UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      DC 20549FORM
      10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Quarterly Period Ended March 31, 2009o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Transition Period From _____________to
  _____________





Commission
      File Number 000-22400STRATEGIC
      DIAGNOSTICS INC.(Exact
      name of Registrant as specified in its charter)





Delaware
            56-1581761(State
      or other jurisdiction of
            (I.R.S.
      employerincorporation
      or organization)
            identification
      no.)111
      Pencader DriveNewark,
      Delaware
            19702(Address
      of principal executive offices)
            (Zip
      Code)Registrant’s
      telephone number, including area code: (302)
      456-6789




Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes:
xNo: o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.




Yes:
o No:
o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




Yes:
o No:
x




As
of May 12, 2009, there were 20,749,521 outstanding shares of the Registrant’s
common stock, par value $.01 per share.









STRATEGIC
      DIAGNOSTICS INC.INDEXItem
              
              
              PagePART
      I FINANCIAL INFORMATIONITEM
      1. Financial Statements (Unaudited)Consolidated
      Balance Sheets – March 31, 2009 and December 31, 2008
              
              2Consolidated
      Statements of Operations – Three months ended March 31, 2009 and
      2008
              
              3Consolidated
      Statements of Cash Flows – Three months ended March 31, 2009 and
      2008
              
              4Notes
      to Consolidated Interim Financial Statements
              
              5ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              
              12ITEM
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              17ITEM
      4. Controls and Procedures
              
              17PART
      II OTHER INFORMATION
              
              18ITEM
      5. Other Information
              
              18ITEM
      6. Exhibits
              
              18SIGNATURES
              
              19


1





PART
      I. – FINANCIAL INFORMATIONITEM
      1. FINANCIAL STATEMENTSSTRATEGIC
      DIAGNOSTICS INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share data)(unaudited)





March
      31,
                                                                    
                                                                    
                                                                    December
      31,2009
                                                                    
                                                                    
                                                                    2008ASSETSCurrent
      Assets :Cash
      and cash equivalents
                                                                    
                                                                    $
                                                                    9,066
                                                                    
                                                                    
                                                                    $
                                                                    9,980Receivables,
      net
                                                                    
                                                                    
                                                                    3,587
                                                                    
                                                                    
                                                                    
                                                                    4,099Inventories
                                                                    
                                                                    
                                                                    3,994
                                                                    
                                                                    
                                                                    
                                                                    3,890Deferred
      tax asset
                                                                    
                                                                    
                                                                    3
                                                                    
                                                                    
                                                                    
                                                                    3Other
      current assets
                                                                    
                                                                    
                                                                    1,110
                                                                    
                                                                    
                                                                    
                                                                    534Total
      current assets
                                                                    
                                                                    
                                                                    17,760
                                                                    
                                                                    
                                                                    
                                                                    18,506Property
      and equipment, net
                                                                    
                                                                    
                                                                    5,178
                                                                    
                                                                    
                                                                    
                                                                    5,275Other
      assets
                                                                    
                                                                    
                                                                    33
                                                                    
                                                                    
                                                                    
                                                                    107Deferred
      tax asset
                                                                    
                                                                    
                                                                    59
                                                                    
                                                                    
                                                                    
                                                                    71Intangible
      assets, net
                                                                    
                                                                    
                                                                    1,523
                                                                    
                                                                    
                                                                    
                                                                    1,562Total
      assets
                                                                    
                                                                    $
                                                                    24,553
                                                                    
                                                                    
                                                                    $
                                                                    25,521LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities :Current
      portion of long-term debt
                                                                    
                                                                    $
                                                                    1,505
                                                                    
                                                                    
                                                                    $
                                                                    1,658Accounts
      payable
                                                                    
                                                                    
                                                                    422
                                                                    
                                                                    
                                                                    
                                                                    691Accrued
      expenses
                                                                    
                                                                    
                                                                    1,353
                                                                    
                                                                    
                                                                    
                                                                    1,860Deferred
      revenue
                                                                    
                                                                    
                                                                    364
                                                                    
                                                                    
                                                                    
                                                                    64Total
      current liabilities
                                                                    
                                                                    
                                                                    3,644
                                                                    
                                                                    
                                                                    
                                                                    4,273Stockholders’
      Equity:Preferred
      stock, $.01 par value, 20,920,648 shares authorized, no shares issued or
      outstanding
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Common
      stock, $.01 par value, 35,000,000 shares authorized, 20,749,521 and
      20,680,522 issued at March 31, 2009 and December 31, 2008,
      respectively
                                                                    
                                                                    
                                                                    208
                                                                    
                                                                    
                                                                    
                                                                    206Additional
      paid-in capital
                                                                    
                                                                    
                                                                    40,573
                                                                    
                                                                    
                                                                    
                                                                    40,345Treasury
      stock, 406,627 and 406,627 common shares at cost at March 31, 2009 and
      December 31, 2008, respectively
                                                                    
                                                                    
                                                                    (555
                                                                    )
                                                                    
                                                                    
                                                                    (555
                                                                    )Accumulated
      deficit
                                                                    
                                                                    
                                                                    (19,186
                                                                    )
                                                                    
                                                                    
                                                                    (18,625
                                                                    )Cumulative
      translation adjustments
                                                                    
                                                                    
                                                                    (131
                                                                    )
                                                                    
                                                                    
                                                                    (123
                                                                    )Total
      stockholders’ equity
                                                                    
                                                                    
                                                                    20,909
                                                                    
                                                                    
                                                                    
                                                                    21,248Total
      liabilities and stockholders’ equity
                                                                    
                                                                    $
                                                                    24,553
                                                                    
                                                                    
                                                                    $
                                                                    25,521


The
accompanying notes are an integral part of these statements.


