Inventories consisted of the following:

We operate in two principal segments - research services and research products. Our services segment provides research and development support on a contract basis directly to pharmaceutical companies. Our products segment provides liquid chromatography, electrochemical and physiological monitoring products to pharmaceutical companies, universities, government research centers and medical research institutions. Our accounting policies in these segments are the same as those described in the summary of significant accounting policies found in Note 2 to Consolidated Financial Statements in our annual report on Form 10-K for the year ended September 30, 2007.

On October 1, 2007, we recognizedrecorded a $183 increase in our liability for uncertain income tax positions, which was accounted for as a reduction to retained earnings, for the cumulative effect change of adopting FIN 48, which was the total reserve at that date.48. During the quarterthree and six months ended DecemberMarch 31, 2007,2008, we recorded additional tax expense of $38 in our income tax provision$70 and $108 for additional exposure on these uncertain tax positions. Thepositions, thus increasing our reserve for uncertain income tax positions at DecemberMarch 31, 2007 was $221.2008 to $291. This reserve is classified as a current liability in the condensed consolidated balance sheet based on the timing of when we expect each of the items to be settled. We record interest and penalties accrued in relation to uncertain income tax positions as a component of income tax expense.

Any changes in the liability for uncertain tax positions would impact our effective tax rate. Over the next twelve months, it is reasonably possible that the uncertainty surrounding our reserve for uncertain income tax positions, relatedwhich relate to certain state income tax issues, will be resolved as a result ofupon the conclusion of state tax audits. If such resolutions are favorable, we would reduce the carrying value of our reserve.  The following tax years remain open to regulatory examination as of DecemberMarch 31, 20072008 for our major tax jurisdictions:

On December 18, 2007, we entered into a loan agreement with Regions Bank (“Regions”) under which Regions loaned us $1,400 under a term loan maturing December 18, 2010. Interest on the loan is equal to LIBOR plus 215 basis points and requiredrequires monthly payments areof approximately $12 plus interest. The loan is securedcollateralized by real estate at the Company’s West Lafayette and Evansville, Indiana locations. Regions holds an additional $8,000 of our mortgage debt on these facilities. We used a portion of the proceeds of the loan and existing cash on hand to repay our subordinated debt of approximately $4,500 during the first quarter.

Our Agreement limits outstanding borrowings to the borrowing“borrowing base,” as defined in the agreement,Agreement, up to a maximum available amount of $5,000. As of DecemberMarch 31, 2007, there were no borrowings2008, we had a balance on this line. We also had an outstanding letter of credit to collateralize our lease in Baltimore, Maryland for $1,000, which was counted against our allowable borrowings. Borrowings under the line of credit of $1,915. Borrowings bear interest at a variable rate based on either (a) the London Interbank Offer Rate (LIBOR) or (b) a base rate determined by the lender’sbank’s prime rate, in either case, plus an applicable margin, as defined in the agreement.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 feefees on the unused portionportions 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 computation, we had $3,419$3,942 of available additional borrowing capacity at DecemberMarch 31, 2007.2008.

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 our intent, belief or current expectations with respect to (i) our strategic plans; (ii) our future profitability; (iii) our capital requirements; (iv) industry trends affecting our financial condition or results of operations; (v) our sales or marketing plans; or (vi) our growth strategy. Investors in our common shares are cautioned that reliance on any forward-looking statement involves risks and uncertainties, including the risk factors contained in our annual report on Form 10-K for the fiscal year ended September 30, 2007. Although we believe that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. 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 us that our plans and objectives will be achieved. (Amounts in thousands unless otherwise indicated.)

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

WeAs described in Note 6, 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 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.

Any changes in the liability for uncertain tax positions would impact our effective tax rate. Over the next twelve months, it is reasonably possible that the uncertainty surrounding our reserve for uncertain income tax positions, relatedwhich relate to certain state income tax issues, will be resolved as a result ofupon the conclusion of state tax audits. IfAccordingly, if such resolutions are favorable, we would reduce the carrying value of our reserve. The following tax years remain open to investigation as of December 31, 2007 for our major tax jurisdictions:

The majority of our research service contracts involveinvolves the processing of bioanalytical samples for pharmaceutical companies. These contractscompanies and generally provide for a fixed fee for each assay method developed or sample processed and revenueprocessed. Revenue is, therefore, recognized under the specific performance method of accounting. Underaccounting and the specific performance method, revenue and related direct costs are recognized when services are performed. Other research service contracts generally consist of preclinical and clinical trial studies, for pharmaceutical companies. Serviceand revenue is recognized based on the ratio of direct costs incurred to total estimated direct costs under the proportional performance method of accounting. Losses on both types of contracts are provided in the period in which the loss becomes determinable. Revisions in profit estimates, if any, are reflected on a cumulative basis in the period in which such revisions become known. The establishment of contract prices and total contract costs involves estimates we mademake at the inception of the contract period. These estimates could change during the term of the contract which couldand 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 generally not been material. ServiceResearch service contract fees received upon acceptance are deferred and classified within customer advances, until earned. Unbilled revenues represent revenues earned under contracts in advance of billings.

