Click here to Index

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



---

FORM 10-Q

| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended June 30, 2006

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------------------------------------------------------------------------------------

For the Transition Period From _________ to _________

Commission File Number000-22400

STRATEGIC
  DIAGNOSTICS INC.

(Exact name of Registrant as specified in its charter)



---

| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 56-1581761(I.R.S. employeridentification no.) | 
| | --------------------------------------------------------------------- |  | --------------------------------------------- | 

| |                                                                            |  |                 | 
| | -------------------------------------------------------------------------- |  | --------------- | 
| | 111 Pencader DriveNewark, Delaware(Address of principal executive offices) |  | 19702(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:No:

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of large accelerated filer and accelerated filer in Rule 12b-2 of the Exchange Act.

Large Accelerated FilerAccelerated FilerNon-Accelerated Filer

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

Yes:No:

As of June 30, 2006 there were 19,989,806 outstanding shares of the Registrants common stock, par value $.01 per share.








---



STRATEGIC DIAGNOSTICS INC.

INDEX



|                                     |    | Item                                                                                                          | Page
|------------------------------------ | -- | ------------------------------------------------------------------------------------------------------------- | ----
|                                     |    |                                                                                                               |     
|PART
        I FINANCIAL INFORMATION |   
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        1. Financial Statements                                                                          |     
|                                     |    |                                                                                                               |     
|                                     |    | Consolidated
        Balance Sheets  June 30, 2006 and December 31, 2005                                     | 2   
|                                     |    |                                                                                                               |     
|                                     |    | Consolidated
        Statements of Operations  Three and six months ended June 30, 2006
        and 2005     | 3   
|                                     |    |                                                                                                               |     
|                                     |    | Consolidated
        Statements of Cash Flows  Six months ended June 30, 2006 and 2005                       | 4   
|                                     |    |                                                                                                               |     
|                                     |    | Notes
        to Consolidated Interim Financial Statements                                                    | 5   
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        2. Managements Discussion and Analysis of Financial Condition and
        Results of Operations | 11  
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        3. Quantitative and Qualitative Disclosures About Market Risk                                    | 17  
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        4. Controls and Procedures                                                                       | 17  
|                                     |    |                                                                                                               |     
|PART
        II OTHER INFORMATION    |   
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        4. Submission of Matters to a Vote of Security Holders                                           | 19  
|                                     |    |                                                                                                               |     
|                                     |    | ITEM
        6. Exhibits                                                                                      | 19  
|                                     |    |                                                                                                               |     
|SIGNATURES                           | 19

1

---



Back to Index

PART
  I. FINANCIAL INFORMATION

ITEM
  1. FINANCIAL STATEMENTS

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)



June 30,2006


      

        December
          31,2005ASSETSCurrent Assets :Cash and cash equivalents

        

        $

        9,586

        

        $

        10,009Receivables, net

        

        

        3,128

        

        

        3,242Inventories

        

        

        3,201

        

        

        3,212Deferred tax asset

        

        

        1,204

        

        

        1,048Other current assets

        

        

        869

        

        

        362Total current assets

        

        

        17,989

        

        

        17,873Property and equipment, net

        

        

        3,766

        

        

        3,884Other assets

        

        

        3

        

        

        3Deferred tax asset

        

        

        8,323

        

        

        8,101Intangible assets, net

        

        

        6,485

        

        

        6,800Total assets

        

        $

        36,565

        

        $

        36,661LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities :Accounts payable

        

        $

        465

        

        $

        464Accrued expenses

        

        

        1,143

        

        

        1,439Deferred revenue

        

        

        320

        

        

        207Current portion of long term debt

        

        

        211

        

        

        211Total current liabilities

        

        

        2,139

        

        

        2,321Long-term debt

        

        

        457

        

        

        562Stockholders 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, 19,989,806 and
          19,916,635 issued and outstanding at June 30, 2006 and December 31,
          2005, respectively

        

        

        200

        

        

        200Additional paid-in capital

        

        

        38,197

        

        

        37,936Accumulated deficit

        

        

        (4,513

        )

        

        (4,374

        )Cumulative translation adjustments

        

        

        85

        

        

        16Total stockholders equity

        

        

        33,969

        

        

        33,778Total liabilities and stockholders equity

        

        $

        36,565

        

        $

        36,661


The accompanying notes are an integral part of these statements.

2

---



Back to Index

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



Three MonthsEnded June 30,


      

        Six MonthsEnded June 30,2006

        

        2005

        

        2006

        

        2005NET REVENUES:Product related

        

        $

        5,640

        

        $

        6,178

        

        $

        11,908

        

        $

        12,855Total net revenues

        

        

        5,640

        

        

        6,178

        

        

        11,908

        

        

        12,855OPERATING EXPENSES:Manufacturing

        

        

        2,728

        

        

        2,898

        

        

        5,668

        

        

        5,715Research and development

        

        

        596

        

        

        851

        

        

        1,293

        

        

        1,658Selling, general and administrative

        

        

        2,793

        

        

        2,290

        

        

        5,356

        

        

        4,765Total operating expenses

        

        

        6,117

        

        

        6,039

        

        