2




STRATEGIC
      DIAGNOSTICS INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except share and per share data)(unaudited)





Three
      Months
                                                                                                      Ended
      March 31,2009
                                                                                                    
                                                                                                    
                                                                                                    2008Revenues
                                                                                                    
                                                                                                    $
                                                                                                    6,902
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    7,155OPERATING
      EXPENSES:Manufacturing
                                                                                                    
                                                                                                    
                                                                                                    3,097
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,122Research
      and development
                                                                                                    
                                                                                                    
                                                                                                    663
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    940Selling,
      general and administrative
                                                                                                    
                                                                                                    
                                                                                                    3,720
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,178Total
      operating expenses
                                                                                                    
                                                                                                    
                                                                                                    7,480
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7,240Operating
      loss
                                                                                                    
                                                                                                    
                                                                                                    (578
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (85
                                                                                                    )Interest
      income, net
                                                                                                    
                                                                                                    
                                                                                                    5
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    62Loss
      before taxes
                                                                                                    
                                                                                                    
                                                                                                    (573
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (23
                                                                                                    )Income
      tax benefit
                                                                                                    
                                                                                                    
                                                                                                    (12
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (11
                                                                                                    )Net
      loss
                                                                                                    
                                                                                                    $
                                                                                                    (561
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (12
                                                                                                    )Basic
      loss per share
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.00
                                                                                                    )Shares
      used in computing basic loss per share
                                                                                                    
                                                                                                    
                                                                                                    20,035,174
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    20,440,000Diluted
      loss per share
                                                                                                    
                                                                                                    $
                                                                                                    (0.03
                                                                                                    )
                                                                                                    
                                                                                                    $
                                                                                                    (0.00
                                                                                                    )Shares
      used in computing diluted loss per share
                                                                                                    
                                                                                                    
                                                                                                    20,035,174
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    20,440,000






3




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS (in
thousands) (unaudited)


Three
      Months
                                                Ended
      March 31,2009
                                              
                                              
                                              2008Cash
      Flows from Operating Activities :Net
      loss
                                              
                                              $
                                              (561
                                              )
                                              
                                              $
                                              (12
                                              )Adjustments
      to reconcile net loss to net cash used in operating activities
      :Depreciation
      and amortization
                                              
                                              
                                              329
                                              
                                              
                                              
                                              326Share-based
      compensation expense
                                              
                                              
                                              218
                                              
                                              
                                              
                                              252Deferred
      income tax provision
                                              
                                              
                                              12
                                              
                                              
                                              
                                              35(Increase)
      decrease in :Receivables
                                              
                                              
                                              512
                                              
                                              
                                              
                                              545Inventories
                                              
                                              
                                              (104
                                              )
                                              
                                              
                                              205Other
      current assets
                                              
                                              
                                              (576
                                              )
                                              
                                              
                                              (633
                                              )Other
      assets
                                              
                                              
                                              82
                                              
                                              
                                              
                                              —Increase
      (decrease) in :Accounts
      payable
                                              
                                              
                                              (269
                                              )
                                              
                                              
                                              (83
                                              )Accrued
      expenses
                                              
                                              
                                              (507
                                              )
                                              
                                              
                                              (774
                                              )Deferred
      revenue
                                              
                                              
                                              300
                                              
                                              
                                              
                                              70Other
      non-current liabilities
                                              
                                              
                                              —
                                              
                                              
                                              
                                              1Net
      cash used in operating activities
                                              
                                              
                                              (564
                                              )
                                              
                                              
                                              (68
                                              )Cash
      Flows from Investing Activities :Purchase
      of property and equipment
                                              
                                              
                                              (193
                                              )
                                              
                                              
                                              (325
                                              )Net
      cash used in investing activities
                                              
                                              
                                              (193
                                              )
                                              
                                              
                                              (325
                                              )Cash
      Flows from Financing Activities :Proceeds
      from employee stock purchase plan
                                              
                                              
                                              4
                                              
                                              
                                              
                                              17Repayments
      on financing obligations
                                              
                                              
                                              (153
                                              )
                                              
                                              
                                              (152
                                              )Net
      cash used in financing activities
                                              
                                              
                                              (149
                                              )
                                              
                                              
                                              (135
                                              )Effect
      of exchange rate changes on cash
                                              
                                              
                                              (8
                                              )
                                              
                                              
                                              1Net
      decrease in cash and cash equivalents
                                              
                                              
                                              (914
                                              )
                                              
                                              
                                              (527
                                              )Cash
      and Cash Equivalents, Beginning of Period
                                              
                                              
                                              9,980
                                              
                                              
                                              
                                              12,988Cash
      and Cash Equivalents, End of Period
                                              
                                              $
                                              9,066
                                              
                                              
                                              $
                                              12,461Supplemental
      Cash Flow Disclosure :Cash
      paid for taxes
                                              
                                              
                                              8
                                              
                                              
                                              
                                              1Cash
      paid for interest
                                              
                                              
                                              26
                                              
                                              
                                              
                                              33




The
accompanying notes are an integral part of these statements  4




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (in
thousands, except share and per share data) (unaudited)


1.
            DESCRIPTION
      OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES




Business




Strategic
Diagnostics Inc. and its subsidiaries (“SDI” or the “Company”) is a
biotechnology company with a core mission of developing, commercializing and
marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.




The
Company’s Life Science portfolio includes products and custom services that
supply critical reagents used across the Life Science research and development
markets. The Company’s Genomic Antibody TechnologyTM (“GATTM”) is gaining wide
adoption in proteomic research, disease understanding and drug/biomarker
discovery among academic, biotech, in-vitro diagnostic and large pharmaceutical
customers.




The
Company’s Industrial BioDetection portfolio includes immunoassays which
represent advanced technology for rapid, cost-effective detection of food
pathogens as well as water and soil contaminants. SDI’s RapidChek®and
SELECT TM kits are experiencing growing adoption for the detection of pathogens
such as E. coli, Salmonella and Listeria in the production,
processing and manufacturing of food and beverages.




The
Company’s technology is also finding potential new applications in strategic
emerging markets such as renewable bio-fuel, where the application of the
Company’s patent pending phage technology is being developed to increase
corn-to-ethanol profits through improvements in plant efficiency that generate
higher yields at a lower operational cost, while increasing the value of
by-products used in animal feed by eliminating antibiotic contamination of those
feeds.




By
applying its core competencies of creating proprietary antibodies and assay
development, the Company has produced sophisticated testing and reagent systems
that are responsive to each customer’s analytical information
needs.




SDI is a
customer-centric organization. The Company’s goals are to consistently deliver
increased value to its customers that facilitate their business results, reduce
costs and help in the management of risk. SDI sales professionals focus on
delivering a quantifiable “return on investment” to their customers by reducing
time and total costs associated with applications for which the Company’s
products are used. In addition, the Company believes its tests provide high
levels of accuracy and reliability, which deliver more actionable test results
to the customer as compared to alternative products. The Company is focused on
sustaining profitable growth by leveraging its expertise in antibodies and
immuno-technologies to successfully develop proprietary products and services
that enhance the competitive advantage of its customers.




