This report contains statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Report and may include statements regarding our intent, belief or current expectations with respect to, but are not limited to (i) our strategic plans; (ii) trends in the demand for our products and services; (iii) trends in the industries that consume our products and services; (iv) our ability to develop new products and services;
(v) our ability to make capital expenditures and finance operations; (vi) global economic conditions, especially as they impact our markets; (vii) our cash position; and (viii) our ability to refinance our outstanding indebtedness. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond our control.

In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the assumptions on which the forward-looking statements contained herein are based are reasonable, actual events may differ from those assumptions, and as a result, the forward-looking statements based upon those assumptions may not accurately project future events. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included or incorporated by reference elsewhere in this Report. In addition to the historical information contained herein, the discussions in this Report may contain forward-looking statements that may be affected by risks and uncertainties, including those discussed in Item 1A, Risk Factors. Our actual results could differ materially from those discussed in the forward-looking statements.

The following amounts are in thousands unless otherwise indicated.

Business Overview

We are an international contract research organization providing drug discovery and development services. Our clients and partners include pharmaceutical, biotechnology, academic and governmental organizations. We apply innovative technologies and products and a commitment to quality to help clients and partners accelerate the development of safe and effective therapeutics and maximize the returns on their research and development investments. 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 numerous therapeutic areas for over 35 years.

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 research at many of the small start-up biotechnology companies and 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 a direct beneficiary of these efforts, through outsourcing by these companies of research work. Our products segment is an indirect beneficiary of these efforts, 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.

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 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, sustained growth will require additional investment in future periods. Our financial position could limit our ability to make such investments.

Executive Overview

Our revenues are dependent on a relatively small number of industries and clients. As a result, we closely monitor the market for our services. For a discussion of the trends affecting the market for our services, see "Item 1. Business - Trends Affecting the Drug Discovery and Development Industry." In fiscal 2012, we experienced decreased demand for our products and services as compared to fiscal 2011. We believe in the fundamentals of the market and that it will continue to slowly rebound in future periods. For fiscal 2013, we plan to focus on sales execution, operational excellence and building strategic partnerships with pharmaceutical and biotechnology companies, to differentiate our company and create value for our clients and shareholders.

We review various metrics to evaluate our financial performance, including revenue, margins and earnings. Revenues declined approximately 14.9% and gross margin declined 34.9% from fiscal 2011. In fiscal 2012, we consolidated our bioanlaytical laboratories into our headquarters in West Lafayette, Indiana, closing facilities in McMinnville, Oregon and the UK to reduce operating costs and strengthen our ability to meet clients' needs by improving laboratory utilization. We also implemented personnel reductions and other cost cutting measures in Selling, R&D and General and Administrative functions. The cost of these restructuring activities totaled $3,195 in the current year. As a result, we reported a net loss of $6,390 in fiscal 2012 as compared to net income of $543 in fiscal 2011.

The majority of the restructuring activities, though, occurred in the second half of the fiscal year. Due to these activities, gross margin improved 60.5% in the second half of fiscal 2012. Operating expenses declined 32.5% in the same time period. As a result, we had operating income of $452 before restructuring charges in the second half of fiscal 2012 compared to an operating loss of $2,943 in the first half. We will continue initiatives to control costs and improve productivity to achieve our financial objectives. For a detailed discussion of our revenue, margins, earnings and other financial results for the fiscal year ended September 30, 2012, see "Results of Operations - 2012 Compared to 2011" below.

As of September 30, 2012, we had $721 of cash and cash equivalents as compared to $2,963 of cash and cash equivalents at the end of fiscal 2011. In fiscal 2012, we used $200 in cash from operations primarily from the net loss we reported versus net income in fiscal 2011. Total capital expenditures declined 7.2% in fiscal 2012, particularly in the second half, as we limited spending to only necessary expenditures. We negotiated an amendment on our loans with Regions Bank, extending the maturity date to October 2013. Our line of credit with Entrepreneur Growth Capital LLC was automatically renewed for another year. We listed for sale our headquarters facility in West Lafayette, Indiana with the intent to leaseback 80% of that square footage in which to continue our laboratory and manufacturing operations. Further, we announced the launch of Culex® NxT, the latest generation of the Company's proprietary in vivo automated sampling system, which we expect to begin shipping in our second quarter of fiscal 2013. We are poised for increased capacity utilization and potential strategic growth in fiscal 2013.

