, including those under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K, as amended, and other information contained in this Quarterly Report before investing in our securities. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.