The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its facilities in Newark, Delaware for the manufacture of test
kits and antibodies, and its facilities located in Dallas, Texas and Windham,
Maine for the manufacture of antibodies.




The
continued economic downturn, including disruptions in the capital and credit
markets, may continue indefinitely and intensify, and could adversely affect our
results of operations, cash flows and financial condition or those of our
customers and suppliers. These circumstances could adversely affect our access
to liquidity needed to conduct or expand our business or conduct acquisitions or
make other discretionary investments. These circumstances could adversely affect
our ability to draw on existing credit facilities, which depend on the ability
of the bank that is a party to that facility to meet its funding commitments to
us. A bank may not be able to meet its funding commitments if it experiences
shortages of capital and liquidity. These circumstances may also adversely
impact the capital needs of our customers and suppliers, which, in turn, could
adversely affect their ability to purchase our products or supply us with
necessary equipment and raw materials. This could adversely affect our results
of operations, cash flows and financial condition. A weakening business climate
could cause longer sales cycles and slower growth, and could expose us to
increased business or credit risk in dealing with customers or suppliers
adversely affected by economic conditions. Our ability to collect accounts
receivable may be delayed or precluded if our customers are unable to pay their
obligations.


5




Basis of Presentation and
Interim Financial Statements




The
accompanying unaudited consolidated interim financial statements of the Company
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all the information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2008. In the opinion of management, the
accompanying consolidated interim financial statements include all adjustments
(all of which are of a normal recurring nature) necessary for a fair
presentation of the results of operations. The interim operating results are not
necessarily indicative of he results to be expected for the entire
year.




Revenue
Recognition




Revenues
composed of sales of immunoassay-based test kits and certain antibodies and
immunochemical reagents are recognized upon the shipment of the product and
transfer of title, or when related services are provided. Revenues associated
with such products or services are recognized when persuasive evidence of an
order exists, shipment of product has occurred or services have been provided,
the price is fixed and determinable and collectibility is reasonably assured.
Management is required to make judgments based on actual experience about
whether or not collectibility is reasonably assured.




The
Company enters into contracts related to the production of custom antibodies,
which provide for the performance of defined tasks for a fixed price, with
delivery of the product upon completion of production. The standard time to
complete a project is typically longer than 30 days but less than 12 months, and
effort is expended over the life of the project. Revenues related to sales of
custom antibody projects are recognized when a project’s specifications have
been met and the related materials have been shipped.




Fees
associated with products and services added on to a custom antibody project
subsequent to delivery of the initial project are billed monthly and recognized
as revenue as the services and other deliverables are provided. Sales taxes
collected from customers are presented net in the consolidated statement of
operations.




Use of
Estimates




The
preparation of the consolidated interim financial statements requires management
of the Company to make a number of estimates and assumptions relating to the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated interim financial statements, and
the reported amounts of revenues and expenses during the period. These estimates
include those made in connection with assessing the valuation of accounts
receivable, inventories, deferred tax assets and long lived assets. Actual
results could differ from these estimates.




New Accounting
Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. No. 141(Revised),
Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No. 141, Business
Combinations, and requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquired at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. This statement also requires the acquirer in a business combination
achieved in stages to recognize the identifiable assets and liabilities, as well
as the non-controlling interest in the acquired, at the full amounts of their
fair values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS No. 141(R)’s impact on accounting for business
combinations is dependent upon future acquisitions the Company may
make.


6




In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors an
entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets. This new guidance applies prospectively to
intangible assets that are acquired individually or with a group of other assets
in business combinations and asset acquisitions. FSP 142-3 is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. FSP 142-3’s impact on the Company is dependent upon future
acquisitions the Company may make.




Comprehensive
Loss




Comprehensive
loss consists of the following for each period:


Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Net
      loss
                  
                  $
                  (561
                  )
                  
                  $
                  (12
                  )Currency
      translation adjustment
                  
                  
                  (8
                  )
                  
                  
                  1Total
      comprehensive loss
                  
                  $
                  (569
                  )
                  
                  $
                  (11
                  )




2.
              BASIC
      AND DILUTED LOSS PER SHARE




Basic
loss per share (EPS) is computed by dividing net loss available for common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted EPS is similar to basic EPS, except that the dilutive effect
of converting or exercising all potentially dilutive securities is also included
in the denominator. The Company’s calculation of diluted EPS includes the
dilutive effect of stock options and restricted stock units. Basic loss per
share excludes potentially dilutive securities. For the periods ended March 31,
2009 and 2008, conversion of stock options and unvested restricted shares
totaling 2,114,040 and 1,558,852 into common share equivalents were excluded
from this calculation because they were anti-dilutive.


Three
      Months Ended
                    March
      31,2009
                  
                  
                  2008Weighted
      average common shares outstanding
                  
                  
                  20,035,174
                  
                  
                  
                  20,439,528Shares
      used in computing basic
                    loss
      per share
                  
                  
                  20,035,174
                  
                  
                  
                  20,439,528Dilutive
      effect of stock options and
                    unvested
      restricted stock units
                  
                  
                  —
                  
                  
                  
                  —Shares
      used in computing diluted
                    loss
      per share
                  
                  
                  20,035,174
                  
                  
                  
                  20,439,528




3.
              SHARE-BASED
      COMPENSATION




Under
various plans, executives, key employees and outside directors receive awards of
options to purchase common stock. The Company has a stock option plan (the “2000
Plan”) which authorizes the granting of incentive and nonqualified stock options
and restricted stock units. Incentive stock options are granted at not less than
100% of fair market value at the date of grant (110% for stockholders owning
more than 10% of the Company’s common stock). Nonqualified stock options are
granted at not less than 85% of fair market value at the date of grant. A
maximum of 4,000,000 shares of common stock are issuable under the 2000 Plan.
Certain additional options have been granted outside the 2000 Plan. These
options generally follow the provisions of the 2000 Plan. The Company issues new
shares to satisfy option exercises and the vesting of restricted stock
units.