        12,317

        

        

        12,138Operating income (loss)

        

        

        (477

        )

        

        139

        

        

        (409

        )

        

        717Interest
    income, net

        

        

        91

        

        

        44

        

        

        174

        

        

        71Income (loss) before taxes

        

        

        (386

        )

        

        183

        

        

        (235

        )

        

        788Income tax expense (benefit)

        

        

        (155

        )

        

        45

        

        

        (96

        )

        

        231Net income (loss)

        

        

        (231

        )

        

        138

        

        

        (139

        )

        

        557Basic net income (loss) per share

        

        $

        (0.01

        )

        $

        0.01

        

        $

        (0.01

        )

        $

        0.03Shares used in computing basic net income (loss) per share

        

        

        19,970,000

        

        

        19,728,000

        

        

        19,966,000

        

        

        19,594,000Diluted net income (loss) per share

        

        $

        (0.01

        )

        $

        0.01

        

        $

        (0.01

        )

        $

        0.03Shares used in computing diluted net income (loss) per share

        

        

        19,970,000

        

        

        19,810,000

        

        

        19,966,000

        

        

        19,691,000


The accompanying notes are an integral part of these statements

3

---



Back to Index

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)





Six MonthsEnded June 30,2006

        

        2005Cash Flows from Operating Activities :Net income (loss)

        

        $

        (139

        )

        $

        557Adjustments
    to reconcile net income (loss) to net cash used in operating activities
    :Depreciation and amortization

        

        

        497

        

        

        457Stock compensation expense

        

        

        174

        

        

        83Income taxes

        

        

        (60

        )

        

        231(Increase) decrease in :Receivables

        

        

        114

        

        

        (587

        )Inventories

        

        

        11

        

        

        (198

        )Other current assets

        

        

        (507

        )

        

        (553

        )Other assets

        

        

        

        

        

        (4

        )Increase (decrease) in :Accounts payable

        

        

        1

        

        

        (350

        )Accrued expenses

        

        

        (296

        )

        

        334Deferred revenue

        

        

        113

        

        

        Net cash used in operating activities

        

        

        (92

        )

        

        (30

        )Cash Flows from Investing Activities :Purchase of property and equipment

        

        

        (258

        )

        

        (237

        )Purchase of intangible assets

        

        

        (117

        )

        

        Net cash used in investing activities

        

        

        (375

        )

        

        (237

        )Cash Flows from Financing Activities :Proceeds from exercise of incentive stock options

        

        

        69

        

        

        925Proceeds from employee stock purchase plan

        

        

        12

        

        

        8Repayments on financing obligations

        

        

        (106

        )

        

        (106

        )Net cash provided by (used in) financing activities

        

        

        (25

        )

        

        827Effect of exchange rate changes on cash

        

        

        69

        

        

        (81

        )Net increase (decrease) in cash and cash equivalents

        

        

        (423

        )

        

        479Cash and Cash Equivalents, Beginning of Period

        

        

        10,009

        

        

        8,096Cash and Cash Equivalents, End of Period

        

        $

        9,586

        

        $

        8,575Supplemental Cash Flow Disclosure :Cash paid for taxes

        

        

        8

        

        

        15Cash paid for interest

        

        

        25

        

        

        23


The accompanying notes are an integral part of these statements

4

---



Back to Index

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 (the Company) develops, manufactures and markets antibody products and analytical test kits to a diverse customer base, across multiple industrial and human health markets. By applying its core competency of creating custom antibodies to assay development, the Company produces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit with quantifiable return on investment by reducing time, labor, and/or material costs. All this is accomplished while increasing accuracy, reliability and actionability of essential test results. 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.

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 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, 2005. In the opinion of management, the accompanying consolidated financial statements include all adjustments (all of which are of a normal recurring nature) necessary for a fair presentation of the results of operations.

Certain amounts have been reclassified to conform to the current periods presentation.

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 probable. 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.

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 and deferred tax assets. Actual results could differ from these estimates.

5

---



Back to Index

New Accounting Pronouncement

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, using the modified prospective transition method and, accordingly, has not retroactively adjusted results from prior periods. SFAS 123R revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires that compensation costs related to share-based payment transactions be recognized in the financial statements.

In prior years, the Company applied the intrinsic-value-based method to account for its incentive plan stock options and had adopted only the disclosure requirements of SFAS No. 123. In recording stock-based compensation expense, the Company recognized in its consolidated financial statements the fair value of restricted stock, the intrinsic value of options wherein the current market price of the underlying stock, at the grant date, exceeded the exercise price and the discount from the market price of common stock acquired by employees under a stock purchase plan. Under SFAS 123R, the Company recognizes stock-based compensation expense based on the fair value of both restricted stock and stock options and the employee discount. Stock-based compensation expense is recognized on a straight-line basis ratably over the respective vesting periods for restricted stock and stock options, and in the
period the employee discount is realized.

