In April, 2010, we settled state tax litigation relating to our fiscal tax years 2003 through 2006 by agreeing to pay $35 and forgoing a refund claim for $64. Because we had previously recorded a $443 liability for this uncertain tax position, we recognized a net tax benefit of $344 in the three months ended March 31, 2010.

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~~we do not anticipate resolution to the uncertainty surrounding our reserve for uncertain income tax positions, which relate to certain state income tax issues, will be resolved upon the conclusion of state tax litigation. Accordingly, if such resolutions are favorable, we would reduce theremaining carrying value of our reserve.

Interest and penalties are included in the reserve. We file income tax returns in the U.S., several U.S. States, and the foreign jurisdiction of the United Kingdom. We remain subject to examination by taxing authorities in the jurisdictions in which we have filed returns for years after 2005.

We have an accumulated net deficit in our UK subsidiaries. Consequently, United States deferred tax assets on such earnings have not been recorded. Also, a valuation allowance was established in fiscal 2009 against the US deferred income tax balance. We had previously recorded a valuation allowance on the UK subsidiary deferred income tax balance.

8.7.

DEBT

Mortgages and note payable

~~On December 18, 2007, we entered into a loan agreement~~We have four loans with Regions Bank ~~(“Regions”) under which Regions loaned us $1,400 under~~secured by our real estate in West Lafayette and Evansville, Indiana. One of these loans with a ~~term~~current principal outstanding of $1,155 matures in December 2010, and another loan ~~maturing December 18,~~with a principal outstanding of $1,419 matures in February 2011. Accordingly, these amounts are included in Current Portion of Long Term Debt on the accompanying balance sheet at March 31, 2010. Interest on ~~the loan~~these loans is equal to LIBOR plus 215 basis points. Monthly payments are $9 plus interest. The loan is collateralized by real estate at our West Lafayette and Evansville, Indiana locations. Regions also holds approximately $7,400 of additional mortgage debt on these facilities. We entered into interest rate swap agreements with notional values of $2,600 with respect to ~~two of~~ these loans to fix the interest rate at 6.1%. We entered into these derivative transactions to hedge the interest rate risk of this debt obligation and not to speculate on interest rates. The fair value of the swaps was determined with a level two analysis. ~~As a result of recent declines in short term interest rates, the~~These swaps had a negative fair value of ~~$86~~$72 at ~~December~~March 31, ~~2009~~2010 and $103 at September 30, ~~2009, a~~2009. A gain of ~~$17, which~~$31 for the six months ended March 31, 2010 was recorded in our condensed consolidated financial statements as a decrease to interest expense and a long term liability. There was ~~no gain or~~a loss of $131 recorded for the ~~three~~six months ended ~~December~~March 31, ~~2008.~~2009. The terms of the interest rate swaps match the scheduled principal outstanding under the loans. We do not intend to prepay the loans, and expect the swaps to expire under their terms without payment by us. Upon expiration of the swaps, the net fair value recorded in the consolidated financial statements is expected to be zero. Two other mortgage loans with Regions totaling $5,881 mature in November 2012.

The covenants in our loan agreements with Regions require us to maintain certain ratios including a fixed charge coverage ratio and total liabilities to tangible net worth ratio. The Regions loans contain both cross-default provisions with each other and with the revolving line of credit with Entrepreneur Growth Capital described below. At ~~December~~March 31 ~~2009,~~2010, we were in breach of the fixed charge coverage ratio ~~covenant.~~ and debt to tangible net equity covenants. On ~~January 7,~~May 11, 2010, Regions waived our violation of the fixed charge coverage ratio ~~covenant~~ and ~~on January 13, 2010, amended the computations and requirements for the fixed charge coverage ratios through fiscal 2010.~~debt to tangible net worth covenants.

Revolving Line of Credit

Through December 31, 2009, we had a revolving line of credit (“Agreement”), with PNC Bank, as successor by merger to National City, which we used for working capital and other purposes. Borrowings under the Agreement were collateralized by substantially all assets related to our operations, other than the real estate securing the Regions loans, all common stock of our United States subsidiaries and 65% of the common stock of our non-United States subsidiaries. Under the Agreement, we agreed to restrict advances to subsidiaries, limit additional indebtedness and capital expenditures and comply with certain financial covenants outlined in the Agreement.

The covenants in the Agreement required that we maintain certain ratios of interest-bearing indebtedness to EBITDA and net cash flow to debt servicing requirements. The Agreement also contained cross-default provisions with the Regions loans.