7




The
Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows
eligible full-time employees to purchase shares of common stock at 90 percent of
the lower of the fair market value of a share of common stock on the first or
last day of the quarter. Eligible employees are provided the opportunity to
acquire Company common stock during each quarter. No more than 661,157 shares of
common stock may be issued under the ESPP. Such stock may be unissued shares or
treasury shares of the Company or may be outstanding shares purchased in the
open market or otherwise on behalf of the ESPP. Under SFAS 123R, Share-Based
Payment, the Company’s ESPP is compensatory. Therefore, the Company is required
to recognize compensation expense related to the discount from market value of
shares sold under the ESPP. The Company issues new shares to satisfy shares
purchased under the ESPP.




Share-based
compensation expense recorded in the three month periods ended March 31, 2009
and 2008 is summarized as follows:


Three
      Months Ended
                                                March
      31,2009
                                              
                                              
                                              2008Stock
      options
                                              
                                              $
                                              101
                                              
                                              
                                              $
                                              137Employee
      stock purchase plan
                                              
                                              
                                              1
                                              
                                              
                                              
                                              2Restricted
      stock units
                                              
                                              
                                              116
                                              
                                              
                                              
                                              113Total
      share-based compensation expense
                                              
                                              $
                                              218
                                              
                                              
                                              $
                                              252




The
deferred income tax benefit related to share-based compensation expense for the
quarter ended March 31, 2009 was $0 due to the full valuation allowance against
deferred tax assets, and $55 for the quarter ended March 31, 2008. Share-based
compensation expense is a component of selling, general and administrative
expense, and is recorded as a non-cash expense in the operating activities
section of the Company’s Consolidated Statements of Cash Flows.




No
options were exercised in the three month periods ended March 31, 2009 and 2008.
Proceeds received from employee payments into the ESPP in the three month
periods ended March 31, 2009 and 2008, were $4 and $17, respectively. These
amounts are recorded in the cash flows from financing activities section of the
Company’s Consolidated Statements of Cash Flows.


8




Information
with respect to the activity of outstanding stock options granted under the 2000
Plan and options granted separately from the 2000 Plan for the three months
ended March 31, 2009 is summarized as follows:


Number
              of
      Shares
            
            Price
      Range
            
            Weighted
              Average
      Remaining
              Contractual
      term
            
            Aggregate
              Instrinsic
              ValueBalance,
      January 1, 2009
            
            
            1,719,972
            
            $
            1.50
            
            
            —
            
            $
            6.94Granted
            
            
            101,000
            
            $
            1.10
            
            
            —
            
            $
            1.50Balance,
      March 31, 2009
            
            
            1,820,972
            
            $
            1.10
            
            
            —
            
            $
            6.94
            
            
            6.0
      years
            
            $
            —Vested
      and excercisable atMarch
      31, 2009
            
            
            1,245,431
            
            $
            1.50
            
            
            —
            
            $
            6.94
            
            
            4.5
      years
            
            $
            —Expected
      to vest as ofMarch
      31, 2009
            
            
            1,745,243
            
            $
            1.10
            
            
            —
            
            $
            6.94
            
            
            5.9
      years
            
            $
            —




During
the three month period ended March 31, 2009, there were 101,000 options granted
with a weighted average grant date fair value, based on a Black-Scholes option
pricing model, of $0.40 per share. The assumptions used in the Black-Scholes
model are as follows: dividend yield 0%, expected volatility 50.30%, risk-free
interest rate 1.84% and an expected life of 5.83 years. The Company uses the
Simplified Method for determining the expected life of options granted which is
computed using the sum of the average vesting period and the contractual life of
the option and dividing by 2, for all periods presented.




The
following table provides additional information about the Company’s stock
options outstanding and exercisable at March 31, 2009:


Options
      Outstanding
            
            Options
      ExercisableWeighted
      Average
            
            
            
            
            Wtd.
      AverageRange
      of
              Exercise
      Prices
            
            Number
      of
              Shares
            
            Remaining
              Contractual
      Life
            
            Exercise
              Price
            
            Number
      of
              Shares
            
            Exercise
              Price$  1.10
            
            —
            
            $
            2.88
            
            
            559,400
            
            
            7.4
            
            Years
            
            $
            1.84
            
            
            176,950
            
            $
            2.59$  3.05
            
            —
            
            $
            3.57
            
            
            286,400
            
            
            5.2
            
            Years
            
            $
            3.34
            
            
            266,400
            
            $
            3.33$  3.69
            
            —
            
            $
            6.94
            
            
            975,172
            
            
            5.4
            
            Years
            
            $
            4.13
            
            
            802,081
            
            $
            4.12$  1.10
            
            —
            
            $
            6.94
            
            
            1,820,972
            
            
            6.0
            
            Years
            
            $
            3.30
            
            
            1,245,431
            
            $
            3.73


9




A summary
of the status of the Company’s unvested restricted stock as of December 31, 2008
and changes during the three month period ended March 31, 2009 is presented
below.


Shares
                        
                        Weighted
      Average
                          Grant
      Date
                          Fair
      Value
                        
                        Aggregate
                          Intrinsic
      ValueNon-vested
      RSU’s at January 1, 2009
                        
                        
                        296,406
                        
                        
                        $
                        2.28Granted
                        
                        
                        27,000
                        
                        
                        $
                        1.03Vested
                        
                        
                        (30,338
                        )
                        
                        $
                        3.80Non-vested
      RSU’s at March 31, 2009
                        
                        
                        293,068
                        
                        
                        $
                        2.00
                        
                        
                        
                        $
                        317Expected
      to vest at March 31, 2009
                        
                        
                        275,420
                        
                        
                        $
                        1.92
                        
                        
                        
                        $
                        297




Restricted
stock granted is generally scheduled to vest over periods of two to four years.
The cost of the grant is charged to operations over the vesting period. At March
31, 2009 the weighted average remaining term of non-vested restricted stock was
1.5 years.


4.
            STOCKHOLDERS’
      EQUITY




On
October 20, 2008, the Company announced that its Board of Directors had approved
a program to repurchase up to $3.0 million of the Company’s outstanding common
shares from time to time over the next 12 months, depending on market
conditions, share price and other factors.