We believe that the development of innovative new drugs is going through an evolution, evidenced by the significant reduction of expenditures on research and development at several major international pharmaceutical companies, accompanied by increases in outsourcing and investments in smaller start-up companies that are performing the early development work on new compounds. Many of these companies are funded by either venture capital or pharmaceutical investment, or both, and generally do not build internal staffs that possess the extensive scientific and regulatory capabilities to perform the various activities necessary to progress a drug candidate to the filing of an Investigative New Drug ("IND") application with the FDA.

While continuing to maintain and develop our relationships with large pharmaceutical companies, we intend to aggressively promote our services to developing businesses, which will require us to expand our existing capabilities to provide services early in the drug development process, and to consult with clients on regulatory strategy and compliance leading to their FDA filings. We have launched our Enhanced Drug Discovery services as part of this strategy, utilizing our proprietary Culex® technology to provide early experiments in our laboratories that previously would have been conducted in the sponsor's facilities. As we move forward, we must balance the demands of the large pharmaceutical companies with the personal touch needed by smaller biotechnology companies to develop a competitive advantage. We intend to accomplish this through the use of and expanding upon our existing project management skills, strategic partnerships and progressive relationship management.

We are focused on improving our cash flow from operations in fiscal 2013 to reduce our reliance on our line of credit. If we are unable to increase cash flow from operations in fiscal 2013, we may not have sufficient liquidity to continue our business.

Patient Protection and Affordable Care Act

In March 2010, the Patient Protection and Affordable Care Act (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. Companies in 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 accurately 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.

Results of Operations

The following table summarizes the consolidated statement of operations as a percentage of total revenues:

                                                Year Ended September 30,
                                                2012                2011

         Service revenue                            75.6 %              77.3 %
         Product revenue                            24.4                22.7
         Total revenue                             100.0 %             100.0 %


         Cost of service revenue (a)                86.7                76.8
         Cost of product revenue (a)                42.0                39.3
         Total cost of revenue                      75.8                68.3

         Gross profit                               24.2                31.7

         Operating expenses                         33.1                27.8
         Restructuring charges                      11.3                   -
         Operating income (loss)                   (20.2 )               3.9

         Other expense                               2.5                 2.1

         Income (loss) before income taxes         (22.7 )               1.8

         Income tax expense                          0.0                 0.2

         Net income (loss)                         (22.7 )%              1.6 %

(a) Percentage of service and product revenues, respectively.

2012 Compared to 2011

Service and Product Revenues

Revenues for the year ended September 30, 2012 decreased 14.9% to $28,208 compared to $33,144 for the year ended September 30, 2011.

Our Services revenue decreased 16.8% to $21,312 compared to $25,613 for the prior fiscal year primarily as a result of lower bioanalytical analysis and toxicology revenues. Study delays by clients, lower new bookings in the current fiscal year and price declines contributed to the decline in bioanalytical analysis revenues as did the closure of our McMinnville, Oregon laboratory as part of our restructuring activities described in Note 13 to our Consolidated Financial Statements. The decline in toxicology revenues stems mainly from the residual effect of two significant customers merging their operations which led to a cancellation of a large contract expected to earn revenues in the current fiscal year. This decline was slightly offset by higher pharmaceutical analysis and discovery services revenues, included in Other laboratory services in the table below, as new bookings and volumes of studies have increased from the prior year. Our Enhanced Drug Discovery services were launched in fiscal 2011. The following table shows more detail for our Service revenue.

                                       Fiscal Year Ended
                                         September 30,
                                       2012          2011        Change         %
         Bioanalytical analysis      $  10,983     $ 13,634     $ (2,651 )     -19.4 %
         Toxicology                      7,449        9,952       (2,503 )     -25.2 %
         Other laboratory services       2,880        2,027          853        42.1 %

Sales in our Products segment decreased 8.4% from $7,531 to $6,896 when compared to the prior fiscal year. The majority of the decrease stems both from lower sales of our Culex automated in vivo sampling systems over prior fiscal year with the release of the Culex Nxt system in fiscal 2013 believed to have caused a slowdown in fiscal 2012 orders and from lower analytical instruments sales due to customer spending slowdown. The following table shows more detail for our Product revenue.

                                           Fiscal Year Ended
                                             September 30,
                                            2012         2011       Change         %
       Culex, in-vivo sampling systems   $    3,693     $ 4,028     $  (335 )      -8.3 %
       Analytical instruments                 2,554       2,971        (417 )     -14.0 %
       Other instruments                        649         532         117        22.0 %

Cost of Revenue

Cost of revenue for the year ended September 30, 2012 was $21,370 or 75.8% of revenue compared to $22,638, or 68.3% of revenue for the comparable prior period.