On December 31, 2009, we executed a Fifth Amendment to the Amended and Restated Credit Agreement with PNC extending the maturity date of the line of credit until January 15, 2010. At December 31, 2009, we had $3,000 of total borrowing capacity from the PNC line of credit, of which $1,569 was outstanding.

On January 13, 2010, we entered into a new $3,000 revolving line of credit agreement (“Credit Agreement”), with Entrepreneur Growth Capital LLC ~~(EGC)~~(“EGC”), ~~which we intend to use~~ for working capital and other purposes. On January 18, 2010, we used this facility to repay ~~the~~our prior line with PNC ~~line of credit.~~bank. Borrowings under the Credit Agreement are secured by a blanket lien on our personal property, including certain eligible accounts receivable, inventory, and intellectual property assets, and a second mortgage on our West Lafayette and Evansville real estate. Borrowings are calculated based on 75% of eligible accounts receivable. The initial term of the Credit Agreement terminates January 31, 2011 but is renewable upon mutual agreement of the parties. If we prepay prior to the expiration of the initial term (or any renewal term), we are subject to an early termination fee equal to the minimum interest charges of $15 for each of the months remaining until expiration.

Borrowings bear interest at an annual rate equal to Prime Rate plus five percent (5%) with minimum monthly interest of $15. Interest is paid monthly. The line of credit also carries an annual facilities fee of 2% and a 0.2% collateral monitoring fee.

The covenants in the Credit Agreement require that we maintain a minimum tangible net worth of $9,500. At March 31, 2010, we were not in compliance with this covenant. On May 13, 2010, EGC waived this requirement and permanently reset the tangible net worth covenant for future periods to $9,000. The Credit Agreement also contains cross-default provisions with the Regions loans and any future EGC loans.

9.8.	LIQUIDITY AND CAPITAL RESOURCES

During the past two fiscal years, we have experienced operating losses due to a decline in business during the recession. Net cash provided by operating activities was $1,220 for the six months ended March 31, 2010 compared to $994 for the six months ended March 31, 2009. The increase in cash provided by operating activities in the current fiscal year partially results from a decrease in our operating loss. Other contributing factors to our cash from operations were $1,207 of depreciation and amortization, collections on accounts receivable of $1,371, an increase in customer advances of $989 as we booked new business and the recording of a $216 long-term liability in settlement of a contingent lease liability on our former Baltimore facility.

In January 2010, we completed a reduction in work force, through both attrition and terminations, which we expected to reduce our annual compensation expense by approximately 10%. This reduction impacted all areas of operations.

Our investing activities in the first six months of fiscal 2010 have been restricted to emergency capital additions. We conducted a sale and leaseback of some of our unencumbered laboratory equipment which netted us $431 of cash, while expending $56 on capital expenditures. We intend to increase capital expenditures, particularly for laboratory equipment, when financing becomes available to fund our purchases.

Currently, we have $2,574 of existing bank debt maturing in the next twelve months that we either must reach agreement with Regions to extend, or find alternative sources of funding to retire the debt as it matures. Regions has indicated that its expectations are that the loans will be repaid at maturity.

We are pursuing opportunities with other lenders and with equity investors to procure the necessary financing to retire this debt; however, there are no assurances that the financing can be arranged, or on terms that would be acceptable to us. Obtaining this financing is dependent on continued improvement in our operating results and the condition of the capital markets. Failure to secure this financing would have material adverse effects on our operations.

9.	SETTLEMENT OF CONTINGENT LIABILITY

In June of 2008 as part of selling our Baltimore Clinical Pharmacology Research Unit, we subleased the building space it occupied to the purchaser of the assets. We remained contingently liable for the rent payments of $800 per year through 2015 in the event the sublessor did not perform. In 2009, the purchaser ceased operations in Baltimore and sought to renegotiate the terms of its sublease. In March of 2010, a settlement was reached with the landlord of the building which canceled the sublessor’s and our obligations under the lease in exchange for a cash payment from the sublessor. We agreed to contribute $250 to the settlement, payable in twenty-five monthly installments of $10 without interest. We recorded the discounted liability of $216 in March, 2010, and recognized the related expense in general and administrative expenses.

10.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other assets, accounts payable and other accruals approximate their fair values because of their nature and respective duration. The fair ~~value~~values of the revolving credit facility and long-term debt isare equal to their carrying values due to the variable nature of their interest rates.