During
the fourth quarter of 2008, the Company repurchased 406,627 common shares at a
weighted average price of $1.34 per share. The total cost of the share
repurchase including applicable broker fees was approximately $555. The Company
did not repurchase any common shares during the three month period ended March
31, 2009.


5.
            INVENTORIES




The
Company’s inventories are valued at the lower of cost or market. For inventories
that consist primarily of test kit components, bulk serum and antibody products,
cost is determined using the first in, first out method. For inventories that
consist of costs associated with the production of custom antibodies, cost is
determined using the specific identification method. At March 31, 2009 and
December 31, 2008, inventories consisted of the following:


March
      31,
                  2009
                
                
                December
      31,
                  2008Raw
      materials
                
                $
                1,340
                
                
                $
                1,216Work
      in progress
                
                
                948
                
                
                
                946Finished
      goods
                
                
                1,706
                
                
                
                1,728Inventories
                
                $
                3,994
                
                
                $
                3,890




10





6.
              INTANGIBLE
      ASSETS




At March
31, 2009 and December 31, 2008, intangible assets consisted of the
following:


March
      31,
                        2009
                      
                      
                      December
      31,
                        2008
                      
                      
                      LivesIntangible
      assets
                      
                      
                      2,614
                      
                      
                      
                      2,614
                      
                      
                      
                      2-20Accumulated
      amortization
                      
                      
                      (1,091
                      )
                      
                      
                      (1,052
                      )Net
      intangible assets
                      
                      $
                      1,523
                      
                      
                      $
                      1,562




7.
              DEBT




On May 5,
2000, the Company entered into a financing agreement with a commercial bank
which was amended on October 1, 2008 (the “Credit Agreement”). The Credit
Agreement provides for up to a $5,000 revolving line of credit, none of which
was outstanding and all of which was available at March 31, 2009. The revolving
line of credit bears a variable interest rate of between 150 basis points and
250 basis points over the one month LIBOR rate depending upon the ratio of the
Company’s funded debt to EBITDA. The Company’s annual effective rate of interest
on this line of credit, taking into account the variable interest rate and
LIBOR, was approximately 3.00% at March 31, 2009.




On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1,500 in financing, $105 of which was
outstanding at March 31, 2009, and is repayable over seven years, with principal
payments that began on October 1, 2002. The loan bears a variable interest rate
of 100 basis points less than the current Prime Interest Rate. Payments are due
monthly, with equal amortization of principal payments plus interest. The
Company’s annual effective rate of interest on this loan at March 31, 2009 was
approximately 2.25%.




On August
21, 2007, the Company received a term loan under the Credit Agreement to finance
the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2,000 in financing, $1,400 of which was
outstanding at March 31, 2009, and is repayable over five years, with principal
payments that began on October 1, 2007. The loan bears a fixed interest rate of
5.96% with equal amortization of principal payments plus interest.




Under the
Credit Agreement, the Company is required to meet certain quarterly financial
covenants that include a ratio of EBITDA to current maturities of debt plus
interest and cash paid for taxes greater than 1.50, a ratio of funded debt to
EBITDA not to exceed 3.25 and a requirement of liquid assets (cash and cash
equivalents) to be greater than or equal to $2.5 million at all
times.




The
Company did not meet its financial covenants with respect to its indebtedness at
March 31, 2009 and does not expect that it will be able to meet all of its
financial covenants under the Credit Agreement for the next 12 months. The
Company received a waiver of the financial covenants relating to the above
financing from its commercial bank as of March 31, 2009.




As of
March 31, 2009, the Company has classified the balance of its long-term
obligations under the Credit Agreement of $1,000 as current debt in the
consolidated balance sheet as the Company believes it is probable that there
will be a violation of the same covenants within the next 12 months if the
covenant terms are not amended. If the Company is unable to obtain a waiver of
future debt covenant violations, the Company will be unable to draw upon its
line of credit until such violations are cured. As of March 31, 2009, the
Company is not required to repay these long-term debt obligations within 12
months and expects to amend the Credit Agreement before December 31, 2009 to
allow the Company to meet its financial covenants and reclassify these long-term
obligations from current to non-current in the consolidated balance
sheet.




As of
March 31, 2009, the outstanding balance on all of the Company’s commercial bank
debt was $1,505. This indebtedness is secured by substantially all of the
Company’s assets.


11




8.
              INCOME
      TAXES




SFAS No.
109, Accounting for Income Taxes (“SFAS No. 109”) requires a company to evaluate
its deferred tax assets on a regular basis to determine if a valuation allowance
against the net deferred tax assets is required. In accordance with SFAS No.
109, the Company had a full valuation allowance offsetting its United States
federal and state net deferred tax assets which primarily represent net
operating loss carryforwards (“NOLs”) at December 31, 2008. During the
three-month period ended March 31, 2009, the Company’s management concluded that
the full valuation allowance for United States federal and state net deferred
tax assets is appropriate as the facts and circumstances have not changed since
the year ended December 31, 2008.




The
Company is subject to U.S. federal and UK income tax, as well as income taxes of
multiple state jurisdictions. The Company recognizes interest and penalties
related to uncertain tax positions in income tax expense. Upon adoption of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement 109 and at March 31, 2009, the Company had no
interest or penalties accrued related to uncertain tax positions due to the
available net operating loss carryforwards.




As of
January 1, 2009, the Company provided a liability for approximately $487 of
unrecognized tax benefits, which if recognized in a period where there was not a
full valuation allowance, would affect the effective tax rate.




For the
quarter ended March 31, 2009, unrecognized tax benefits increased $8 to $495,
which if recognized in a period where there was not a full valuation allowance,
would affect the effective tax rate.




For
federal purposes, post-1993 tax years remain open to examination as a result of
earlier net operating losses being utilized in recent years. For state purposes,
the statute of limitations remains open in a similar manner for states that have
generated net operating losses. The Company does not expect that the total
amount of unrecognized tax benefits related to positions taken in prior periods
will change significantly during the next 12 months.




Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations




Forward-Looking
Statements




This Form
10-Q contains certain forward-looking statements reflecting the current
expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company”
or “SDI”). In addition, when used in this quarterly report, the words
“anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,”
“may,” “will,” “should,” “project” and similar expressions as they relate to the
Company are intended to identify said forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
which may cause actual results to differ from those anticipated at this time.
Such risks and uncertainties include, without limitation, changes in demand for
products, delays in product development, delays in market acceptance of new
products, retention of customers, attraction and retention of management and key
employees, adequate supply of raw materials, inability to obtain or delays in
obtaining third party approvals or required government approvals, the ability to
meet increased market demand, competition, protection of intellectual property,
non-infringement of intellectual property, seasonality, the ability to obtain
financing and other factors more fully described in the Company’s public filings
with the U.S. Securities and Exchange Commission, including, without limitation,
its Annual Report on Form 10-K for the year ended December 31,
2008.




Background




SDI is a
biotechnology company with a core mission of developing, commercializing and
marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.




The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its consolidated facilities in Newark, Delaware for the
manufacture of test kits and antibodies, and its facilities located in Windham,
Maine and Dallas, Texas for the manufacture of antibodies.


12




The
Company believes that by applying its core competency of creating custom
antibodies to assay development, it produces sophisticated diagnostic testing
and reagent systems that are responsive to customer diagnostic and information
needs. Customers benefit from a quantifiable “return on investment” by reducing
time, labor and/or material costs associated with applications for which the
Company’s products are used. In addition, the Company believes its tests provide
high levels of accuracy, reliability and actionability of essential test results
as compared to alternative products. The Company is focused on sustaining this
competitive advantage by leveraging its expertise in immunology, proteomics,
bio-luminescence and other bio-reactive technologies to continue its successful
customer-focused research and development efforts. The Company believes that an
established product base, quality manufacturing expertise, experienced sales and
marketing organization, established network of distributors, corporate partner
relationships and proven research and development expertise will be critical
elements of its potential future success.




In 2008,
the Company continued the transition from a fragmented product offering and
marketing strategy to becoming a focused organization, with proven, proprietary
technologies tied directly to its customers’ needs. The transition is most
evident in the Genomic Antibody TechnologyTM (GATTM) initiative and food pathogen
detection products, where the Company believes significant progress is being
made.




The
Company continues to develop and introduce new methods for the detection of food
pathogens that deliver a strong competitive advantage to its customers. In 2005,
the Company filed a patent for new technology to be used in proprietary
enrichments of its food pathogen testing methods. The patent covers technology
for increasing the specificity and sensitivity of the Company’s immunoassay test
methods. The patent also makes claims for the application of the technology in
large scale bio-production/bio-fermentation processes, such as those used in the
production of amino acids, ethanol, enzymes and other processes using
microbiological production methods.




The
Company continues to develop multiple channels to market products worldwide
through an approach that includes direct sales, inside sales, distributors and
agents. The Company increased distribution for its food pathogen products in
Europe and Asia where there is growing demand for the Company’s product
line.




The
Company believes it is making progress in most of its business efforts. As the
deployment of new initiatives is accelerated, building on the Company’s
leadership position in food pathogens and expanding its strong positioning in
the emerging area of genomic antibodies, the Company anticipates that the
revenue lost to market changes in its legacy businesses will be replaced and the
Company will develop a stronger, more predictable revenue base.




The
Company expects the GATTM and food pathogen products to be its primary growth
drivers in the future, and that the Company’s competencies and competitive
positions in these two areas are strong.




Results of
Operations




Three
Months Ended March 31, 2009 versus Three Months Ended March 31,
2008




Revenues
for the first quarter of 2009 decreased 4% to $6.9 million, compared to $7.2
million for the same period in 2008. The decrease in revenues in the first
quarter of 2009 was primarily the result of a 31% decrease in sales of Ag-GMO
products and a 4% decrease in the sale of antibody products when comparing the
first quarter of 2009 to the first quarter of 2008. These decreases were
partially offset by a 7% increase in sales of food pathogen products and a 2%
increase in the sale of water and environmental products, all as described
below.




Antibody
Products




Antibody
revenues decreased 4% to $3.7 million for the first quarter of 2009, compared to
$3.8 million for the same quarter in 2008. The Company recorded a significant
increase in sales of products utilizing its GAT TM platform of 47% to $350,000
and an increase of 20% to $1.2 million in sales of its bulk antibody offerings.
These increases were offset by decreased sales of custom monoclonal products of
38% to $678,000 and custom polyclonal products of 6% to $1.4 million. These
decreased sales are primarily the result of a reduced number of completed
monoclonal projects and a reduced number of polyclonal orders received during
the three months ended March 31, 2009.


13




Food
Safety Products




Food
safety revenues decreased 9% to $2.0 million for the first quarter of 2009
compared to $2.2 million in the first quarter of 2008. Food pathogen sales
increased 7% in the first quarter of 2009 as compared to the first quarter of
2008. The Company continues to see revenue gains with its RapidChek® SELECTTM
for Salmonella products. Ag-GMO product sales were down $285,000, or 31%, for
the first quarter of 2009 as compared to the first quarter of 2008. This
decrease is primarily attributable to decreased demand for the Company’s testing
products in Brazil and reduced demand for products that detect the StarlinkTM trait
in grains.




Water and
Environmental Products




Water and
environmental products revenue was $1.1 million for each of the first quarters
of 2009 and 2008.




Gross
profits (defined as total revenues less manufacturing costs) for the first
quarter of 2009 was $3.8 million compared to $4.0 million for the same period in
2008. Gross margins were 55% and 56% for the first quarters of 2009 and 2008,
respectively. The decrease in margins was primarily attributable to decreased
levels of production creating a higher cost per unit.




Operating
expenses for the first quarter of 2009 increased 3% to $7.5 million, compared to
$7.2 million for the first quarter of 2008. This increase was primarily
attributable to a 17% increase in selling, general and administrative costs,
partially offset by a 29% decrease in research and development costs and a 1%
decrease in manufacturing costs, all as described below.




Research
and development spending was $663,000, or 10% of net revenues, in the first
quarter of 2009, compared to $940,000, or 13% of net revenues, in the first
quarter of 2008. This decrease was primarily due to decreased spending and
effort on development of the Company’s proprietary SEQerTM antibodies, which are
produced by the Company’s GAT TM platform and are being sold through the
Company’s antibody catalog.




Selling,
general and administrative expenses were $3.7 million for the first quarter of
2009, compared to $3.2 million for the same quarter in 2008. The increase is
primarily associated with severance charges for management changes and the
Company’s continued expansion of its sales and marketing efforts to strengthen
the Company’s life sciences position.