On December 27, 2005, the Board of Directors of the Company approved the accelerated vesting, effective as of December 31, 2005, of all unvested stock options granted to employees and non-employee directors from 2002 through 2005 under the Companys 2000 Stock Incentive Plan, as well as options granted to the Companys Chief Executive Officer under his original employment agreement. The acceleration of vesting of these options had the effect of reducing non-cash compensation expense that would have been recorded in the Companys statement of operations in future periods in anticipation of the adoption of SFAS 123R. The Boards decision was based on such factors as: 48% of the options were out of the money; the options generally would vest over the next three years; and the Company had decided to rely on restricted stock as opposed to options in future incentive
compensation awards.

As a result of the acceleration, options to purchase approximately 381,000 shares of the Companys common stock (which represented 23% of the Companys then currently outstanding stock options) became exercisable on December 31, 2005. The accelerated options ranged in exercise price from $2.51 to $4.12 per share and, at December 31, 2005, the weighted average exercise price of the accelerated options was $3.41 per share. Of the 381,000 shares that became exercisable, approximately 199,000 of these shares were in the money as of December 27, 2005, meaning that the exercise price was at or below the price of the Companys common stock on that date. The weighted average exercise price of the in the money shares at that date was $3.02. The options subject to acceleration included options to purchase approximately 222,000 shares held, in the aggregate, by
executive officers and approximately 48,000 shares held, in the aggregate, by non-employee directors of the Company. Of these 270,000 shares, approximately 147,000 were in the money as of December 27, 2005. The fair value of the unvested portion of accelerated options at December 31, 2005 totaled $975 and would have been expensed in future years as follows: $682 in 2006, $228 in 2007 and $65 in 2008.

Consequently,
    the adoption of SFAS 123R did not have an impact on the Companys results
    of operations and financial position in the first quarter of 2006. However,
    as a result of the granting of options to the Board of Directors as part
    of their compensation package in May 2006, the Companys income before
    income taxes and net income for both the three and six month periods ended
    June 30, 2006 were lower by $45 and $27, respectively, than under the Companys
    previous accounting method for share-based compensation.

The Company also considers the effect of expected forfeitures of equity grants in recording stock-based compensation expense under FAS 123R. Under the new standard, the Company estimates an expected forfeiture rate for grants of equity instruments, and adjusts stock-based compensation expense for its effect. This estimate is adjusted at each reporting period to reflect expected forfeitures as equity instruments vest. Previously under APB No. 25, the Company recognized the actual effect of forfeitures when they occurred.

The new accounting standard also requires that certain income tax benefits realized upon the exercise of stock options, or the vesting of restricted stock, be reported as financing cash flows. Previously, the tax benefits resulting from the income tax deduction, recognized for financial reporting purposes, were reported as operating cash flows.

6

---



Back to Index

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards granted prior to the adoption of SFAS 123R.



Three
          Months EndedJune 30, 2005


      

        Six Months EndedJune 30, 2005Net income


      


      $


      138


      


      $


      557Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

        

        

        39

        

        

        59Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

        

        

        (211

        )

        

        (394

        )Pro forma net income (loss)

        

        $

        (34

        )

        $

        222Earnings (loss) per share:Basicas reported

        

        $

        0.01

        

        $

        0.03Basicpro forma

        

        $

        0.00

        

        $

        0.01Dilutedas reported

        

        $

        0.01

        

        $

        0.03Dilutedpro forma

        

        $

        0.00

        

        $

        0.01


The
    weighted average fair value at the date of grant for options granted during
    the three and six month periods ended June 30, 2005 of $1.73 and $2.08, respectively,
    was estimated using the Black-Scholes valuation model. The assumptions used
    in the Black-Scholes model were as follows: dividend yield of 0%, expected
    volatility of 86% - 85%, risk-free interest rate of 3.71%  3.85% and
    an expected option life of 5 years.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of the following for each period:



Three Months EndedJune 30,


      

        Six Months EndedJune 30,2006

        

        2005

        

        2006

        

        2005Net income (loss)


      


      $


      (231


      )


      $


      138


      


      $


      (139


      )


      $


      557Currency translation adjustment

        

        

        59

        

        

        (61

        )

        

        10

        

        

        (20

        )Total comprehensive income (loss)

        

        $

        (172

        )

        $

        77

        

        $

        (129

        )

        $

        537


7

---



Back to Index

2.

        BASIC AND DILUTED INCOME PER SHARE:


Basic earnings per share (EPS) is computed by dividing net income 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 exercising stock options into common shares.



Three Months EndedJune 30,


      

        Six Months EndedJune 30,2006

        

        2005

        

        2006

        

        2005Weighted avg. common shares outstanding


      


      19,970,459


      


      19,727,816


      


      19,965,579


      


      19,594,497Shares used in computing basic net income (loss) per share

        

        19,970,459

        

        19,727,816

        

        19,965,579

        

        19,594,497Stock options

        

        0

        

        82,368

        

        0

        

        96,099Shares used in computing diluted net income (loss) per share

        

        19,970,459

        

        19,810,184

        

        19,965,579

        

        19,690,596


For the three and six month periods ended June 30, 2006, 124,108 and 130,117 of potentially dilutive securities have been excluded from the computation of diluted net loss per share because to do so would have been anti-dilutive.

3.