~~10.~~11.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued an Accounting Standards Update ~~(“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition. ASU 2009-13 revises~~on the ~~current~~ accounting ~~treatment~~for revenue recognition to specifically address how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. This guidance is applicable to revenue arrangements entered into or materially modified during our next fiscal year that begins October 1, 2010. The guidance may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. We are currently evaluating this authoritative guidance to determine any potential impact that it may have on our consolidated financial statements.

~~11.~~

~~SUBSEQUENT EVENTS~~

We evaluated subsequent events through February 16, 2010, the date our condensed consolidated financial statements were issued. On January 13, 2010, we entered into a new revolving line of credit agreement with Entrepreneur Growth Capital (EGC), which we use for working capital and other purposes, to replace the PNC line of credit that expired on January 15, 2010. See Note 8 for additional information. On January 7, 2010, Regions waived our expected violation of the fixed charge coverage ratio at December 31, 2009 and on January 13, 2010, amended the computations and requirements of the fixed charge coverage ratios through our fiscal year 2010. On January 22, 2010, we entered into a sale-leaseback transaction with Forum Financial Services for $690 in assets. We received $450 in cash and are required to make 36 monthly payments of $18 at which time the assets can be purchased for one dollar.

~~No additional matters were identified that would materially impact our consolidated financial statements or require disclosure.~~

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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;~~profitability, liquidity and capital resources; (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 Part II, Item 1A of this quarterly report on Form 10-Q and in our annual report on Form 10-K for the fiscal year ended September 30, 2009. Although we believe that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could ~~prove~~fail to ~~be inaccurate,~~project actual events, and as a result, the forward-looking statements based upon those assumptions ~~also~~ could prove to be ~~incorrect.~~significantly different from actual results. 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. We do not undertake any obligation to update any forward-looking statement. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of and for the three and six months ended ~~December~~March 31, ~~2009~~2010 and ~~December~~March 31, ~~2008,~~2009, respectively, provided elsewhere in this report.

Amounts are in thousands, unless otherwise indicated.

General

The Company provides contract drug development services and research equipment to many leading global pharmaceutical, medical research and biotechnology companies and institutions. We offer an efficient, variable-cost alternative to our clients' internal product development programs. Outsourcing development work to reduce overhead and speed drug approvals through the Food and Drug Administration ("FDA") is an established alternative to in-house development among pharmaceutical companies. We derive our revenues from sales of our research services and drug development tools, both of which are focused on determining drug safety and efficacy. The Company has been involved in the research of drugs to treat central nervous system disorders, diabetes, osteoporosis and other diseases since its formation in 1974.

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

Our business is largely dependent on the level of pharmaceutical and biotechnology companies' efforts in new drug discovery and approval. Our services segment is the direct beneficiary of these efforts, through outsourcing by these companies of research work. Our products segment is the indirect beneficiary, as increased drug development leads to capital expansion providing opportunities to sell the equipment we produce and the consumable supplies we provide that support our products.

Developments within the industries we serve have a direct, and sometimes material, impact on our operations. Currently, many large pharmaceutical companies have major "block-buster" drugs that are nearing the end of their patent protections. This puts significant pressure on these companies both to develop new drugs with large market appeal, and to re-evaluate their cost structures and the time-to-market of their products. Contract research organizations ("CRO's") have benefited from these developments, as the pharmaceutical industry has turned to out-sourcing to both reduce fixed costs and to increase the speed of research and data development necessary for new drug applications. The number of significant drugs that have reached or are nearing the end of their patent protection has also benefited the generic drug industry. Generic drug companies provide a significant source of new business for CRO's as they develop, test and manufacture their generic compounds.

A significant portion of innovation in the pharmaceutical industry is now being driven by biotech and small, venture capital funded, drug development companies. Many of these companies are "single-molecule" entities, whose success depends on one innovative compound. While several of the biotech companies have reached the status of major pharmaceuticals, the industry is still characterized by smaller entities. These developmental companies generally do not have the resources to perform much of the research within their organizations, and are therefore dependent on the CRO industry for both their research and for guidance in preparing their FDA submissions. These companies have provided significant new opportunities for the CRO industry, including us. They do, however, provide challenges in selling, as they frequently have only one product in development, which causes CRO's to be unable to develop a flow of projects from a single company. These companies may expend all their available funds and cease operations prior to fully developing a product. Additionally, the funding of these companies is subject to investment market fluctuations, which changes with changes to the risk profile and appetite of investors.