The
Company recorded net interest income of $5,000 in the first quarter of 2009
compared to $62,000 in the prior year first quarter. The decrease was primarily
due to lower interest rates received on decreased levels of invested cash and
cash equivalents during the first quarter of 2009.




The
Company’s effective rate was 2% for the three month period ended March 31, 2009
and approximately 48% for the three month period ended March 31, 2008. This
decrease is primarily due to the full valuation allowance placed against U.S.
federal and state deferred tax assets as of March 31, 2009.




Net loss
in the first quarter of 2009 was $561,000, or $0.03 per diluted share, compared
to a net loss of $12,000, or $0.00 per diluted share, for the same period in
2008. Diluted shares utilized in these computations were 20.0 million and 20.4
million for the first quarters of 2009 and 2008, respectively.




Liquidity
and Capital Resources




The net
cash used in operating activities of $564,000 for the first quarter of 2009
compared to net cash used in operating activities of $68,000 for the first
quarter of 2008. The net cash used in operating activities for the first quarter
of 2009 was primarily the result of the net loss recorded in the period, and
increases in other current assets and deferred revenues and decreases in accrued
expenses, accounts payable and inventories. The increase in other current assets
was primarily the result of the purchase of insurance for 2009, while the
decrease in accrued expenses is primarily attributable to reductions in accrued
commissions and salaries.




Net cash
used in investing activities of $193,000 for the first quarter of 2009 related
to the capital expenditures for the period. This compares to net cash used in
investing activities of $325,000 for the first quarter of 2008. The capital
expenditures for the first quarter of 2009 were primarily related to computer
and electronic equipment. In the first quarter of 2008, the capital expenditures
were primarily related to purchases of laboratory and manufacturing
equipment.


14




Net cash
used in financing activities of $149,000 and $135,000 for the first quarters of
2009 and 2008, respectively, was primarily the result of scheduled debt
repayments.




The
Company’s working capital, current assets less current liabilities, decreased
$117,000 to $14.1 million at March 31, 2009 from $14.2 million at December 31,
2008.




On May 5,
2000, the Company entered into a financing agreement with a commercial bank
which was amended on October 1, 2008 (the “Credit Agreement”). The Credit
Agreement provides for up to a $5.0 million revolving line of credit, none of
which was outstanding and all of which was available at March 31, 2009. The
revolving line of credit bears a variable interest rate of between 150 basis
points and 250 basis points over the one month LIBOR rate depending upon the
ratio of the Company’s funded debt to EBITDA. The Company’s annual effective
rate of interest on this line of credit, taking into account the variable
interest rate and LIBOR, was approximately 3.00% at March 31, 2009.




On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1.5 million in financing, $105,000 of which
was outstanding at March 31, 2009, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of 100 basis points less than the current Prime Interest Rate.
Payments are due monthly, with equal amortization of principal payments plus
interest. The Company’s annual effective rate of interest on this loan at March
31, 2009 was approximately 2.25%.




On August
21, 2007, the Company received a term loan under the Credit Agreement to finance
the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2.0 million in financing, $1.4 million of which
was outstanding at March 31, 2009, and is repayable over five years, with
principal payments that began on October 1, 2007. The loan bears a fixed
interest rate of 5.961% with equal amortization of principal payments plus
interest.




Under the
Credit Agreement, the Company is required to meet certain quarterly financial
covenants that include a ratio of EBITDA to current maturities of debt plus
interest and cash paid for taxes greater than 1.50, a ratio of funded debt to
EBITDA not to exceed 3.25 and a requirement of liquid assets (cash and cash
equivalents) to be greater than or equal to $2.5 million at all
times.




The
Company did not meet its financial covenants with respect to its indebtedness at
March 31, 2009 and does not expect that it will be able to meet all of its
financial covenants under the Credit Agreement for the next 12 months. The
Company received a waiver of the financial covenants relating to the above
financing from its commercial bank as of March 31, 2009 and expects it will
receive waivers of the financial covenants until such covenants are
amended.




As of
March 31, 2009, the Company has classified the balance of its long-term
obligations under the Credit Agreement of $1.0 million as current debt in the
consolidated balance sheet as the Company believes it is probable that there
will be a violation of the same covenants within the next 12 months if the
covenant terms are not amended. If the Company is unable to obtain a waiver of
future debt covenant violations, the Company will be unable to draw upon its
line of credit until such violations are cured. As of March 31, 2009, the
Company is not required to repay these long-term debt obligations within 12
months and expects to amend the Credit Agreement before December 31, 2009 to
allow the Company to meet its financial covenants and reclassify these long-term
obligations from current to non-current in the consolidated balance
sheet.




As of
March 31, 2009, the outstanding balance on all of the Company’s commercial bank
debt was $1.5 million. This indebtedness is secured by substantially all of the
Company’s assets.




For the
quarter ended March 31, 2009, the Company satisfied all of its cash requirements
from cash available and on-hand. At March 31, 2009, the Company had $1.5 million
in debt and stockholders’ equity of $20.9 million.


15




Based
upon its cash and cash equivalents on hand, credit facilities, current product
sales and the anticipated sales of new products, the Company believes it has, or
has access to, sufficient resources to meet its operating requirements through
the next 12 months. The Company’s ability to meet its long-term capital needs
will depend on a number of factors, including compliance with existing and new
loan covenants, the success of its current and future products, the focus and
direction of its research and development programs, competitive and
technological advances, future relationships with corporate partners, government
regulation, the Company’s marketing and distribution strategy, its successful
sale of additional common stock and/or the Company successfully locating and
obtaining other financing, and the success of the Company’s plan to make future
acquisitions. Accordingly, no assurance can be given that the Company will be
able to meet the future liquidity requirements that may arise from these
inherent and similar uncertainties.




Non-GAAP
Financial Measures




The
Company presents an earnings before interest, tax, depreciation and amortization
(“EBITDA”) measure as the Company believes this provides investors and the
Company’s management with additional information to measure the Company’s
liquidity. EBITDA measures are not a measure of performance under GAAP, and
therefore should not be considered in isolation or as a substitute for net loss
or cash flows from operations. Additionally, the Company’s EBITDA calculations
may differ from the EBITDA calculations for other companies.