        STOCK-BASED COMPENSATION


The Company has a stock incentive plan (the 2000 Plan), which authorizes the granting of incentive and nonqualified stock options and restricted stock. Under the 2000 Plan, executives, key employees and outside directors receive awards of options to purchase common stock or restricted stock. 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. Stock options granted under the 2000 Plan have a maximum contractual term of 10 years. The 2000 Plan provides for accelerated vesting if there is a change of control (as defined in the 2000 Plan).

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, the Companys ESPP is compensatory, therefore, the Company
    is required to recognize compensation expense related to the fair value of
    equity shares at date of grant.

Stock
    based compensation expense and the associated income tax benefit recognized
    is primarily related to stock options and the amortization of restricted
    stock awards that for the three months ended June 30, 2006 totaled $108 and
    $43, respectively, and for the six month period ended June 30, 2006 totaled
    $174 and $71, respectively. Cash received from options exercised and employee
    purchases of common stock under the ESPP totaled $19 and $81 for the three
    and six month periods ended June 30, 2006, respectively.

The
    intrinsic value of options exercised during the three month and six month
    periods ended June 30, 2006 was $36 and $47, respectively.

8

---



Back to Index

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 six months ended June 30, 2006 is summarized as follows:



Numberof Shares


      

        Price Range


      

        WeightedAverageExercisePriceBalance, December 31, 2005


      


      1,660,500


      


      $


      1.88


      -


      $


      6.94


      


      $


      3.68Issued

        

        55,895

        

        $

        3.80

        -

        $

        3.80

        

        $

        3.80Cancelled

        

        (109,666

        )

        $

        2.51

        -

        $

        4.08

        

        $

        3.78Exercised

        

        (37,000

        )

        $

        1.88

        -

        $

        1.88

        

        $

        1.88Balance, June 30, 2006

        

        1,569,729

        

        $

        1.88

        -

        $

        6.94

        

        $

        3.72


The fair value of each option award granted after the adoption of SFAS 123R is estimated on the date of grant using the Black-Scholes option valuation model and assumptions noted in the following table.



Three Months EndedJune 30, 2006


      


      Six Months EndedJune 30, 2006Expected life


      


      5.5 years


      


      5.5 yearsExpected volatility

        

        68.2

        %

        68.2

        %Risk-free interest rate

        

        4.99

        %

        4.99

        %Dividend yield

        

        0.00

        %

        0.00

        %


The expected life of the options is based on the SAB 107 simplified method. Since the Companys stock is thinly traded, the expected volatility is calculated based on the monthly closing price for the trailing six year period. The risk-free interest rate is based on the St. Louis Federal Reserve constant maturity daily series at a term consistent with the life of the option. The dividend yield is based on the fact that the Company does not expect to declare a dividend.

During the six month period ended June 30, 2005 the Company granted options to purchase 146,500 shares with a weighted average grant date fair value of $3.01 per share.

The following table provides additional information about the Companys stock options outstanding and exercisable at June 30, 2006:



Options OutstandingWeighted Average


      

        


      


      


      

        Options ExercisableWeighted AverageRange ofExercise Prices

        

        Numberof Options

        

        RemainingContractual Life

        

        ExercisePrice

        

        IntrinsicValue

        

        Numberof Options

        

        RemainingContractual Life

        

        ExercisePrice

        

        IntrinsicValue$1.88


      

        -


      


      $2.65


      


      257,334


      


      3.9 Years


      


      $


      2.23


      


      $


      183,170


      


      257,334


      


      3.9
          Years


      


      $


      2.23


      


      $


      183,170$2.88

        

        -

        

        $4.69

        

        1,161,145

        

        6.6 Years

        

        $

        3.72

        

        $

        6,500

        

        1,123,878

        

        6.7 Years

        

        $

        3.72

        

        $

        6,500$5.17

        

        -

        

        $6.94

        

        151,250

        

        5.0 Years

        

        $

        6.23

        

        $

        0

        

        151,250

        

        5.0 Years

        

        $

        6.23

        

        $

        0$1.88

        

        -

        

        $6.94

        

        1,569,729

        

        6.0 Years

        

        $

        3.72

        

        $

        189,670

        

        1,532,462

        

        6.0 Years

        

        $

        3.71

        

        $

        189,670


9

---



Back to Index

A summary of the status of the Companys unvested restricted stock as of December 31, 2005 and changes during the six month period ended June 30, 2006 is presented below.



Number
          ofShares
      
      WeightedAverageFair ValueUnvested
          at December 31, 2005
      
      121,013
      
      $
      3.46Vested
      
      (20,532
      )
      $
      3.32Forfeited
      
      (867
      )
      $
      3.05Unvested
          at June 30, 2006
      
      99,614
      
      $
      3.49


During the six month period ended June 30, 2006, there was no restricted stock granted. At June 30, 2006, there were outstanding 194,567 shares of restricted stock with a value (based on the market price for the stock at the date of grant) totaling $711 and a weighted average remaining term of .87 years. Restricted stock granted is generally scheduled to vest over periods of two to five years. The cost of the grant is charged to operations over the vesting period. The total unamortized fair value of unvested restricted stock, at June 30, 2006, was $186. During the six month period ended June 30, 2005, there were 44,700 shares of restricted stock granted with a weighted-average grant date fair value of $3.19 per share.