Our productProduct revenue is derived primarily from sales of equipment utilized for scientific research. Revenue from equipment not requiring installation, testing or training is recognized upon shipment to customers. One product includes internally developed software and requires installation, testing and training, which occur concurrently. Revenue from this productthese sales is recognized upon completion of the installation, testing and training.training when the services are bundled with the equipment sale.

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 byin the amount by which the carrying amount of the asset exceeds the fair value of the asset.

On October 1, 2005, we changed our accounting toWe 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.method. We elected to use the modified prospective transition method of adoption. We measuredmeasure compensation cost for all outstanding unvested stock-basedshare-based awards made to our employees and directors based on estimated fair values and recognizedrecognize compensation over the servicevesting period for awards expected to vest.awards. We recognized stock-based compensation related to employee stock options of $148$155 and $43$50 with tax benefits of $38 and $0 during the three months ended DecemberMarch 31, 20072008 and 2006,2007, respectively.

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

Employee stock-based compensation expense recognized in the first quarterthree and six months of fiscal 2008 and 2007 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment will be recognized at that time.

Changes to our underlying stock price, our assumptions used in the binomial option valuation calculation and our forfeiture rate as well as future grants of equity could significantly impact compensation expense to be recognized in fiscal 2008 and future periods.

Revenues for the fiscal quarter ended DecemberMarch 31, 2007 increased 5.2%2008 decreased 2.5% to $11,452$11,031 compared to $10,884$11,311 for the same period last year.

Our Service segment revenue increased by 3.6%6.3% from $8,608$8,726 to $8,922$9,280 compared to the same period last year. This wasyear primarily theas a result of strong increases in toxicology and pharmaceuticalbioanalytical analysis revenues as well asplus an increase in pharmacokinetics and pharmacodynamics revenues. These gains were partially offset by declines in clinical and bioanalyticalpharmaceutical 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 samples available to assay in our bioanalytical analysis areas which contributed to the revenue decrease. Our toxicology revenues increased $295 (an 11.6%$665 (a 29.9% increase), reflecting the continued strength of our toxicology operations in line with industry trends. Revenues for pharmaceutical analysis grew 31.7%29.6% to $512$538 from $388. Finally,$415. Further, our bioanlaytical analysis revenues experienced increases in each location (Oregon, West Lafayette and the UK), totaling a 28.9% increase, from $3,667 to $4,728. The increases in the UK facility are mainly due to the management and personnel changes made in the current fiscal year, which increased efficiencies and output volume when compared to the same quarter of prior year. The Oregon and West Lafayette facilities experienced increased revenues because of a larger amount of samples available to assay, some delayed from the first quarter, as well as an increase in pharmacokinetics and pharmacodynamicsimmunochemistry revenues of $197 or 74.8% versusnearly $500 over prior year. Offsetting our revenue increases, our clinical operations revenue declined by 61.9% to $730 from $1,914 in the comparable period last year reflectsof the strength of these operations with continued growth since inception in fiscal 2005.

Sales in our Products segment increased 11.2%decreased 32.3% from $2,276$2,585 in our firstsecond fiscal quarter last year to $2,530$1,751 in the current quarter. Sales of our Culex automated in vivo sampling systems showed continued strength posting a $353, or 25.6%, increase overdecreased 54.4% to $668 from $1,465 in the same period last year. The Culex systems improvement in sales was partially offset by a declineyear mainly due to client order delays as well as timing of $97, or 12.1%, in our more mature, analytical products.shipments and equipment installations. We also experienced a decline in our Vetronics business of $108$89 from last year asprimarily because a contract with a long-time client was not renewed, which caused mostrenewed. The decrease in sales above was partially offset by an increase of the decline$43, or 5.2%, in Vetronics revenue.our more mature, analytical products.

Cost of revenues for the current quarter was $7,947$7,611 or 69.4%69.0% of revenue compared to $7,499,$8,131, or 68.9%71.9% of revenue for the prior year period.

Cost of Service revenue as a percentage of revenue in our service segment increaseddecreased to 77.5%74.7% in the current quarter from 76.9%79.8% in the comparable period last year. Due to the commercializationThis decrease occurred because a significant portion of a new product, costs associated with our pharmacokinetics and pharmacodynamics services are included in costs of revenue for the service segment; whereasproductive capacity in the prior year period they were considered researchService segment are fixed. Thus, revenue increases generate efficiencies and development expenses.lower costs per incremental revenue dollar.