Cost of Service revenue as a percentage of Service revenue increased to 86.7% in the current fiscal year from 76.8% in the prior year. The principal cause of this increase was the revenue decline which led to lower absorption of the fixed costs in our Service segment. A significant portion of our costs of productive capacity in the Service segment are fixed. Thus, decreases in revenues lead to increases in costs as a percentage of revenue.

Cost of Product revenue as a percentage of Product revenue in the current fiscal year increased to 42.0% from 39.3% in the prior fiscal year. This increase is mainly due to a change in the mix of products sold in fiscal 2012.

Operating Expenses

Selling expenses for the year ended September 30, 2012 increased by 4.5% to $3,263 from $3,121 for the year ended September 30, 2011. This increase was primarily driven by an increase in the number of sales personnel and higher spending for marketing, advertising and consulting services as we implemented our new sales and marketing strategy in the first half of the fiscal year. In the second half of fiscal 2012, we reduced selling expenses 36.4% due to restructuring activities at our West Lafayette, Indiana and UK locations.

Research and development expenses for the year ended September 30, 2012 increased 1.5% to $542 from $534 for the year ended September 30, 2011. In the second half of fiscal 2012, we reduced research and development expenses 40.6% due to personnel reductions as part of restructuring activities.

General and administrative expenses for the current fiscal year decreased 0.7% to $5,524 from $5,564 for the prior year. More specifically, general and administrative expenses for the second half of fiscal 2012 were 29.2% lower than the first half of fiscal 2012 due to restructuring activities at our West Lafayette and Evansville, Indiana locations as well as our UK location. This decrease occurred despite recording severance expenses for our former CEO and CFO, higher consulting and accounting fees and increased product liability insurance and software maintenance.

Other Income/Expense

Other income (expense), net, was $(702) for the year ended September 30, 2012 as compared to $(694) for the year ended September 30, 2011.

Income Taxes

Our effective tax rate for continuing operations for the year ended September, 30, 2011 was (0.1%) compared to 8.5% for the prior fiscal year. The current year expense primarily relates to state franchise taxes. The expense in fiscal 2011 relates to cash tax expense for U.S. corporate alternative minimum tax. No net benefits have been provided on taxable losses in the current fiscal year.

Restructuring Activities

In March 2012, we announced a plan to restructure our bioanalytical laboratory operations. We consolidated our laboratory in McMinnville, Oregon into our 120,000 square foot headquarters facility in West Lafayette, Indiana. This plan was implemented to reduce operating costs and strengthen our ability to meet clients' needs by improving laboratory utilization. In the fourth quarter of fiscal 2012, we decided to initiate closure of our facility and bioanalytical laboratory in Warwickshire, United Kingdom after careful evaluation of its financial performance and analysis of our strategic alternatives. We will continue to sell our products globally while further consolidating delivery of our CRO services into our Indiana locations. As part of the overall evaluation of our business, personnel reductions in the Selling, R&D and General and Administrative functions were also implemented at both of our Indiana locations during the second half of fiscal 2012. In total, 74 employees were terminated as part of the restructuring activities this fiscal year.

The following table sets forth the costs incurred in connection with these restructuring activities during the year ended September 30, 2012.

              Description                                   Amount
              One-time termination benefits                 $ 1,454
              Lease related costs                               861
              Equipment moving costs and method transfers       153
              Travel and relocation costs                        47
              Loss on sale of equipment                         446
              Other costs                                       234
              Total                                         $ 3,195

We have reserved for lease payments at the cease use date and have considered free rent, sublease rentals and the number of days it would take to restore the space to its original condition prior to our improvements. Based on this, we have reserved $861 for lease related costs.

Restructuring related costs incurred during fiscal 2012 totaled $1,360 in our Services segment, $0 in our Products segment and $1,835 in corporate expenses.

The following table sets forth the rollforward of the restructuring activity for the year ended September 30, 2012.