Research services are capital intensive. The investment in equipment and facilities to serve our markets is substantial and continuing. While our physical facilities are adequate to meet market needs for the near term, rapid changes in automation, precision, speed and technologies necessitate a constant investment in equipment and software to meet market demands. We are also impacted by the heightened regulatory environment and the need to improve our business infrastructure to support our increasingly diverse operations, which will necessitate additional capital investment. Our ability to generate capital to reinvest in our capabilities, both through operations and financial transactions, is critical to our success. While we are currently committed to fully utilizing recent additions to capacity and have instituted a freeze on capital expenditures, sustained growth will require additional investment in future periods. Our financial position could limit our ability to make such investments.

In contrast to fiscal 2008, there were several announcements of large mergers in the pharmaceutical industry in fiscal 2009. Pfizer Inc. and Eli Lilly and Co. both completed significant acquisitions. Also, Merck and Roche have announced mergers with Schering-Plough and Genentech, respectively. We believe that such merger and consolidation activity reduced the demand and increased competition for CRO services in fiscal 2009 and was a distraction for the research and development arms of these companies as they rationalize their new drug development portfolios. The additional competitive pressures could adversely affect our future operating results.

Our primary market, the contract research organization (“CRO”) market, is experiencing serious economic pressures. Since the end of our 2008 fiscal year, pharmaceutical development companies have delayed the initiation of CRO studies and reduced their total spending for CRO services. We believe these actions are largely in response to the global economic recession and related financial crisis. The delays and reductions in spending by our customers resulted in a significant negative impact on our revenues for the current and prior fiscal years. However, the number of new studies initiated by our customers began to increase during our third fiscal quarter ended June 30, 2009 and continued through the end of the ~~first~~second fiscal quarter ended ~~December~~March 31, ~~2009.~~2010, although prices have not rebounded to pre-recession levels resulting in revenue decreases for similar work. Our basic operating costs have remained stable as a result of the sluggish demand in the market. The aggregate revenue from new studies has not yet reached a level large enough for the Company to achieve profitable operations.

Patient Protection and Affordable Care Act

In March 2010 the above law (the “Act”) was enacted by the U.S. Congress and signed into law by the President. The purpose of the legislation is to extend medical insurance coverage to a higher percentage of U.S. citizens. Many of the provisions in the Act have delayed effective dates over the next decade, and will require extensive regulatory guidance. Our principal client industry, pharmaceuticals, will be required under the Act to provide additional discounts on medicines provided under Medicare and Medicaid to assist in the funding of the program; however, government estimates are that over 31 million additional citizens will eventually be covered by medical insurance as a result of the Act, which should expand the markets for their products. It is premature to predict the impacts these and other competing forces will have on our basic client market, drug development. Additionally, the Act does not directly impact spiraling health care costs in the U.S., which could lead to additional legislation impacting our target markets in the future.

We maintain an optional health benefits package for all of our full-time employees, which is largely paid by our contributions with employees paying a portion of the cost, generally less than 20% of the total. Based on our current understanding of the Act, we do not anticipate significant changes to our programs or of their costs to the Company or our employees as a result of the Act.

We have experienced increases in the costs of our health benefit programs in excess of inflation rates, and expect those trends to continue. We are exploring options in plan funding, delivery of benefits and employee wellness in our continuing effort to obtain maximum benefit for our health care expenditures, while maintaining quality programs for our employees. We do not expect these efforts to have a material financial impact on the Company.

Critical Accounting Policies

"Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Liquidity and Capital Resources" discuss 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.

Revenue Recognition

The majority of our service contracts involve the processing of bioanalytical samples for pharmaceutical companies. These contracts generally provide for a fixed fee for each assay method developed or sample processed and revenue is recognized under the specific performance method of accounting. Under the specific performance method, revenue and related direct costs are recognized when services are performed. Other service contracts generally consist of preclinical studies for pharmaceutical companies. Service revenue is recognized based on the ratio of direct costs incurred to total estimated direct costs under the proportional performance method of accounting. Losses on contracts are provided in the period in which the loss becomes determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which such revisions become known. The establishment of contract prices and total contract costs involves estimates made by the Company at the inception of the contract period. These estimates could change during the term of the contract which could impact the revenue and costs reported in the consolidated financial statements. Projected losses on contracts are provided for in their entirety when known. Revisions to estimates have not been material. Service contract fees received upon acceptance are deferred and classified within customer advances, until earned. Unbilled revenues represent revenues earned under contracts in advance of billings.

Product revenue from sales of 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 these sales is recognized upon completion of the installation, testing and training when the services are bundled with the equipment sale.