4.

        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 June 30, 2006 and December 31, 2005, inventories consisted of the following:



June 30,2006


      

        December 31,2005Raw materials


      


      $


      1,121


      


      $


      1,181Work in progress

        

        

        599

        

        

        498Finished goods

        

        

        1,481

        

        

        1,533$

        3,201

        

        $

        3,212


5.

        INTANGIBLE ASSETS:


At June 30, 2006 and December 31, 2005, intangible assets consisted of the following:



June
          30, 
          2006


      


      December
          31, 
          2005


      


      LivesGoodwill


      


      $


      4,847


      


      $


      5,168


      


      N/AOther

        

        

        3,134

        

        

        3,017

        

        2-20Less  accumulated amortization

        

        

        (1,496

        )

        

        (1,385

        )Net intangible assets

        

        $

        6,485

        

        $

        6,800


10

---



Back to Index

6.

        DEBT:


On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for up to a $5,000 revolving line of credit, none of which was outstanding and approximately $2,247 of which was available at June 30, 2006, based on eligible assets. The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Companys funded debt to EBITDA, and is subject to a borrowing base determined by the Companys eligible accounts receivable. The Companys annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 6.84% at June 30, 2006.

On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1,500 in financing, $668 of which was outstanding at June 30, 2006, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Companys funded debt to EBITDA, as defined. Payments are due monthly, with equal amortization of principal payments plus interest. The Companys annual effective rate of interest on this loan at June 30, 2006 was approximately 7.09%.

Under the terms of the above financing, 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 and a ratio of funded debt to EBITDA not to exceed 3.25. Under the covenant, the Company met all of its financial covenants with respect to this indebtedness at June 30, 2006 and expects that it will be able to meet all of its financial covenants with respect to this indebtedness for 2006.

As of June 30, 2006 and December 31, 2005, the outstanding balance on all of the Companys commercial bank debt was $668 and $773, respectively. This indebtedness is secured by substantially all of the Companys assets.

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). These statements include, among others, statements regarding: the Companys intentions with respect to future spending on research and development; the development, market acceptance and sales of tests for food-borne pathogens and related growth media; the size and nature of demand in the markets for the Companys products and related effects on operating results; the need for water quality and toxicity tests; approval and validation by third parties of the Companys food pathogen tests; the performance of the Companys testing products; sales of the Companys antibodies; timing of new product introductions and other information that may be predictive of future operating results;
the Companys ability to reduce operating expenses; and the Companys ability to improve operating results thus enabling it to meet future loan covenants. In addition, when used in this Form 10-Q, 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.

Background

We provide bio-services and industrial bio-detection services. Bio-services include providing custom antibody production services and antibody reagents to the diagnostic, pharmaceutical, bio-medical and academic research and development markets. Industrial bio-detection services include providing test kits for assessing the health, safety and quality of food, water and the environment.

11

---



Back to Index

Our primary core competency is the development and manufacture of antibodies. Such antibodies are used by medical diagnostic and pharmaceutical companies, research institutions and incorporated into test kits manufactured by us for the detection of a wide variety of substances related to food safety and water quality.

Our food safety product group includes tests to detect specific traits in genetically engineered plants, tests to detect Genetically Modified (GM) traits in food ingredients and food fractions, tests to detect naturally occurring fungi in grains (mycotoxins) and tests for food pathogens.

Our water quality product group includes tests to detect toxicity in drinking water, industrial process water and wastewater, and tests to detect specific traits in soil and other waste matter for use at environmental remediation projects, hazardous waste operations and other applications.

Our antibody product group provides a wide array of antibodies and antibody services, including hybridoma development, calibrators, antigens and reagents and the production of monoclonal and polyclonal antibodies. Such antibodies are incorporated into test kits we manufacture as described above and diagnostic and therapeutic products, and used in clinical research.

We sell products and services in the food safety, water quality and antibody market categories through our U.S. direct sales force, a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and our corporate partners. These products and services are sold to a wide range of customers including water utilities, food processors, pharmaceutical, biotechnology and diagnostic companies and major biomedical research centers.

Adoption of New Accounting Pronouncement

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment, using the modified prospective transition method and, accordingly, has not retroactively adjusted results from prior periods. SFAS 123R revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R requires that compensation costs related to share-based payment transactions be recognized in the financial statements.

In prior years, the Company applied the intrinsic-value-based method to account for its incentive plan stock options and had adopted only the disclosure requirements of SFAS No. 123. In recording stock-based compensation expense, the Company recognized the costs of restricted stock in its consolidated financial statements and those options wherein the current market price of the underlying stock, at the grant date, exceeded the exercise price. Under SFAS 123R, the Company recognizes stock-based compensation expense based on the fair value of both restricted stock and stock options. Stock-based compensation expense is recognized on a straight-line basis ratably over the respective vesting periods.