The
Company excludes stock compensation expense from its measure of EBITDA. The
calculation of the Company’s EBITDA measure (as discussed above), and the
reconciliation of the Company’s EBITDA measure to net cash provided by operating
activities for the three months ended March 31, 2009 and 2008, respectively, is
as follows:


Three
      Months Ended
                        March
      31,2009
                      
                      
                      2008(in
      thousands)Net
      cash used in operating activities
                      
                      $
                      (564
                      )
                      
                      $
                      (68
                      )Changes
      in assets and liabilities:Receivables
                      
                      
                      (512
                      )
                      
                      
                      (545
                      )Inventories
                      
                      
                      104
                      
                      
                      
                      (205
                      )Other
      current assets
                      
                      
                      576
                      
                      
                      
                      633Other
      assets
                      
                      
                      (82
                      )
                      
                      
                      —Accounts
      payable
                      
                      
                      269
                      
                      
                      
                      83Accrued
      expenses
                      
                      
                      507
                      
                      
                      
                      774Deferred
      revenue
                      
                      
                      (300
                      )
                      
                      
                      (70
                      )Other
      non-current liabilities
                      
                      
                      —
                      
                      
                      
                      (1
                      )Net
      change in deferred income tax
                      
                      
                      (12
                      )
                      
                      
                      (35
                      )Income
      tax provision
                      
                      
                      (12
                      )
                      
                      
                      (11
                      )Stock
      compensation expense
                      
                      
                      (218
                      )
                      
                      
                      (252
                      )Interest
      income, net
                      
                      
                      (5
                      )
                      
                      
                      (62
                      )EBITDA
                      
                      $
                      (249
                      )
                      
                      $
                      241




16




Item
3. Quantitative and Qualitative Disclosures About Market Risk




The
Company has exposure to changing interest rates, and is currently not engaged in
hedging activities. Interest on approximately $105,000 of outstanding
indebtedness is at a variable rate of 1% less than the published prime interest
rate. At the Company’s current level of indebtedness, each 1% change in the
variable interest rate will have an effect of $1,000 on the Company’s annual
interest expense charges.




The
Company conducts operations in the United Kingdom. The consolidated financial
statements of the Company are denominated in U.S. dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company’s consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.




Item
4. Controls and Procedures




(a)      
 Evaluation of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of March 31, 2009, our disclosure controls and procedures
were effective to provide reasonable assurance that the information required to
be disclosed by us in reports filed under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that information required to
be disclosed by us in the reports we file or submit under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to our
management, including our principal executive and financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.




(b)      
Change in Internal Control over Financial Reporting




No change
in the Company’s internal control over financial reporting occurred during the
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the internal control over financial
reporting.


17




PART
II – OTHER INFORMATION




Item
5. Other Information




On May
14, 2009, the Company and Stanley Fronczkowski (“Fronczkowski”) entered into
Amendment No. 1, effective as of April 3, 2009, to the December 8, 2008
Separation Agreement and General Release by and between the Company and
Fronczkowski (the “Separation Agreement”). Under Amendment No. 1, the date on
which Fronczkowski is to be released from employment by SDI has been extended to
July 3, 2009; through that date, Fronczkowski will remain the Company’s Vice
President – Finance and Chief Financial Officer. Under Amendment No. 1, the date
through which Fronczkowski will receive benefits has been extended to January
31, 2010, and the Company has agreed, in satisfaction of its obligation under
the Separation Agreement to provide Fronczkowski with up to $20,000 worth of
outplacement services to Fronczkowski, to instead pay Fronczkowski in cash the
amount of $20,000. A copy of Amendment No. 1 is attached to this Form 10-Q as
Exhibit 33.1.




Also, on
May 12, 2009, the Company’s Board of Directors determined to revise the
Company’s director compensation policy. The changes are not designed to alter in
a material respect, from an economic standpoint, the overall value to the
directors of the compensation paid to them.




As under
the existing policy, non-employee directors will continue to receive under the
new policy, upon their election to the Board, a non-statutory option to
purchase, at the fair market value, which is equal to the greater of $1.50 and
the closing price of the Common Stock on the date of grant, shares of Common
Stock with an aggregate value of $30,000. This option is immediately vested with
respect to one-third of the option shares, with the remaining shares vesting in
a series of two (2) successive equal annual installments upon the optionee’s
completion of each year of service as a Board member.




Each
non-employee Board member shall also receive an annual base retainer in cash of
$25,000, an increase from the $14,000 annual base retainer which had been
payable in restricted shares of Common Stock. Directors will no longer receive
payments for meeting attendance; previously directors had received $1,000 for
each Board meeting attended and $500 for each committee meeting
attended.




The
$20,000 payable to the Chairman of the Board and the $10,000 payable to the
Chairman of the Audit Committee as annual base retainers will be payable in cash
rather than in restricted shares of Common Stock. In addition, payments made for
service in other leadership and committee membership positions are modified
under the new policy, and shall all be payable in cash.




Finally,
the new policy provides that on the date of each annual meeting of stockholders,
each individual who is to continue to serve as a non-employee Board member
following that meeting shall be granted (i) a non-statutory option to purchase
10,000 shares of Common Stock (increased from 8,000 shares) with an exercise
price per share that is equal to the greater of $1.50 or the closing price of
the Common Stock on the date of grant and a term of seven years and (ii) 2,500
shares of the Common Stock, which such options and restricted stock shall vest
in two (2) successive equal annual installments upon the first two anniversaries
of the date of grant.




Item
6. Exhibits


10.1
                        Amendment
      No. 1, effective as of April 3, 2009, to the Seperation Agreement by and
      between the Company and Stanley Fronczkowski.31.1
                        Certifications
      of the Chief Executive Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193431.2
                        Certifications
      of the Chief Financial Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193432.1
                        Certification
      of the Chief Executive Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of 200232.2
                        Certification
      of the Chief Financial Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of
2002




18




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


STRATEGIC
      DIAGNOSTICS INC.Date:
      May 15, 2009
                /s/
      Francis M. DiNuzzoFrancis
      M. DiNuzzoPresident,
      Chief Executive Officer(Principal
      Executive Officer)





Date:
      May 15, 2009
                    /s/
      Stanley A. FronczkowskiStanley
      A. FronczkowskiVice
      President – Finance and Chief Financial Officer(Principal
      Financial and Accounting Officer)
    19