Long-Lived Assets, Including Goodwill

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

Goodwill is tested annually for impairment, and more frequently if events and circumstances indicate that the asset might be impaired, using a two-step process. In the first step, we compare the fair value of each reporting unit, as computed primarily by present value cash flow calculations, to its book carrying value, including goodwill. We do not believe that market value is indicative of the true fair value of the Company mainly due to average daily trading volumes of less than 1%. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is potentially impaired and we would then complete step 2 in order to measure the impairment loss. In step 2, the implied fair value is compared to the carrying amount of the goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, we would recognize an impairment loss equal to the difference. The implied fair value is calculated by allocating the fair value of the reporting unit (as determined in step 1) to all of its assets and liabilities (including unrecognized intangible assets) and any excess in fair value that is not assigned to the assets and liabilities is the implied fair value of goodwill.

The discount rate and sales growth rates are the two material assumptions utilized in our calculations of the present value cash flows used to estimate the fair value of the reporting units when performing the annual goodwill impairment test. Our ~~three~~ reporting units are West Lafayette/Oregon ~~Evansville~~ and ~~the UK~~Evansville, based on the discrete financial information available which is reviewed by management. We utilize a cash flow approach in estimating the fair value of the reporting units, where the discount rate reflects a weighted average cost of capital rate. The cash flow model used to derive fair value is most sensitive to the discount rate and sales growth assumptions used.

Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted sales growth rates and our cost of capital or discount rate, are based on the best available market information and are consistent with our internal forecasts and operating plans. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period. The assumptions used in our impairment testing could be adversely affected by certain of the risks discussed in “Risk Factors” in Item 1A of our 10-K for the fiscal year ended September 30, 2009. There have been no significant events since the timing of our impairment tests at fiscal year end 2009 that have triggered additional impairment testing.

At ~~December~~March 31, ~~2009,~~2010, recorded goodwill was $1,383, and the net balance of other intangible assets was ~~$106.~~

~~Stock-Based Compensation~~

We recognize the cost resulting from all share-based payment transactions in our financial statements using a fair-value-based method. We measure compensation cost for all share-based awards based on estimated fair values and recognize compensation over the vesting period for awards. We recognized stock-based compensation related to stock options of $89 and $158 during the three months ended December 31, 2009 and 2008, respectively.

We use the binomial option valuation model to determine the grant date fair value. 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:

$99.

~~Risk-free interest rate.~~ ~~The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.~~

~~Expected volatility.~~ ~~We use our historical stock price volatility on our common stock for our expected volatility assumption.~~

~~Expected term.~~ The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.

~~Expected dividends.~~ ~~We assumed that we will pay no dividends.~~

Employee stock-based compensation expense recognized in the first three months of fiscal 2010 and 2009 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 2010 and future periods.

Income Taxes

As described in Note 76 to these condensed consolidated financial statements, we use the asset and liability method of accounting for income taxes. We account for Income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We record valuation allowances based on a determination of the expected realization of tax assets.

We ~~maintain a reserve for uncertain tax positions, according to ASC 740, Income Taxes. Under ASC 740, we may~~ recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. ~~The~~We measure the amount of the accrual for which an exposure exists ~~is measured~~ as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. ~~This reserve is classified as~~As of March, 2010 and September 30, 2009, we had a ~~current~~$30 and $473 liability ~~in the consolidated balance sheet based on when we expect each of the items to be settled. Interest and penalties are included in this reserve. Our reserve~~ for uncertain income tax positions, ~~at December 31, 2009 and September 30, 2009 remains at $473.~~respectively.

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~~we do not anticipate resolution to the uncertainty surrounding our reserve for uncertain income tax positions, which relates to certain state income tax issues, will be resolved upon the conclusion of state tax litigation. Accordingly, if such resolutions are favorable, we would reduce theremaining carrying value of our reserve.

Results of Operations

The following table summarizes the condensed consolidated statement of operations as a percentage of total ~~revenues from continuing operations:~~revenues:

	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2009			2008			2010			2009			2010			2009
Service revenue		75.4	%		74.1	%		75.7	%		75.3	%		75.6	%		74.7	%
Product revenue		24.6			25.9			24.3			24.7			24.4			25.3
Total revenue		100.0			100.0			100.0			100.0			100.0			100.0

Cost of service revenue (a)		95.0			88.3			90.6			99.1			92.7			93.4
Cost of product revenue (a)		39.0			35.5			41.2			52.7			40.2			43.3
Total cost of revenue		81.2			74.7			78.6			87.7			79.9			80.7

Gross profit		18.8			25.3			21.4			12.3			20.1			19.3

Total operating expenses		38.3			44.8			39.9			43.5			39.1			44.2

Operating loss		(19.6	)		(19.5	)		(18.5	)		(31.2	)		(19.0	)		(24.9	)

Other expense		(3.8	)		(4.8	)		4.0			3.5			3.9			4.2

Loss before income taxes		(23.3	)		(24.3	)		(22.5	)		(34.7	)		(22.9	)		(29.1	)

Income tax benefit		—			(4.7	)		(5.0	)		(8.7	)		(2.6	)		(6.6	)

Net loss		(23.3	)%		(19.6	)%		(17.5	) %		(26.0	) %		(20.3	) %		(22.5	) %

INDIANA (State or other jurisdiction of incorporation or organization)		35-1345024 (I.R.S. Employer Identification No.)

2701 KENT AVENUE WEST LAFAYETTE, INDIANA (Address of principal executive offices)		47906 (Zip code)

		Page
PART I	FINANCIAL INFORMATION

Item 1	Condensed Consolidated Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of ~~December~~March 31, ~~2009~~2010 and September 30, 2009	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended ~~December~~March 31, ~~2009~~2010 and ~~2008~~2009	4
	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~December~~March 31, ~~2009~~2010 and ~~2008~~2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4	Controls and Procedures	19

PART II	OTHER INFORMATION

Item 1A	Risk Factors	1920
Item 5	~~Other Information~~New Chief Executive Officer	19 20
Item 6	Exhibits	2021
	Signatures	2122

	December 31, 2009			September 30, 2009			March 31, 2010			September 30, 2009
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	524		$	870		$	1,715		$	870
Accounts receivable
Trade		2,792			3,996			3,387			3,996
Unbilled revenues and other		1,438			1,684			867			1,684
Inventories		2,006			1,847			1,912			1,847
Refundable income taxes		538			544			105			544
Prepaid expenses		460			622			423			622
Total current assets		7,758			9,563			8,409			9,563

Property and equipment, net		20,746			21,282			20,145			21,282
Deferred income taxes		12			12			12			12
Goodwill		1,383			1,383			1,383			1,383
Intangible assets, net		106			114			99			114
Debt issue costs		132			145			208			145
Other assets		85			86			83			86

Total assets	$	30,222		$	32,585		$	30,339		$	32,585

Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	2,050		$	1,997		$	1,950		$	1,997
Accrued expenses		1,587			2,113			2,045			2,113
Customer advances		2,916			2,863			3,852			2,863
Income tax accruals		473			473			65			473
Revolving line of credit		1,569			1,759			1,690			1,759
Current portion of capital lease obligation		587			650			666			650
Current portion of long-term debt		1,598			524			2,935			524
Total current liabilities		10,780			10,379			13,203			10,379

Capital lease obligation, less current portion		664			792			829			792
Long-term debt, less current portion		6,989			8,191			5,736			8,191
Fair value of interest rate swaps		86			103			72			103

Shareholders’ equity:
Preferred Shares:
Authorized 1,000 shares; none issued and outstanding		—			—			—			—
Common shares, no par value:
Authorized 19,000 shares; issued and outstanding 4,915 at December 31, 2009 and September 30, 2009		1,191			1,191
Authorized 19,000 shares; issued and outstanding 4,915 at
March 31, 2010 and September 30, 2009								1,191			1,191
Additional paid-in capital		13,220			13,131			13,258			13,131
Accumulated deficit		(2,778	)		(1,290	)		(3,990	)		(1,290	)
Accumulated other comprehensive income (loss)		70			88

Accumulated other comprehensive income								40			88
Total shareholders’ equity		11,703			13,120			10,499			13,120

Total liabilities and shareholders’ equity	$	30,222		$	32,585		$	30,339		$	32,585

	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2009			2008			2010			2009			2010			2009
Service revenue	$	4,811		$	5,987		$	5,247		$	5,322		$	10,058		$	11,310
Product revenue		1,566			2,089			1,688			1,744			3,254			3,833
Total revenue		6,377			8,076			6,935			7,066			13,312			15,143

Cost of service revenue		4,570			5,288			4,754			5,276			9,325			10,564
Cost of product revenue		611			741			696			918			1,306			1,660
Total cost of revenue		5,181			6,029			5,450			6,194			10,631			12,224