                                  Balance,                                                        Balance,
                                September 30,        Total           Cash                       September 30,
                                    2011            Charges        Payments        Other            2012
One-time termination
benefits                       $             -     $    1,454     $   (1,006 )   $       -     $           448
Lease related costs                          -            861            (61 )           -                 800
Equipment moving costs and
method transfers                             -            153           (104 )           -                  49
Travel and relocation costs                  -             47            (43 )           -                   4
Loss on sale of equipment                    -            446              -          (539 )               (93 )
Other costs                                  -            234            (37 )           -                 197
Total                          $             -     $    3,195     $   (1,251 )   $    (539 )   $         1,405

Other costs include legal and professional fees and other costs incurred in connection with transitioning services from sites being closed as well as costs incurred to remove improvements previously made to the UK facility. Other activity in the reserve rollforward primarily reflects a receivable for settlement of the capital lease in the UK.

Liquidity and Capital Resources

Comparative Cash Flow Analysis

At September 30, 2012, we had cash and cash equivalents of $721 compared to $2,963 at September 30, 2011.

Net cash used by operating activities was $200 for the year ended September 30, 2012, compared to $1,088 provided for the year ended September 30, 2011. The decrease in cash provided by operating activities in the current fiscal year partially results from our current operating loss versus operating income in the prior year period as well as cash paid during the current year for restructuring activities of $1,251. Other contributing factors to our cash from operations were an increase in accounts payable of $2,375, partially due to the restructuring liabilities of $1,405, and noncash charges of $2,278 of depreciation and amortization. Included in operating activities for fiscal 2011 are non-cash charges of $2,134 for depreciation and amortization offset by a decrease in customer advances of $1,010. The impact on operating cash flow of other changes in working capital was not material.

We have seen significant reductions in expenses in the second half of fiscal 2012 as compared to the first half. Operating expenses declined approximately 32.5% in the second half of fiscal 2012 primarily due to restructuring efforts and cost containment initiatives.

Investing activities used $860 in fiscal 2012 for capital expenditures. Our principal investments included a waste-water treatment facility at one of our sites, renovation costs associated with a health care clinic at our corporate headquarters, new laboratory equipment, replacements and upgrades in all of our facilities, as well as general building and information technology infrastructure expenditures at all sites. The proceeds from sale of equipment relate to the closure of our UK facility. The decrease in capital spending from fiscal 2011 is a result of cost containment initiatives during the year.

Financing activities used $1,164 in the current fiscal year as compared to $1,660 provided in fiscal 2011. The main use of cash in fiscal 2012 was for long-term debt and capital lease payments of $1,390. These were slightly offset by net borrowings on our line of credit of $98 and a direct common share purchase by Company executives and directors, which provided $128. The main source of cash in fiscal 2011 was the completion of our May 2011 equity offering, which netted $4,606, as well as net borrowings on our line of credit of $151, offset by long-term debt and capital lease payments of $3,097, including the two $500 individual principal payments on one mortgage and one note payable and the down payments of $618 for the new capital leases for laboratory equipment.

Capital Resources

Property and equipment spending totaled $1,090 and $1,174 in fiscal 2012 and 2011, respectively. The decrease in spending in fiscal 2012 is the result of cost containment initiatives during the year.

We have notes payable to Regions Bank ("Regions") aggregating approximately $5,800. Regions notes payable currently include two outstanding mortgages on our facilities in West Lafayette and Evansville, Indiana, which total $4,768. The mortgage loans initially matured in November 2012 with an interest rate fixed at 4.1% and monthly principal payments of approximately $38 plus interest.

On November 29, 2010, we executed amendments on two loans with Regions. Regions agreed to accept a $500 principal payment on the note payable maturing on December 18, 2010 and a $500 principal payment on one mortgage maturing on February 11, 2011. The principal payments were made on December 17, 2010 and February 11, 2011, respectively. Upon receipt of these two payments, Regions incorporated the two loans into a replacement note payable for $1,341 maturing on November 1, 2012. The replacement note payable bears interest at a per annum rate equal to the 30-day LIBOR plus 300 basis points (minimum of 4.5%) with monthly principal payments of approximately $14 plus interest. The replacement note payable is secured by real estate at our West Lafayette and Evansville, Indiana locations. At September 30, 2012, the replacement note payable had a balance of $1,074.

As part of the amendment, Regions also agreed to amend the loan covenants for the related debt to be more favorable to us. Regions requires us to maintain certain ratios including a fixed charge coverage ratio and total liabilities to tangible net worth ratio. The fixed charge coverage ratio calculation currently requires a ratio of not less than 1.25 to 1.00. We are also required to maintain a ratio of our total liabilities to tangible net worth of not greater than 2.10 to 1.00. If we fail to comply with these covenants, , the loan agreement restricts our ability to purchase fixed assets.

On November 9, 2012, we executed a sixth amendment with Regions. On December 21, . . .