On December 27, 2005, the Board of Directors of the Company approved the accelerated vesting, effective as of December 31, 2005, of all unvested stock options granted to employees and non-employee directors from 2002 through 2005 under the Companys 2000 Stock Incentive Plan, as well as options granted to the Companys Chief Executive Officer under his original employment agreement. The acceleration of vesting of these options had the effect of reducing non-cash compensation expense that would have been recorded in the Companys statement of operations in future periods in anticipation of the adoption of SFAS 123R. The Boards decision was based on such factors as: 48% of the options were out of the money; the options generally would vest over the next three years; and the Company had decided to rely on restricted stock as opposed to options in future incentive
compensation awards.

As a result of the acceleration, options to purchase approximately 381,000 shares of the Companys common stock (which represented 23% of the Companys then currently outstanding stock options) became exercisable on December 31, 2005. The accelerated options ranged in exercise price from $2.51 to $4.12 per share and, at December 31, 2005, the weighted average exercise price of the accelerated options was $3.41 per share. Of the 381,000 shares that became exercisable, approximately 199,000 of these shares were in the money as of December 27, 2005, meaning that the exercise price was at or below the price of the Companys common stock on that date. The weighted average exercise price of the in the money shares at that date was $3.02. The options subject to acceleration included options to purchase approximately 222,000 shares held, in the aggregate, by
executive officers and approximately 48,000 shares held, in the aggregate, by non-employee directors of the Company. Of these 270,000 shares, approximately 147,000 were in the money as of December 27, 2005. The fair value of the unvested portion of accelerated options at December 31, 2005 totaled $975 and would have been expensed in future years as follows: $682 in 2006, $228 in 2007 and $65 in 2008.

12

---



Back to Index

Consequently,
    the adoption of SFAS 123R did not have an impact on the Companys results
    of operations and financial position in the first quarter of 2006. However,
    as a result of the granting of options to the Board of Directors as part
    of their compensation package in May 2006, the Companys income before
    income taxes and net income for both the three and six month periods ended
    June 30, 2006 were lower by $45 and $27, respectively, than under the Companys
    previous accounting method for share-based compensation. The Company determines
    the fair values of stock options awarded by using the Black-Scholes valuation
    model.

The Company also considers the effect of expected forfeitures of equity grants in recording stock-based compensation expense under FAS 123R. Under the new standard, the Company estimates an expected forfeiture rate for grants of equity instruments, and adjusts stock-based compensation expense for its effect. This effect is adjusted to reflect actual forfeitures as equity instruments vest. Previously under APB No. 25, the Company recognized the actual effect of forfeitures when they occurred.

The new accounting standard also requires that certain income tax benefits realized upon the exercise of stock options, or the vesting of restricted stock, be reported as financing cash flows. Previously, the tax benefits resulting from the income tax deduction, recognized for financial reporting purposes, were reported as operating cash flows.

Results of Operations

Three Months Ended June 30, 2006 versus Three Months Ended June 30, 2005

Revenues for the second quarter of 2006 decreased 8.7% to $5.6 million, compared to $6.2 million for the same period in 2005. Revenues from the Companys products for the detection of food pathogens grew 7% to $847,000 in the 2006 quarter compared to $788,000 for the same quarter in 2005. The second quarter of 2006 was negatively impacted by lower than expected sales of food pathogen tests through the Companys international distributor, attrition of high margin sales in the water and environmental product group and a decline in monoclonal antibody revenues not associated with the Genomic Antibodies platform compared to the same period in the prior year.

Gross profits (defined as total revenues less manufacturing costs) for the second quarter of 2006 were $2.9 million compared to $3.3 million in the second quarter of 2005. Gross margins were 51.6% and 53.1% for the second quarters of 2006 and 2005, respectively.  The margin decrease is primarily attributable to the Companys antibody product group and results from an increase in production expenses associated with the start-up of the Companys new Genomic Antibodies platform, and the changing mix of products.

Operating expenses for the second quarter of 2006 increased 1.3% to $6.1 million, compared to $6.0 million for the second quarter of 2005.

Research and development spending was $596,000, or 10.6% of net revenues in the second quarter of 2006, compared to $851,000, or 13.8% of net revenues, in the second quarter 2005. Second quarter 2005 research and development expense included a $114,000 non-recurring investment in software upgrades for the Microtox® test equipment.

Selling, general and administrative (SG&A) expenses were $2.8 million for the second quarter of 2006, compared to $2.3 million for the same quarter in 2005.  The overall increase in SG&A expenses was associated with the continued expansion of sales and marketing activities in support of the Companys new Genomic Antibodies platform and the scheduled launch of new food safety products in the third quarter of this year.

The Company recorded interest income, net of interest expense, of $91,000 for the three months ended June 30, 2006 compared to $44,000 for the three months ended June 30, 2005, due to higher levels of invested cash during the 2006 period.

Pre-tax loss totaled $386,000 for the second quarter of 2006, compared to pre-tax income of $183,000 for the same period in 2005. Net loss in the second quarter of 2006 was $231,000, or $0.01 per diluted share, compared to net income of $138,000, or $0.01 per diluted share, for the same period in 2005. Diluted shares utilized in these computations were 20.0 million and 19.8 million for the second quarters of 2006 and 2005, respectively.

13

---



Back to Index

The Companys effective tax rate of 40% for the second quarter of 2006 is above the federal and state statutory rates primarily due to expenses incurred that are not deductible for tax purposes.

Six
      Months Ended June 30, 2006 versus Six Months Ended June 30, 2005

For the six months ended June 30, 2006, revenues decreased 7.4% to $11.9 million, compared to $12.9 million for the same period in 2005. Revenues from the Companys products for the detection of food pathogens grew in the first six months of 2006 by 27.7% to $1.7 million, compared to $1.4 million for the same period in 2005.  In addition to attrition in the water and environmental product group and agricultural product line, revenues for the six months ended June 30, 2006 continued to be negatively impacted by a lower volume in bulk and monoclonal antibody product sales.

Gross profits for the first six months of 2006 were $6.2 million compared to $7.1 million for the same period in 2005. Gross margins were 52.4% and 55.5% for the six months ended June 30, 2006 and 2005, respectively.  The margin decrease is primarily attributable to the Companys antibody product group and results from an increase in production expenses associated with the start-up of the Companys new Genomic Antibodies platform, and the changing mix of products.  Also contributing to margin pressure is the ongoing, but anticipated, commoditization of products for GMO testing of grains and seed.

Operating expenses for the six months ended June 30, 2006 increased 1.5% to $12.3 million, compared to $12.1 million for the same period of 2005.

Research and development spending was $1.3 million, or 10.9% of net revenues, in the first six months of 2006, compared to $1.7 million, or 12.9% of net revenues, for the same period of 2005. For the six months ended June 30, 2005, research and development expense included a $279,000 non-recurring investment in software upgrades for the Microtox® test equipment.

SG&A expenses were $5.4 million for the first six months of 2006, compared to $4.8 million for the same period in 2005.  The overall increase in SG&A expenses was associated with the Companys previously announced plans to expand sales and marketing activities.

The Company recorded interest income, net of interest expense, of $174,000 for the six months ended June 30, 2006 compared to $71,000 for the six months ended June 30, 2005, due to higher levels of invested cash during the 2006 period.

Pre-tax loss totaled $235,000 for the six months ended June 30, 2006, compared to pre-tax income of $788,000 for the same period in 2005. Net loss for the first six months of 2006 was $139,000, or $0.01 per diluted share, compared to net income of $557,000, or $0.03 per diluted share, for the same period in 2005. Diluted shares utilized in these computations were 20.0 million and 19.7 million for the second quarters of 2006 and 2005, respectively.

The Companys effective tax rate of 41% for the six months ended June 30, 2006 is above the federal and state statutory rates primarily due to expenses incurred that are not deductible for tax purposes.

Product Groups

Food
  Safety Products

Food safety revenues were $1.8 million in the second quarter of 2006, compared to $1.9 million in the second quarter of 2005, and were $4.4 million for both the six months ended June 30, 2006 and 2005.  The food safety product group includes the Companys sales of food pathogen tests and agricultural test products.  Food pathogens comprise approximately 48% and 40% of the total product group for the three and six month periods ended June 30, 2006, respectively, compared to approximately 43% and 31%, respectively, for the comparative periods in 2005.

14

---



Back to Index

Water
  and Environmental Products

Water and environmental products revenues were $1.4 million for the second quarter of 2006, compared to $1.6 million in the second quarter of 2005. For the six months ended June 30, 2006 and 2005, water and environmental products revenues were $2.5 million and $2.9 million, respectively. Contributing to the decrease were the effects of weather conditions on sales of tests for pesticides, the timing of sales of Microtox® test system and pricing pressures from some niche competitors in the U.S. Although the overall rate of attrition for the first six months of 2006 was 10.8%, the Companys UK affiliate grew 6.3% during this period, compared to the same period in 2005 and at June 30, 2006 comprised approximately 38% of the total product group, compared to approximately 32% for the comparative period in 2005.

Antibody
  Products

Antibody revenues decreased 7.6% to $2.5 million for the second quarter of 2006, compared to $2.7 million for the same quarter in 2005, and decreased 11.4% to $5.0 million in the six months ended June 30, 2006, compared to $5.65 million for the same period in the prior year. The decline was primarily due to cyclical order patterns for bulk antibodies and a decline in the demand for high volume monoclonal antibody production.

Liquidity and Capital Resources

The net cash used in operating activities of $92,000 for the first six months of 2006 was primarily the result of increases in other current assets and decreases in accrued expense levels. The increase in other current assets was primarily the result of the purchase of insurance for the 2006 business year, while the decrease in accrued expenses is primarily attributable to the reduction in accrued accounting fees related to the preparation of the amended 2004 Form 10-K and  the amended Forms 10-Q for the first and second quarters of 2005.

Net cash used in investing activities of $375,000 for the first six months of 2006 was primarily related to the capital expenditures for the period and the acquisition in the second quarter of 2006 of a customer list from a manufacturer of an environmental Listeria test. This compares to net cash used in investing activities of $237,000 for the same period of 2005, which was driven by capital expenditures for the period. The capital expenditures for 2006 and 2005 are primarily related to purchases of laboratory and manufacturing equipment.

Net cash used in financing activities of $25,000 for the six months ended June 30, 2006 and net cash provided by financing activities for the same period of 2005 of $827,000 were primarily driven by proceeds from the exercise of stock options, which was partially offset by net repayments of outstanding debt.

The Companys working capital (current assets less current liabilities) increased $298,000 to $15.9 million at June 30, 2006 from $15.6 million at December 31, 2005, primarily due to the reduction in accrued expenses as described above. Outstanding debt decreased $106,000 from $773,000 at December 31, 2005 to $668,000 on June 30, 2006, due to scheduled repayments.

On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for up to a $5.0 million revolving line of credit, none of which was outstanding and approximately $2.25 million of which was available at June 30, 2006, based on eligible assets.

The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Companys funded debt to EBITDA, and is subject to a borrowing base determined by the Companys eligible accounts receivable. The Companys annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 6.84% at June 30, 2006.

15

---



Back to Index

On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1.5 million in financing, $668,000 of which was outstanding at June 30, 2006, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Companys funded debt to EBITDA. Payments are due monthly, with equal amortization of principal payments plus interest. The Companys annual effective rate of interest on this loan at June 30, 2006 was approximately 7.09%.

Under the terms of the above financing, 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 and a ratio of funded debt to EBITDA not to exceed 3.25. The Company met all of its financial covenants with respect to this indebtedness at June 30, 2006.

For the six months ended June 30, 2006, the Company satisfied all of its cash requirements from cash provided by operating activities, cash available and on-hand and from the financing agreements described above. At June 30, 2006, the Company had $457,000 in long-term debt and stockholders equity of $34.0 million. Although the Company has no material commitments for capital expenditures at June 30, 2006, it does anticipate that it may spend approximately $1.1 million in 2006 to upgrade or expand certain manufacturing, research and development and office equipment and systems that will drive productivity or generate cost savings, and also to introduce automation into certain manufacturing processes that are currently labor intensive.

Based upon its cash 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. 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 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 income or cash flows from operations. Additionally, the Companys EBITDA calculations may differ from the EBITDA calculations for other companies.

16

---



Back to Index

The
    calculation of the Companys EBITDA measure (as discussed above), and
    the reconciliation of the Companys
    net cash used in operating activities to its EBITDA measure for the six
    month periods ended June 30, 2006 and 2005, respectively, is as follows (amounts
    in thousands):



|                                      |  | Six Months Ended June 30, |     
|------------------------------------- |  | ------------------------- | ----
|                                      |  |                           |     
|                                      |  | 2006                      |     
|                                      |  |                           |     
|Net cash used in operating activities |  | $                         | (92 
|Changes in assets and liabilities:    |  |                           |     
|Receivables                           |  |                           | (114
|Inventories                           |  |                           | (11 
|Other current assets                  |  |                           | 507 
|Other assets                          |  |                           |    
|Accounts payable                      |  |                           | (1  
|Accrued expenses                      |  |                           | 296 
|Deferred revenue                      |  |                           | (113
|Net change in deferred income tax     |  |                           | (36 
|Stock-based compensation expense      |  |                           | (174
|Interest income, net                  |  |                           | (174
|                                      |  |                           |     
|EBITDA                                |  | $                         | 88  
|                                      |  |                           |     

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 $668,000 of outstanding indebtedness is at a variable rate of between 2% to 3% over the published London Interbank Offered Rate (LIBOR), based upon the Companys ratio of funded debt to EBITDA, and was 3% over LIBOR on average for the year. At the Companys current level of indebtedness, each 1% change in the variable interest rate will have an effect of approximately $7,000 on the Companys annual interest expense charges.

The Company conducts operations in 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 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 June 30, 2006, 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.

17

---



Back to Index

|(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.

18

---



Back to Index

PART
  II  OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

On May 16, 2006, we held our annual meeting of stockholders. At the annual meeting, the stockholders voted on the election of four directors, each for a two-year term. The voting results at the annual meeting were as follows:



|Name
        of Nominee     |  | Votes
        For |  | Votes
        Withheld | 
|--------------------------- |  | ----------------- |  | ---------------------- | 
|                            |  |                   |  |                        | 
|Richard
        J. Defieux  |  | 17,954,201        |  | 157,020                | 
|Herbert
        Lotman      |  | 15,315,657        |  | 2,795,564              | 
|Clifford
        L. Spiro   |  | 18,002,352        |  | 108,869                | 
|Stephen
        L. Waechter |  | 17,958,101        |  | 153,120                | 

Item
  6. Exhibits

|     |                                                                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 | Certifications of the Chief Executive Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934                               
|     |                                                                                                                                                                                
|31.2 | Certifications of the Chief Financial Officer of Strategic Diagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934                               
|     |                                                                                                                                                                                
|32.1 | 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 2002
|     |                                                                                                                                                                                
|32.2 | 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

SIGNATURES

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



STRATEGIC DIAGNOSTICS INC.Date: August 15, 2006
        
        /s/ Matthew H. KnightMatthew H. KnightPresident, Chief Executive Officer(Principal Executive Officer)




Date: August 15, 2006
        
        /s/ Anthony J. SimonettaAnthony J. SimonettaVice President  Finance and Chief Financial Officer(Principal Financial and Accounting Officer)


19

---