Gross profit		1,196			2,047			1,485			872			2,681			2,919
Operating expenses:
Selling		785			1,005			683			829			1,468			1,835
Research and development		171			205			138			213			310			418
General and administrative		1,487			2,390			1,944			2,030			3,431			4,440
Loss on sale of property and equipment		—			20
Total operating expenses		2,443			3,621			2,765			3,072			5,209			6,693

Operating loss		(1,247	)		(1,574	)		(1,281	)		(2,200	)		(2,528	)		(3,774	)

Interest income		—			2
Interest expense		(241	)		(392	)		(275	)		(249	)		(516	)		(641	)
Other income		—			1			—			—			—			3

Loss before income taxes		(1,488	)		(1,963	)		(1,556	)		(2,449	)		(3,044	)		(4,412	)

Income tax benefit		—			(379	)		(344	)		(618	)		(344	)		(997	)

Net loss	$	(1,488	)	$	(1,584	)	$	(1,212	)	$	(1,831	)	$	(2,700	)	$	(3,415	)

Basic net loss per share	$	(0.30	)	$	(0.32	)	$	(0.25	)	$	(0.37	)	$	(0.55	)	$	(0.69	)
Diluted net loss per share	$	(0.30	)	$	(0.32	)	$	(0.25	)	$	(0.37	)	$	(0.55	)	$	(0.69	)

Weighted common shares outstanding:
Basic		4,915			4,915			4,915			4,915			4,915			4,915
Diluted		4,915			4,915			4,915			4,915			4,915			4,915

	Three Months Ended December 31,						Six Months Ended March 31,
	2009			2008			2010			2009
Operating activities:
Net loss	$	(1,488	)	$	(1,584	)	$	(2,700	)	$	(3,415	)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		607			680			1,207			1,340
Employee stock compensation expense		89			158			126			309
Bad debt expense		12			1			55			53
Interest rate swap		(17	)		137
Liability incurred on settlement of lease								216			—
(Gain) loss on interest rate swap								(31	)		131
Loss on sale of property and equipment		—			20			—			21
Deferred income taxes		—			(377	)		—			(995	)
Changes in operating assets and liabilities:
Accounts receivable		1,437			2,920			1,371			3,830
Inventories		(160	)		(12	)		(65	)		156
Refundable income taxes		6			—
Income taxes payable and refundable								31			605
Prepaid expenses and other assets		176			99			136			(81	)
Accounts payable		53			(997	)		(47	)		(257	)
Accrued expenses		(526	)		(128	)		(68	)		(76	)
Customer advances		53			(652	)		989			(627	)
Net cash provided by continuing operating activities		242			265
Net cash provided by operating activities								1,220			994

Investing activities:
Capital expenditures		(57	)		(304	)
Net cash used by continuing investing activities		(57	)		(304	)
Capital expenditures, net of proceeds from sale of property and equipment								375			(584	)
Net cash provided (used) by investing activities								375			(584	)

Financing activities:
Payments of long-term debt		(128	)		(120	)		(260	)		(244	)
Payments on revolving line of credit		(7,334	)		(4,668	)		(14,408	)		(8,916	)
Borrowings on revolving line of credit		7,144			4,292			14,339			8,571
Payments on capital lease obligations		(191	)		(174	)		(378	)		(351	)
Net cash used by continuing financing activities		(509	)		(670	)

Cash Flow of Discontinued Operations (Note 5):
Cash provided (used) by operating activities		—			558
Net cash provided by discontinued operations		—			558
Net cash used by financing activities								(707	)		(940	)

Effect of exchange rate changes		(22	)		267			(43	)		495

Net increase (decrease) in cash and cash equivalents		(346	)		116			845			(35	)
Cash and cash equivalents at beginning of period		870			335			870			335
Cash and cash equivalents at end of period	$	524		$	451		$	1,715		$	300

OR
¨ o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to _____________.

	Options (shares)		Weighted- Average Exercise Price		Weighted- Average Grant Date Fair Value		Options (shares)			Weighted- Average Exercise Price		Weighted- Average Grant Date Fair Value

Outstanding - October 1, 2009		620	$	5.97	$	3.36		620		$	5.97	$	3.36
Exercised		-	$	-	$	-		-		$	-	$	-
Granted		-	$	-	$	-		25		$	0.79	$	0.66
Terminated		-	$	-	$	-		(329	)	$	6.72	$	3.48
Outstanding - December 31, 2009		620	$	5.97	$	3.36
Outstanding - March 31, 2010								316		$	4.77	$	3.02

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

	3.2	Second Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (incorporated by reference to Exhibit 3.2 of Form 10-K for the fiscal year ended September 30, 2009).	3.2	Second Amended and Restated Bylaws of Bioanalytical Systems, Inc., as subsequently amended (incorporated by reference to Exhibit 3.2 to Form 10-K for the fiscal year ended September 30, 2009).

(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).	4.1	Specimen Certificate for Common Shares (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1, Registration No. 333-36429).

(10)			10.1	Fifth Amendment to Amended and Restated Credit Agreement between Bioanalytical Systems, Inc. and PNC Bank, as successor by merger to National City Bank, executed December 31, 2009 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 7, 2010).

			10.2	Waiver letter, dated January 7, 2010, from Regions Bank (incorporated by reference to Exhibit 10.33 of Form 10-K for the fiscal year ended September 30, 2009).

	10.1	Fifth Amendment to Amended and Restated Credit Agreement between Bioanalytical Systems, Inc. and PNC Bank, as successor by merger to National City Bank, executed December 31, 2009 (incorporated by reference to Exhibit 10.1 to Form 8-K filed January 7, 2010).	10.3	Third amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank, dated January 13, 2010 (incorporated by reference to Exhibit 10.34 of Form 10-K for the fiscal year ended September 30, 2009).

	10.2	Waiver letter, dated January 7, 2010, from Regions Bank (incorporated by reference to Exhibit 10.33 of Form 10-K for the fiscal year ended September 30, 2009).	10.4	Loan and Security Agreement by and between Bioanalytical Systems, Inc., and Entrepreneur Growth Capital LLC, executed January 13, 2010 (incorporated by reference to Exhibit 10.35 of Form 10-K for the fiscal year ended September 30, 2009).

	10.3	Third amendment to Loan Agreement between Bioanalytical Systems, Inc. and Regions Bank, dated January 13, 2010 (incorporated by reference to Exhibit 10.34 of Form 10-K for the fiscal year ended September 30, 2009).	10.5	Agreement for Lease, by Bioanalytical Systems, Inc. and Forum Financial Services, dated January 22, 2010 (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended December 31, 2009).

	10.4	Loan and Security Agreement by and between Bioanalytical Systems, Inc., and Entrepreneur Growth Capital LLC, executed January 13, 2010 (incorporated by reference to Exhibit 10.35 of Form 10-K for the fiscal year ended September 30, 2009).	10.6	Amendment to Employment Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated February 1, 2010 (incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter ended December 31, 2009).

	10.5	Agreement for Lease, by Bioanalytical Systems, Inc. and Forum Financial Services, dated January 22, 2010 (filed herewith).	10.7	Employee Incentive Stock Option Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated February 1, 2010 (incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended December 31, 2009).

	10.6	Amendment to Employment Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated February 1, 2010 (filed herewith).	10.8	Waiver letter, dated May 11, 2010 from Regions Bank (filed herewith)

	10.7	Employee Incentive Stock Option Agreement between Anthony S. Chilton and Bioanalytical Systems, Inc., dated February 1, 2010 (filed herewith).	10.9	Amendment to Loan Agreement between Bioanalytical Systems, Inc., and Entrepreneur Growth Capital LLC, dated May 13, 2010 (filed herewith)

(31)	31.1	Certification of Richard M. Shepperd (filed herewith).	31.1	Certification of Anthony S. Chilton (filed herewith).
			31.2	Certification of Michael R. Cox (filed herewith).
	31.2	Certification of Michael R. Cox (filed herewith).

(32)	32.1	Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith)..	32.1	Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (filed herewith)..

	BIOANALYTICAL SYSTEMS, INC.
	(Registrant)

Date: ~~February 16,~~May 17, 2010	By:	/s/ ~~Richard M. Shepperd~~Anthony S. Chilton
	~~Richard M. Shepperd~~Anthony S. Chilton
	Chief Executive Officer

Date: ~~February 16,~~May 17, 2010	By:	/s/ Michael R. Cox
	Michael R. Cox
	Vice President, Finance and Administration, Chief Financial Officer and Treasurer

	December 31, 2009			September 30, 2009			March 31, 2010			September 30, 2009

Raw materials	$	1,676		$	1,732		$	1,688		$	1,732
Work in progress		323			131			265			131
Finished goods		294			271			289			271
	$	2,293		$	2,134		$	2,242		$	2,134
Obsolescence reserve		(287	)		(287	)		(330	)		(287	)
	$	2,006		$	1,847		$	1,912		$	1,847