Costs of Products revenue as a percentage of revenue in our products segment increaseddecreased to 38.8% from 38.5% to 40.9%45.0%. This increasedecrease is due in part to decreased sales and higher absorption of manufacturing costs that are included in the resultcost of continuing growth of sales of Culex supplies, which have a lower margin thanproducts during the capital equipment.current quarter as compared to the same period in the prior year.

Selling expenses for the three months ended DecemberMarch 31, 20072008 increased 16.6%29.8% to $792$874 from $679$673 for the comparable period last year. This increase is primarily driven by expanded sales efforts and new hires in both our West Lafayette and UK sites along with increased marketing and advertising efforts. Research and development expenses for the second quarter of fiscal 2008 increased to $183 from $101 mainly as a result of higher usage of operating supplies and outside services in conjunction with the performance of services for an NIH grant.

Selling expenses for the six months ended March 31, 2008 increased 23.2% to $1,666 from $1,352 for the comparable period last year. This increase is driven by enhancedexpanded sales efforts and new hires in both our West Lafayette and UK sites and by thean increase in revenue experienced in the current quarter.trade shows and exhibits expenses. Research and development expenses for the first quarterhalf of fiscal 2008 decreased 47.0%18.6% to $188$371 from $355$456 mainly as a result of costs related to the commercialization of our pharmacokinetics and pharmacodynamics services being considered as cost of services; whereas in the first quarter of the prior fiscal year, period they were considered research and development expenses.

General and administrative expenses for the current quartersix months ended March 31, 2008 increased 38.8%28.7% to $2,252$4,502 from $1,622$3,497 for the prior year period. The increase is mainly due to the following: 1) expenses for attracting and hiring new management personnel in our Baltimore and UK facilities; 2) an increase in stock compensation expense with the new option grants to executive officers in the second quarter of fiscal 2007 and first quarter of fiscal 2008; 3) higher legal and other professional consulting costs; and 4) increased spending for computer infrastructure and supplies.

Our effective tax rate for the quartersix months ended DecemberMarch 31, 20072008 was 123.6%623.8% compared to 41.5%7.9% used for the prior year period. The main differences stem fromare the FIN 48 adoption and subsequent additional taxresult of having taxable income for state taxes in some states, even though experiencing a consolidated loss in the first three monthshalf of fiscal 2008 versus a tax benefit in the first three monthssame period of fiscal 2007 due to domestic losses and the use of 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 DecemberMarch 31, 20072008 we had cash and cash equivalents of $641,$465, compared to cash and cash equivalents of $2,837 at September 30, 2007.

Investing activities used $848 as compared to $268 used for$1,321 in the first quarterhalf 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, Oregon and UK facilities, new building improvements in the UK as we prepare to relocate to new space, a building conversion in our 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$1,603 as compared to $487$691 used for the first quarterhalf of fiscal 2008 and 2007, respectively. The main use of cash in the first quarter of fiscal 2008 was to repay the balance of our subordinated debt, approximately $4,500, as well as other long term debt and capital lease payments of $222,$431, partially offset by the $1,400 borrowed from Regions Bank in a new loan agreement described more fully below.below and $1,915 net borrowed from our line of credit.

On December 18, 2007, we entered into a loan agreement with Regions Bank (“Regions”) under which Regions loaned us $1,400 under a term loan maturing December 18, 2010. Interest on the loan is equal to LIBOR plus 215 basis points. Monthly payments are $12 plus interest. The loan is securedcollateralized by real estate at the Company’s West Lafayette and Evansville, Indiana locations. Regions holds an additional $8,000 of debt of the Company secured by mortgages on these facilities. A portion of the proceeds of the $1,400 loan werewas used to repay our subordinated debt of approximately $4,500 during the first quarter of the current fiscal year while existing cash on hand made up the balance of the 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 continue to borrow on our revolving credit facility to finance working capital and capital expenditure requirements. At DecemberMarch 31, 2007, there was2008, we had a balance on our line of credit of $1,915 with approximately $3,419$3,942 available under our revolving credit facilityto borrow and $641$465 of cash on hand.

Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of DecemberMarch 31, 20072008 to ensure that information required to be disclosed 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 our internal controls or other factors that could significantly affect those controls subsequent to the date of their evaluation, which was completed as of DecemberMarch 31, 2007.2008.

You should carefully considerOn March 20, 2008, the risks described in our Annual ReportMeeting of Shareholders of BASi was held at the principal executive offices of BASi. The Shareholders voted on Form 10-K for the year ended September 30, 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.following five proposals: